Tencent remains wary of public criticism that it is growing too large
Tencent remains wary of public criticism that it is growing too large © Reuters

Sometimes, the deals that companies decline to do say as much about their culture and strategy as the deals they undertake.

In January, when Carlyle and Citic group joined forces to buy the leading McDonald's’ franchises in China and Hong Kong, the two investment firms approached Tencent in the hope of luring the internet firm into their transaction. They reasoned that Tencent would want the 2,740 McDonald’s outlets to offer customers incentives to use its online payments system, Weixin wallet, just as Kentucky Fried Chicken, in which Alibaba has a small stake, promotes Alipay.

But Tencent founder Pony Ma and its president Martin Lau, turned down the approach. The two have said they feared that such an investment would reinforce a widespread perception within China and outside it that Alibaba and Tencent were locked in combat. That caution was part of a broader Tencent policy to use its huge market power carefully and avoid conflicts, especially at home.

Now Tencent’s approach appears to be changing.

This week, Tencent and JD.com — the best known local rival to Alibaba’s ecommerce business — announced a joint $863m investment in Vipshop. They paid a rich 55 per cent premium for a combined 12.5 per cent stake.

Tencent’s motive was clearly strategic. It is seeking to drive more traffic to its digital wallet and JD’s logistics business while also increasing orders for Vipshop’s apparel and accessories, Jefferies Hong Kong research noted.

Vipshop was Tencent’s second retailing deal this month: it also paid $639m for a 5 per cent stake in Yonghui Superstore. Together they suggest that Tencent is moving to challenge Alibaba in its core ecommerce business.

Tencent is under pressure to diversify away from the online games, such as ‘Honour of Kings’, that provide the bulk of its revenues
Tencent is under pressure to diversify away from the online games, such as ‘Honour of Kings’, that provide the bulk of its revenues © Reuters

At the moment, the fight for consumers’ retail spending on- and offline is not an equal contest. JD and Vipshop accounted for 9 per cent and 7 per cent respectively of the direct to consumer apparel market. Alibaba unit Tmall has an 81 per cent share, according to data cited by Jefferies.

But Tencent is under pressure to diversify away from the online games that provide the bulk of its revenues. Beijing has voiced disapproval of the extent to which its young citizens are addicted to games and the time they spend online — which mostly means on Tencent’s websites. There is no doubt that the message has got through.

China’s two biggest internet groups have always had a complicated relationship. While Tencent and Alibaba have avoided overt conflict, many observers believe Alibaba would have long ago killed off JD but for Tencent’s support. That relationship is likely to become even more difficult.

Still, given how powerful the two companies are, it was perhaps inevitable that they would take each other on more directly. With the possible exception of Japan’s SoftBank, no other Asian group comes close to having the deep pockets of Alibaba and Tencent. Given their soaring market values, (despite softening in recent weeks), the two have a cost of capital that is far cheaper than the investment funds they compete with on the mainland, and an infinite time horizon. Unlike private equity fund managers, they never have to return money to their backers.

For digital start-ups, the appeal of taking money from Alibaba or Tencent is clear: an investment from either will help scare any potential competitors away — except of course a rival with the other’s backing.

Tencent remains wary of public criticism that it is growing too large. Late last month, Mr Lau hosted members of the Chinese Entrepreneurs Association on a tour of Tencent’s Shenzhen campus and its Artificial Intelligence Lab and gaming development facilities. He was in a philosophical mood, according to one member of the group. “How big should a company be? Are we too big?” He answered his own question by positing that his company would gain legitimacy by contributing to the growth of the economy.

That may (or may not) be entirely self-serving. But moving into more direct competition with Alibaba may help Mr Lau expand his own company and improve the competitiveness of China’s broader economy. Given the size of the two behemoths — both Tencent and Alibaba have market values above $400bn — no other local group can really challenge them. In any case, the sparring will only grow more intense next year in China and elsewhere.

henny.sender@ft.com

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