Tencent, JD.com ally, e-business change expected

Chinese Internet firm Tencent announced on Monday that it is to buy a big stake in JD.com in an attempt to break the e-commerce market domination of Alibaba.

The two companies reached an agreement that Tencent will buy a 15 percent stake in JD.com at a cost of 214.6 million U.S. dollars, before JD.com's initial public offering (IPO) in the United States, according to Tencent's statement filed with Hong Kong exchange.

After the purchase, Tencent will be obliged to buy 5 percent of JD.com's outstanding ordinary shares on a post-IPO basis, on condition that the IPO is successful.

Tencent will then be one of JD.com's largest shareholders, possessing roughly the same stakes as Liu Qiangdong, JD.com's chief executive officer, and Tiger Fund.

Liu Chiping, president of Tencent, will join the board of China's second largest online direct sales company, and in return, JD.com will take over nearly all Tencent's e-commerce, including business-to-consumer (B2C) service Wanggou.com and a consumer-to-consumer (C2C) platform Paipai.com, with all capital, assets, and liabilities transferred to JD.com.

The deal will up the stakes in competition with Alibaba - the largest online purchase platform and the most widespread online payment tool.

Since 2005, Tencent has tracked the expansion of Alibaba in B2C and C2C territory with its own arms, such as Yixun.com, and by repeated acquisitions of online businesses, but it still lags behind.

Xu Zhipeng, senior analyst of Zero2IPO Group, feels Tencent has lost patience waiting for its own e-commerce business to flourish. Its websites, including the most popular, Yixun.com, are completely dwarfed by Alibaba's Taobao.com. Buying into JD.com is a forceful strike at the competitor's main business, he said.

In other words, by giving up some of its non-core businesses, Tencent has allied itself with the second best, in a bid to redivide the territory. Tencent has retained a foothold in the Web store by allowing JD.com to gain a mere minor stake in Yixun.com, the most lucrative of Tencent's B2C sites.

Li Hongke, analyst with Haitong Securities, nodded at Tencent's bold move, saying without the burden and distraction of its sluggish B2C and C2C service, albeit with a possible 20-percent drop in income, Tencent could concentrate on information services.

The company, which started from online community software QQ, will have more energy to improve the Online-to-Offline(O2O) business through communication application WeChat and sharpen up its payment tool, Li added.

Tencent has been engaged in continuous battles with Alibaba for dominance of mobile payment services, but unable to win the upper hand. The situation is likely to improve, as Tencent will offer JD level 1 access points at WeChat and Mobile QQ, to boost the latter's growth in physical goods e-commerce, the statement said.

The two firms will also work together on mobile applications and payment solutions, with JD being regarded as Tencent's preferred partner in certain business areas.

As a result, JD.com is expected to pose a major challenge to Taobao.com's grip on the B2C sector, helped by Tencent's enormous user resources and increased market share through website integration.

Industry watchers have surmised that the Tencent-JD.com coalition could be enough to rival Alibaba in over 20 areas including mobile payment, e-commerce and O2O.

Hu Yanping, founder of Data-Center of China Internet, thought the cooperation would re-divide China's e-commerce domain currently led by search engine service provider Baidu.com, Alibaba and Tencent (BAT).

However business coalition failures are plentiful, despite market high hopes.

In the short term, Tencent's share purchase will improve the IPO valuation of JD.com, which have prepared for years for the opportunity of going public in the U.S..

In the first three quarters of 2013, JD.com posted net profits of 63 million yuan (10.28 million U.S. dollars) following consecutive marked losses in 2012 and 2011. But its main B2C business suffered a 361-million-yuan loss, offset by interest income and tax refund.