With the world’s largest number of internet users (731 million, as of December 2016), China remains one of the hottest e-commerce, social media and online services markets. However, the country has a long way to go in order to reach the internet penetration levels of developed countries, as only around half of the Chinese population have access to the internet. As Chinese internet users grow, naturally the business of the country’s internet giants grows more and more. What’s more, the presence of internet giants such as Google, Facebook and Twitter in the country remains limited, which leaves the majority of the digital market to local players. The key local players on the Chinese technology frontline are the trio known as the BAT companies – Baidu, Alibaba and Tencent.
Baidu Seeks Tech-led Growth
Baidu is often referred to as ‘the Chinese Google’. The company’s 2016 revenue slightly underperformed against its 2015 results, thus Baidu’s investors will be focused on revenue and net profit growth in near future. Some analysts predict Baidu, who remain focused on the PC market, is going to lose market share to its competitors, whose products are primarily designed for mobile users.
Around 80% of Baidu’s total revenue comes from the segment of search services, and applications such as Baidu Encyclopedia, maps, image search, video search, news search, and so on. Last year Baidu received a total of $5.5bn in advertising revenue, which accounts for 20% of the total Chinese digital ad market.
The other two business segments – transaction services (Baidu Wallet) and video streaming (iQiyi) – account for the rest of their revenues. iQiyi is the largest online video platform in China (often benchmarked against YouTube) and continues to invest both in licensed content and in-house production, since exclusive content is a prerequisite for gaining higher-margin subscriptions.
A State-of-the-art Strategy
However, two things are intriguing about Baidu from a strategic perspective:
- Its R&D expenses stand at record levels;
- Its high-tech pipeline, which includes early-stage projects in the fields of VR, augmented reality, AI, machine learning and autonomous cars.
Two years ago, Baidu’s technology pipeline started delivering results as the company’s speech recognition technology Deep Speech 2 became a pioneer in recognising different Chinese dialects. Its autonomous car tests were a success. Baidu’s mapping technology could prove to be a significant advantage as the company plans to begin small-scale production of autonomous cars next year, but mass production remains delayed till after 2020.
One year ago, Baidu launched a HealthTech solution with huge growth potential: the medical assistant chatbot Melody. Also in 2016, the company presented its facial recognition technology, which was said to have up to 99.77% accuracy.
This year the internet giant revealed its text-to-speech system, which synthesises artificial human speech from text. Baidu is also developing a holographic technology for VR and planning to launch a concert streaming and movie production service based on VR.
By investing heavily in technology and R&D, Baidu is positioning itself to profit from exponential growth in AI, augmented reality, VR and self-driving cars.
Alibaba’s Ambitious Plans
While a detailed strategic analysis of the Chinese e-commerce giant could take up an entire doctoral dissertation, to put it briefly, the Group has two ambitious long-term objectives:
- Expand its core business outside China (as currently around 7% of the group’s revenues are derived from commerce outside the country);
- Increase its active buyers from 423 million users to 2 billion users in 2036, and thus increase the merchandise volume handled;
In order to achieve its goals, Alibaba has made investments in a wide range of sectors – smart logistics, payment services, cloud computing, online marketing services, travel booking, music and video streaming. Because of its ambitious goals, its solid existing customer base, the synergies between the companies in the group and strong overall cash flows, Alibaba remains the largest retail commerce company in world.
According to eMarketer, Alibaba received a total of $11bn in advertising revenue, which accounts for around 40% of the total digital ad market in China. Alibaba also remains the dominant niche player on the online B2B marketplace, while key competitors Amazon and eBay focus more on B2C.
Base Growth and Market Share
From a mid-term perspective, Alibaba is looking at two strategic goals. The first is to acquire a customer base in the growing middle class beyond China’s metropolitan areas, in order to increase its active buyer base. Apart from traditional customer acquisition strategies, online to offline (O2O) could be an excellent model for expansion in those locations as Alibaba’s online discovery tools and mobile payments platform can be easily combined in order to benefit both buyers and sellers.
Alibaba’s second mid-term goal is gaining market share in the entertainment sector – the group is diversifying its earnings with investments in digital media, entertainment and last month, Alibaba announced its plan to enter the game distribution industry. Entertainment revenues are derived from digital content such as film, music and sports and online distribution of movie tickets, online video, streaming and over-the-top content TV, which are gaining popularity at solid speeds on the Asian markets. The group also has huge potential for the integration of anchor assets in the entertainment field with its payment, cloud and e-commerce solutions.
In January, Alibaba representatives said the company is considering a European logistics centre in Bulgaria. Bulgaria’s strategic location (close both to leading European and growing Turkish markets), well-educated workforce and improving road and rail infrastructure could lead to an expanding market share of the group in both Europe and Turkey, and thus assist the company to achieve part of its international expansion goal. The logistics centre in Bulgaria could be the first stepping stone in the group’s globalisation strategy.
Tencent: Payments, Clouds and Apps
Tencent offers a wide portfolio of digital services: social media, online gaming, cloud and payment services, music streaming, film production, microblogging, and more. Since 2010, Tencent is on the growth track and the company reported a 43% rise in 2016 net profit. Last year’s growth is mainly due to the company’s increased business in mobile games, social media platforms, cloud and payment services and the giant’s key focus remained the transition from PC to mobile.
Tencent operates the largest social communication platform in China, and the company revealed that its social media platforms were growing faster than Facebook. WeChat is the key brand in Tencent’s portfolio, as it is the most used app in China for 2016. Especially, WeChat’s ‘red envelope’ application was a social hit around the holidays – users sent 14.2 billion virtual red envelopes over Chinese New Year. WeChat was ranked as the most valuable Chinese brand, valued at $106bn. Another Tencent messaging app, QQ, was ranked second in the list of most popular apps in China.
Tencent received a total of $3.2 billion dollars of advertising revenue last year, accounting for around 11% of the total digital ad market in China. Payment services are also leading to solid growth as TenPay and QQ Wallet are widely used for utility payments and public transport cards. Other services such as QQ Music continue to gain market share – the service now has around 10 million users who have signed up for its paid music services.
Healthy Growth vs Squeezed Profits
Though the key growth drivers for the company were cloud services, payments, smartphone games and messaging platforms, due to intense competition from rivals, the gross profit margin from payments and cloud services is expected to remain relatively low in the future. So Tencent can still ride the organic growth trend, but it needs to increase the popularity of key services such as mobile and PC games, and work on further monetising its messaging apps.
From an opportunity perspective, Tencent has potential to enhance valuable synergies between services in its portfolio – for example between Didi (the company which acquired Uber’s Chinese operations) and WeChat or QQ Wallet and QQ Music or between its film and music businesses. The tech company can further develop partnerships with global exclusive content providers and global powerhouses, as it has done with Starbucks, as a means to position itself in the high-end of the online content value chain. Tencent recently acquired a 5% stake in Tesla, which could be the first step in a beneficial cross-continental partnership.
One trend is certain: for the rest of the year, Chinese tech companies are going to develop new services, spend more on R&D, acquire stakes in local and overseas companies and test new breakthrough technologies.
Have your say. Sign up now to become an Author!
Why Newspapers Failed
The internet has brought about massive change, both for the good and, in the eyes of many, for the bad....
Competing with free: News and how to do it better
Simple ideas are often the best ones. The ideas behind so many of the products and services that have changed...
What Ancient Egypt and Blockchain Have in Common
Blockchain is already ten-years-old, but following the cryptocurrency highs of 2017, it has only just started to capture the imagination....
News is Broken: Ads, Subscriptions and a Better Model
“Society doesn’t need newspapers, it needs journalism” News has become increasingly devalued over recent years. Outlets have had to pivot...