Internet giant Tencent Holdings (00700.HK) has picked JD.com, one of China’s leading business-to-consumer (B2C) portals, as its partner for e-commerce business. The deal, which will see Tencent transfer its e-commerce platform to JD.com for joint operations, marks an admission of failure by Tencent to make headway on its own and challenge the No.1 player in the segment, Alibaba Group.
The logic in seeking out a partner is understandable, but the question arises: is JD.com the best option for Tencent to boost its e-commerce business?
According to a regulatory filing, Tencent will pay US$214 million for 15 percent stake in JD.com, and transfer most of its e-commerce business operations including QQ Wanggou and Paipai and a minority stake in Yixun to the partner. Tencent also agreed to buy a further 5 percent stake in JD.com after the latter completes its initial public offering That could make Tencent one of the top shareholders in the e-commerce firm.
The latest initiative comes after Tencent merged its search engine business with Sohu.com Inc’s Sogou last year. The deals suggest that Tencent is continuing its place out its underperforming businesses and focus on its core social media platforms, QQ.com and WeChat, and its online games business.
Tencent has been a latecomer to the e-commerce battlefield. It established a separate e-commerce arm — Tencent E-Commerce Holding Co. — only in May 2012, noting that a subsidiary structure will offer more flexibility in taking the business strategy to a higher level.
In 2006, Tencent established paipai.com, a consumer-to-consumer platform for users to buy and sell goods. Two years later, it founded the business-to-consumer portal QQ shopping mall. In 2012, Tencent acquired Yixun.com, a consumer electronics online shopping platform. In addition, Tencent also took minority stakes in online shoe selling platform okbuy.com, online travel agency elong.com and online diamond seller kela.com. The company spent more than 2 billion yuan on the deals.
However, the e-commerce business failed to make significant contribution to the group. For the nine months to September 2013, Tencent’s e-commerce business reported a gross profit of 396 million yuan on 6.4 billion yuan revenue. That was relatively minor compared to the group’s overall net profit of 11.5 billion yuan and revenue of 43.5 billion yuan for the period.
As Tencent is competing head-to-head with Alibaba, the partnership with JD.com makes sense, given the fact that JD.com is the No. 2 online retailer in China. With the deal, JD.com and Tencent will hold 26 percent share in the nation’s B2C e-commerce market. But that would be still way behind Alibaba, which currently has 49.7 percent share of the market.
For Tencent, the strategic partnership allows it to sit back from the highly competitive e-commerce sector and let JD.com leverage its expertise to boost traffic and transactions. Tencent can focus on building its social network platform and mobile gateway to establish its online-to-offline and mobile ecosystems.
JD.com, which has been focusing on serving desktop users, can leverage Tencent’s competitive edge in mobile internet to step into the fast-growing mobile commerce market, which should help bring huge traffic for the online retailer.
While JD.com will be responsible for the operations of two Tencent brand e-commerce portals, there is still a question as to whether JD.com can extend its expertise in the B2C market to the C2C space, given that the two segments are totally different in business model. JD.com may need to work closely with Tencent in consolidating the latter’s e-commerce assets in other portals and bring in traffic from Tencent’s social platforms.
Tencent, meanwhile, should secure online transaction information on its own platforms first hand after the partnership. The data would constitute a key strength as it would provide clues on market trends and demand and consumer preferences. Cross-analysis with Tencent’s social platform data could even help Tencent and JD.com beat Alibaba.com in the long run.
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