What is Tencent known for in China?

What exactly does Tencent do?

With the overwhelming success of WeChat (part of the Tencent Group) in China and the increasing dominance of Asian providers on amazon.de and ebay.de, I would like to increasingly dedicate myself to the BATman phenomenon. BATman is an abbreviation for Baido, Alibaba and Tencent, which overall are even more dominant in Asia than the GAFA (Google, Amazon, Facebook and Apple) in our country. In contrast to previous analyzes, we at Tencent do not evaluate the business model, but this issue is more about understanding what Tencent actually is. In this analysis series I have so far Bonobos (too quickly too big), ULTA (prime example of stationary digitization), Zappos (On the drip from Amazon), Farfetch (the next Fab.com), Stitchfix (I'm a fan!), The Hut Group (old business model, but very successful) and Etsy / DaWanda (homemade problems). The material for the analyzes is provided by eTribes - the leading digital consultancy in Germany. Many of you already know eTribes from the many Knut Digital studies.

Where is the market in China?

Before we get to Tencent, it is worth taking another look at the Chinese market, to which we have dedicated a separate chapter in the e-commerce book. Baidu, Alibaba and Tencent (plus JD.com) have built extremely strong dominance in the meanwhile huge internet and e-commerce market of China. Chinese online trade already accounts for 40% of all global e-commerce sales. And the trend shouldn't flatten out anytime soon. Today 53.2% of the population there have internet access - 10 years ago it was 58% in Germany (today 79%). So there is still room for improvement.

In China last year, the number of internet users reached 731 million, accounting for 53.2 percent of the country’s entire population. Online shopping consumers reached 467 million, or 63.8 percent of internet users, which also increased 12.9 percent over the end of 2015.

The rapidly growing share of e-commerce in total sales is even more exciting. China now tops the list worldwide in this category.

THERE was a time, not that long ago, when China’s big internet companies were dismissed by investors in Silicon Valley as marginal firms with a tendency to copy Western products. Not any more. Today they are monsters with increasingly heavy international ambitions. Western companies usually prefer to focus on a few core areas, whereas Chinese internet firms typically try to do everything from cloud computing to digital payments. When this works, as with Tencent’s wildly successful app, WeChat, the results can be impressive. [...] can succeed on a rapid and massive scale because the state-dominated economy is so inefficient. Often there is not even a physical infrastructure to leapfrog — so-called third-tier cities, for example, often lack of big retail centers. Nationwide there is one shopping mall per 1.2m people.

What role is Tencent playing in this development?

Tencent has set up a platform, primarily through WeChat, that offers end consumers so many services that over a third of the almost 1 billion users spend over 4 hours a day using the service.

WeChat now has 937.8 million active users, more than a third of whom spend in excess of four hours a day on the service. To put that in context, consider that the average person around the world spends a little more than an hour a day on Facebook, Instagram, Snapchat, and Twitter combined.

Tencent describes itself as follows:

Founded in November, 1998, Tencent is a leading provider of Internet value added services in China. Since its establishment, Tencent has maintained steady growth under its user-oriented operating strategies. On June 16, 2004, Tencent Holdings Limited (SEHK 700) went public on the main board of the Hong Kong Stock Exchange. It is Tencent’s mission to enhance the quality of human life through Internet services. Presently, Tencent provides social platforms and digital content services under the "Connection" Strategy. Tencent’s leading Internet platforms in China […] have brought together China’s largest Internet community, to meet the various needs of Internet users including communication, information, entertainment, financial services and others […]. The development of Tencent has profoundly influenced the ways hundreds of millions of Internet users communicate with one another as well as their lifestyles. It also brings possibilities of a wider range of applications to China’s Internet industry.

A couple of facts:

  • Founded in 1998 by media-shy pony Ma, IPO 2004
  • Initially, the ICQ clone “OICQ” (now QQ) gained users
  • Naspers bought a 46.5% stake in Tencent in 2001 (still has around 30% today)
  • Then invested a lot in online and mobile gaming and generated the most revenue here
  • Has invested heavily in various online areas for several years and has built up an excessive portfolio of services and investments
  • The most used social networking services are WeChat, QQ and Qzone, Tencent also dominates the Asian gaming market and has the world's largest music streaming service in the content area with 600 million users (Spotify has 140 million users)
  • Over 50% of the employees are employed in R&D
  • 65% of their sales are distributed between gaming, social networking and media (own news, music and video streaming formats), 18% online advertising, 17% other (payment in particular is growing extremely strongly here, but also cloud and internet services such as security software , email, map, image processing, ...)
  • The dominant core of Tencent is WeChat

The new number 1 among the online business giants is the Chinese company Tencent, established in 1998, which was able to gain by 19% [in 2016]. Their portfolio contains, among other services, Asia's most used messenger service WeChat. Its WeChat Wallet is furthermore the most extensively used mobile payment system in China. For a few months, Tencent was even the most valuable among all of China’s companies, before e-commerce giant Alibaba superseded it again near the end of the year.

The annual report is quite informative. With a turnover of $ 23 billion in 2016 and a market cap of almost $ 400 billion. there is already a lot of imagination in the stock, but it more likely follows that shareholders are comparing Tencent to Facebook rather than Amazon.

What exactly is Tencent's strategy?

I'm not at all sure whether Tencent was clear from the start how far the journey with WeChat could go, so I'm happy to post a video here again, with which the potential of WeChat can be better recognized.

WeChat is the Chinese Internet at the moment. Desktop offers are not nearly as mature as mobile offers and that makes it particularly exciting to look at China. The list of services that are already integrated into WeChat or will soon make Whatsapp pale. This is not just about private offers, but about services for everything to do with the workplace.

  • The app, called Weixin in Mandarin Chinese and operated by Chinese web giant Tencent, is already a phenomenon in its own right. It lets people send instant messages and post about personal events, while incorporating functions like ride hailing, buying movie tickets, sending payments, settling utility bills as well as online shopping. WeChat, which now has more than 800 million users, is essentially a portal of web services that an average Chinese checks about 10 times a day. Last year, HSBC valued the app at $ 83.6 billion, about half of the market capitalization of the Hong Kong-listed Tencent.
  • More than 20 million office workers now apply for leave, file for reimbursement and track project progress through WeChat’s enterprise accounts, which are special built-in accounts that Chinese companies open for their employees, Tencent said during an analyst call on Wednesday. In addition to common features such as file transfer and group call, the accounts offer customized functions for different bureaus and firms.
  • Supermarket chain Meiyijia, for example, added functions where employees can report inventories while the Beijing Institute of Technology allows its students and professors to check performance and pay school fees through its account, according to the website of WeChat enterprise account. Companies can also offer customers virtual membership cards through WeChat, where consumers can scan each time they make a purchase to accumulate reward points.

In order to maintain and expand this dominance in the private environment and at work, Tencent invests like no other company worldwide.

Tencent is also making bold acquisitions abroad. A consortium that it led spent $ 8.6bn to acquire Finland’s Supercell last year, a deal that turned Tencent into the world's biggest purveyor of online games. Together with Taiwan’s Foxconn, a contract-manufacturing giant, the firm invested $ 175m last year into Hike Messenger, an Indian messaging app akin to America’s WhatsApp. It was also an early investor in America’s Snapchat, another popular messaging app, whose parent company Snap went public in March.

In the following picture, the Tencent strategy could be understood as a pure platform strategy. Control customer access & manage content distribution.

What does all of this have to do with e-commerce?

Above all, it has to do with understanding what e-commerce is all about.

# 1 Tencent has closed its own shops, but is arguably the most important e-commerce player in China after Alibaba.

At the same time, the company was also learning how to cut its losses and play to its strengths. In 2013, Tencent gave up on its floundering search business, turned it over to a competitor, Sogou Inc., and invested $ 448 million in Sogou instead. The following year it sold its equally unsuccessful e-commerce initiative to JD.com Inc. and invested $ 214 million in JD for a 15 percent stake. Before these deals, Tencent “was involved in everything,” says Zhang Lei, founder and CEO of Hillhouse Capital Group and an early JD.com and Tencent investor. After the deals, "it only focused on what it did best and entrusted other sectors to partners."

# 2 By participating in JD.com, Tencent participates directly in the stark e-commerce development in China

JD.com is developing to become an ecosystem similar to the one of Amazon, it is a real opportunity for foreign brands to position itself on this online store to develop its reputation and brand awareness in the Chinese market. The platform is considered to be the biggest online direct selling website. The company owns and operates seven execution centers and 166 warehouses in 44 cities. It also has about 4,000 delivery stations in China and makes it a company with a strong distribution network.

# 3 Much more important than JD.com are the various shopping services from Tencent

With more than 938 million monthly active users at the end of the first quarter of 2017 and accounting for 29 percent of mobile app utilization in China, WeChat is hands down China's leading super app. One of the reasons for WeChat's popularity is the ability to make online purchases. In 2016 more than 30% of WeChat users made purchases on the platform compared to just 15% in 2015. Today, more and more brands are looking to sell on WeChat. Some luxury brands like Swarovski, Dior and Longchamp have taken the plunge. WeChat is no longer a choice but a necessity for brands that want to sustain their growth in China. Earlier this year, WeChat introduced mini programs on the platform, a game changer that will reshape the current WeChat e-commerce standard.

# 4 With these services Tencent is now the most important opponent of Alibaba, while Amazon.com does not have such an opponent in the USA (The article is from 2014, but in my opinion still very up-to-date)

Until recently, Alibaba and Tencent seemed largely content to develop their own areas of expertise without moving too aggressively onto each other's turf. Alibaba owns e-commerce sites like Taobao and Tmall, while Tencent operates messaging services like QQ and WeChat. But over the last year or so, with Alibaba positioning itself for an initial public offering and Tencent eyeing the lucrative earnings from the boom in online retailing in China, the gloves have come off. "Tencent is absolutely trying to get more aggressive in the e-business space, challenging Alibaba, as most of their services are now overlapping," said Bryan Wang, an analyst at Forrester Research. In October, Jack Ma, the chairman of Alibaba, announced that he was shutting down his WeChat account and moving to a new Alibaba messaging service called Laiwang. He urged his followers to do the same. The video game market in China increased 38 percent last year, to $ 13.8 billion, according to a government agency that monitors the industry. Mobile games were the fastest-growing segment, with revenue more than tripling to $ 1.8 billion. E-commerce is a much bigger business. Last year, sales in China, including online transactions between businesses, rose to $ 335 billion from $ 221 billion in 2012, according to an Alibaba research center. Tencent said the agreement with China South City would enhance its e-commerce reach. The companies will work together to help small and midsize companies develop their online retailing operations, they said.

When is Tencent (or Alibaba) coming to Europe?

This is the question I get asked the most about BATman and the answers to that are very vague. On the one hand, the growth in China is still so strong that the relatively complicated European market is not that exciting compared to the domestic growth. On the other hand, I do not expect that there will be some kind of JD.de, but rather expect market access in the rollout of the WeChat platform. The current WeChat variant for Europeans cannot be compared with the Chinese variant.

Tencent's stock had risen to make it the most richly valued company not only in China, but in all of Asia — a record it now trades back and forth with its archrival, Alibaba Group Holding Ltd Where the company wants to go, eventually, is outside its home market. Tencent, which is based just north of Hong Kong in Shenzhen, permeates daily life in China. More than two-thirds of Chinese people use its two messaging apps, WeChat and QQ, for everything from texting to shopping, flirting, dating, watching videos, playing games, and ordering food and taxis. According to venture capitalist Mary Meeker, Chinese users collectively spend 1.7 billion hours a day on Tencent apps, more than they spend on all other apps combined.

Aside from that, Tencent could simply buy a few European or US companies to get into the market. Ebay would be a candidate, in my opinion, or media market.

With record success at home, WeChat once again sets its sights on global expansion, partnering with Silicon-valley-based mobile payment startup Citcon to bring WeChat pay to the US. The partnership will effectively enable millions of American retailers to leverage the influx of Chinese travelers whose spending is expected to surpass $ 80 billion by 2020. The Citcon partnership is a notable development for the Chinese tech giant. Earlier efforts by WeChat to expand into new markets have been largely fruitless, including large-scale marketing campaigns in Europe, India and South America. In 2013, WeChat recruited soccer superstar Lionel Messi for a series of TV and internet ads, yet failed to build a significant user base abroad.

From a distance, Tencent's strategy is difficult to assess, and I firmly believe that we will hear from Tencent primarily as an investor in Europe over the next few years. Tencent's valuation on the stock market is gigantic, money is cheap and the Chinese market will soon no longer be big enough even for such giants. That should upset a lot in the western ecosystem.

The next candidate for the checkout zone analysis is the Wish, followed by Mediamarkt. The analysis material for this is also used byeTribes provided - one of the leading digital consultancies in Germany. Many of you already know eTribes from the manyKnut Digital StudiesThere are further suggestions for new analysis goals in the Whatsapp channel.

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Alexander Graf, * 1980, e-commerce entrepreneur & analyst, trained at the Otto Group, then founded over 10 companies, today Co-CEO of the leading commerce technology provider Spryker Systems. In June 2015 he did that E-commerce book published, which has led the e-commerce rankings since then. Further information here, or contact directly at: [email protected]