The rivalry between Alibaba and Tencent is so intense that it has long carved China’s tech sector into two competing ecosystems and forced start-ups to choose sides. But in recent months the split has begun to look a little blurry.
Alibaba became the third-biggest shareholder in China International Capital Corporation, even though Tencent has the second-largest stake in the leading investment bank.
A month later, in March, the Hangzhou-based tech giant invested $171m into Tencent-backed news app Qutoutiao through a loan that will convert into a 4 per cent stake in the content platform.
The same month the two joined forces with other companies in a $1.5bn ride-hailing venture.
The sudden co-operation is a sign of the growing maturity of China tech sector — Tencent and Alibaba have passed their 20th anniversaries — and changing dynamics as capital becomes tighter and the focus shifts from consumer-focused apps to the world of enterprise.
“In consumer it was winner takes all, so [companies backed by] Alibaba and Tencent both fight and only one will survive,” said the executive of one enterprise tech business.
But in the market for business customers “multiple companies can survive and they are not necessarily going to fight with each other. They’ve wasted billions of dollars in the past already.”
The scars of the bruising fight between the companies are easy to see. In food delivery, where Tencent-backed Meituan Dianping and Alibaba’s Ele.me are racking up losses in the battle for supremacy; in ecommerce, where Tencent-backed Pinduoduo is spending heavily to lure customers; and in payments.
But now, as growth in internet users slows and investors tire of cash-guzzling customer acquisition costs, the sector is pivoting to enterprise. Both Alibaba, the dominant player, and Tencent are building on their cloud capabilities to offer software and other services to business users.
To do so they are relying on organic growth and acquisitions, at home and overseas: thus Alibaba’s investment in German big-data group Data Artisans and Tencent-backed Teambition, a Chinese productivity platform.
It also reflects the maturing of a sector that is now seeing its third generation of start-ups, said Seamon Chan, co-founder and managing partner of Palm Drive Capital and a previous investor in Alibaba. “The tech giants are maturing. Sometimes it makes sense to join forces against new entrants. Some of these are getting big so it’s important to defend against them and build alliances.”
For those in the initial stages of business, Tencent’s backing comes with access to the billion users of its WeChat messaging platform, and with the tech giant’s experience: its 700-plus portfolio includes 122 unicorns and 60-plus listed companies.
“In the consumer space the reason for making investment is to have access to the consumer traffic, so they take Tencent’s money,” said one person familiar with the deals. “But once they’ve built up they need to find a way to generate revenues. As ecommerce is the most lucrative way to monetise traffic, then they go to Alibaba.”
Fierce rivalry means companies usually have to choose between the two when raising funds — an investment from one will often prohibit investment, or even certain kinds of co-operation, with the other. But these conditions typically expire when the company lists, he added.
With last year’s bumper listing of tech stocks, including 16 from Tencent’s portfolio alone, many of these ties have been cut.
Recently-listed companies that want to tap investors for more money, and the recent popularity of convertible bonds, are convenient gateways for Alibaba to move in — in addition to Qutoutiao, it picked up an 8 per cent stake in the Tencent-backed anime and game streaming group Bilibili.
Those deals also nod to the third factor driving joint investments: a fear of an arch-rival gaining a competitive edge.
That loomed large in Alibaba’s purchase of a stake in CICC, according to one person familiar with the matter. As China’s top homegrown investment bank, a regular underwriter on deals carried out by both and owner of a banking licence, CICC is seen as a prize by both companies.
Similarly both invested in the ride-hailing venture in part because “neither wanted the other to be the only investor in the business”, he added.
China boasts the world’s biggest car-booking market, estimated at $23bn by consultants Bain & Co. By far the lion’s share of that goes to Didi Chuxing, which has dominated the market since being formed in the 2015 merger between Didi Dache and Kuaidi Dache — and which also has stakes held by Alibaba and Tencent, as well as SoftBank of Japan.
The two also came together in ZhongAn, hailed as pioneering the hot sector of insurance technology but whose subsequent performance has fallen well short of the excitement surrounding its initial public offering in September 2017: shares are now half the HK$59.70 IPO price.
For start-ups, the thaw offers a hint of warmth. With China’s tech bubble fading and access to capital tightening, the fight for money has become harder for many companies. But both Alibaba and Tencent have flagged their intentions to keep on investing.
“Founders have had a lot of leverage over the past 18 months and so terms had got more and more loose,” said one former financier now running a start-up. “That’s turned hard in the last quarter.”