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Alibaba VS Tencent – battle of the Chinese giants

 

Walmart Inc. executed a large slam at Alibaba Group Holding Ltd. and its Alipay digital payment app on March 27, when the Arkansas-based company signed a deal with one of the Chinese giant’s strongest combatants on the field of electronic payment – Tencent Holdings Limited. The American hypermarket chain corporation is choosing WeChat app over the recently used Alipay, to serve all the clients of their western China stores. The markets in question include the districts Sichuan, Yunnan and Gansu.  An announcer for the U.S.-based retailer confirmed that this deal aims to enhance customers experience during shopping. Right now, Walmart approves diversified methods of disburse including payment cards and digital payments and giving cash.

Earlier this month, Pony Ma, the chief executive of the Shenzhen-based corporation said WeChat managed to reach more than 1 billion customers. Tencent’s payment service is second in China behind Alipay but the O2O (online-to-offline) app is now fighting for the win. The payment market is separated in two bases with consumers from China usually having both apps installed on their smartphones.

Meanwhile, Alibaba attempts to buy the 60% of Ele.me that it or its branch Ant Financial doesn’t already own. An investment which will strengthen Alipay’s hold on its clients. Of course, the food delivery app – Ele.me would give Alibaba hype to the quickly-developing sector and protect Alibaba’s e-commerce market share.

Ele.me is a food delivery app that allows users to order food through their mobile devices. According to the reports,Ele.me had around $9.5 million sales on a daily basis in 2015. And after the Ele.me’s merge with Baidu’s (Baidu Inc.) own food delivery service Waimai, it became the fastest growing business in the online food delivery sector in China.

Valuation of the company improved as well. After the $3 billion valuation in 2015, from which it raised $630 million, in 2017 Ele.me’s valuation doubled to almost $6 billion. Alibaba is reportedly seeking to buy the rest of Ele.me for the price of $9.5 billion.

So it turns out that the e-commerce holding is trying to step on another large market, which is reported by analysts from China to have amounted $24.18 billion in gross merchandise volume in 2016. From those billions, Ele.me has a market share of about 53% in China, which is essentially more than $12 billion in gross sales.

The food delivery corporation is planning on expanding its business in mainland China since now only 5% of people in the country are using online services such as Ele.me. Once it reaches 20%, a firm position, Ele.me will concentrate on other Asian segments such as Taiwan, Singapore and Hong Kong. This way, both Alibaba and Ele.me will expand overseas together.

Even more importantly, closing this deal will help Alibaba to protect its market share. And all of this is possible because Ele.me is an e-commerce company just like its buyer. Ordering food online is basically an expansion of e-commerce, and it is a rather new segment which will serve for the preservation of Alibaba’s overall e-commerce market share.

And perhaps most crucially, what sponsors believe is the real gain, comes from the fact that online-to-offline services payments are the future. So, from this deal, Alibaba secures tens of millions monthly Ele.me’s users to be transferred to Alipay. And Alibaba makes another win over Tencent, which won’t be able to sign the exact same deal and crown its own payment service Tenpay as the leading online product. But as a matter of truth, Tencent still stands as a worthy opponent owning a significant percent of Meituan-Dianping – Ele.me’s rival, with close to 40% market share in the same segment in China.

The potential acquisition of Ele.me will produce a considerable profit gain for Alibaba. If the predictions of management, for the quadrupling penetration (from 5% to 20%) of the Chinese market for online food delivery and if Ele.me sustains its high position of over 50% market share, then the company might make a net profit of $800 million( due to over $48 billion in gross sales). And now, backed by powerful new technology Ele.me’s margins could reach an even bigger profit growth of more than $1.5 billion in a year.

As you can see, on the battlefield of e-commerce everything is always new and the potential for both companies to make billions of dollars is very real. If you plan on investing in Chinese companies, Tencent Holding and Alibaba Group deserve your attention.

 

Written by: Lyubomir S. Evtimov

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