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Tencent buys 15 percent stake in retailer JD.com to compete with Alibaba

Tencent buys 15 percent stake in retailer JD.com to compete with Alibaba

By Reuters | Updated: 10 March 2014 16:30 IST

Tencent Holdings Ltd's new partnership with China's No. 2 online retailer JD.com takes aim at dominant rival Alibaba's Achilles heel - its weakness in mobile - in a move set to reshape the country's e-commerce industry.

The deal gives JD.com a headline slot on Tencent's WeChat app that dominates China's smartphones, an entry into eBay-style consumer-to-consumer shopping and a backer with the muscle to help it make the most of a logistics infrastructure that Alibaba lacks.

It also burnishes the appeal of JD.com's planned $1.5 billion U.S. listing while taking some shine off Alibaba's own IPO, which is expected to be worth $15 billion.

"JD was competing with Alibaba however the scale was too small. But now with the WeChat platform that's a game changer," said Bryan Wang, a Beijing-based vice president with Forrester Research.

Under the deal, Tencent will take 15 percent of JD.com for $215 million with plans to take another 5 percent after the IPO. Share dilution in the IPO process means Tencent's ultimate stake in JD.com has not been finalised, said a source familiar with the matter.

President Martin Lau of Tencent, which is more than one-third owned by South African media group Naspers Ltd, will take a seat on JD.com's board.

JD.com will take on several of Tencent's e-commerce businesses and gain a minority stake in 51Buy.com, known as Yixun, which specialises in consumer electronics.

The nature of the deal does not point to a clear valuation for JD.com. In February 2013, a fundraising round for the online retailer valued it at around $8 billion.

Alibaba weak spots
China's business to consumer e-commerce sales may pass $180 billion this year due to rising Internet usage, expanding middle-class incomes and a better distribution network, according to New York-based market research firm eMarketer.

JD.com had an 18.3 percent share of that market as of the third quarter of 2013, according to Beijing-based iResearch.

By contrast, Alibaba controls at least half of China's online retail sales through its Tmall marketplace while its Taobao service controls around 80 percent of consumer-to-consumer online sales.

Alibaba has, however, been losing ground to Tencent as smartphone and tablet usage surged over recent years. WeChat, known as Weixin in China, had 272 million monthly active users as of September and has quickly grown from a messaging app to a full-fledged platform, letting users play games, book taxis, make online payments and even invest in wealth management products.

Smart marketing systems, like a gift-giving service that was rolled out for Chinese New Year, were highly successful in drawing new users onto the WeChat Payment system.

"As a result (of the deal), Alibaba, which has no logistics infrastructure and at the same time is losing ground to Tencent in mobile payment, will face greater challenges," Wendy Huang, head of China technology and Internet research at Standard Chartered, wrote in a note on Monday.

"This is certainly negative for Alibaba's upcoming IPO," she said.

Representatives for Alibaba declined to comment.

Logistics strategies
JD.com has concentrated on building up its logistics infrastructure, controlling the supply chain from product purchases to delivery. But that strategy has also left it with only 60 million yuan of profits for the first nine months of 2013, and a warning to investors that they may incur net losses for some time in the future.

Alibaba, which had net income of $792 million in the July-September quarter, relies on China's sometimes shaky infrastructure and delivery services to get products to customers. It has said it plans to form a partnership to invest $16 billion in revamping that infrastructure by 2020.

JD.com, which used to go by the name of 360Buy, has raised $2.2 billion in the past six years from investors including the Ontario Teachers' Pension Plan and Saudi billionaire Prince Alwaleed bin Talal's Kingdom Holding Co.

Bank of America Merrill Lynch and China Renaissance acted as JD.com's financial advisers, while Barclays Bank PLC advised Tencent.

Tencent shares were down 1.9 percent in trading on Monday, versus a 1.8 percent fall for the Hang Seng Index.

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