Tencent Has Taken Another E-Commerce Company Public: 17 Charts on How Its Challenge to Taobao and Tmall Is Going

The fight over the future shopping habits of 1.4 billion people

A week before Double 11, Alibaba held its third-quarter earnings call. Asked about the slowdown in the wider economy, executive vice chairman Joseph Tsai said the company had beaten the market and was taking space from its rivals: "Tmall grew physical-goods sales 30% this quarter, ahead of the 24% year-on-year growth in total online goods sales reported by the National Bureau of Statistics."

On Double 11 itself, gross merchandise volume across Alibaba's platforms hit 213.5 billion yuan, another record. Spread over 601 million Tmall and Taobao users, that is 355 yuan of orders each.

But the rivals have not collapsed. JD.com announced its own number: 159.8 billion yuan, up 27% on last year. Mogujie, pushed out of the Taobao ecosystem by Jack Ma years ago, filed its prospectus on the eve of Double 11 and is heading for a US listing. One quarter earlier, Pinduoduo went public, and its market value briefly reached $30 billion.

What they share is Tencent's backing. In Mogujie's new prospectus, Tencent is already the largest shareholder with 18% — half again as much as founder Chen Qi. Eighteen looks like a number Tencent picked on purpose: it holds 18% of JD.com and 18% of Pinduoduo too.

Count Vipshop, which JD.com and Tencent jointly invested in this year, and Tencent has a stake in every one of China's four biggest e-commerce companies outside Alibaba. All are already listed in the US except Mogujie, which is on its way.

WeChat, meanwhile, has spent this year redesigning itself in ways that lean toward shopping. The latest mini program update opened up product search: type a product into the mini program search box and you get results supplied by mini programs.

The users of WeChat and QQ, plus a whole roster of Tencent-backed shopping platforms. Four years after it gave up running its own store in 2014, Tencent's strategy for taking another run at Tmall and Taobao has taken shape.

The Tencent–Alibaba fight in e-commerce is a fight over users, but it matters more as a fight over who sets the shopping habits of 1.4 billion people

No product in China has more users than WeChat. Of the nearly 800 million people in China who go online by phone, essentially all of them use it.

But having users is not the same as having users who shop. Otherwise Tencent's Paipai would not have died.

Baidu search was once China's biggest single traffic gateway. Taobao stopped buying Baidu ads in 2007, and the next year it blocked Baidu's crawlers outright. To this day, search Baidu for a Taobao or Tmall shop and you get: "Due to restrictions in this site's robots.txt file, the system cannot provide a description of this page."

Alibaba could afford to shut out Baidu because users had already learned to search for goods inside Taobao. Taobao, and later Tmall, had become a search engine built for shopping.

Every search engine makes its money by handing out traffic: whether a product appears in front of a shopper depends not only on relevance but on how much the seller pays. And Alibaba is China's largest shopping search engine. Last year it took in 108.4 billion yuan selling ad slots to Tmall and Taobao merchants, roughly the ad revenue of Baidu and Tencent combined.

Once people reach for Taobao or Tmall by reflex, teaching them a new shopping habit is very hard.

What could change that is Tencent, which until now has never put its full weight behind e-commerce. WeChat still holds back. According to figures released in the first quarter of this year, the average user sees just two ads a day in Moments.

And WeChat's potential for selling things is enormous. The data firm QuestMobile counts 30% of Chinese phone users' time going to WeChat and QQ — about ten times what they spend inside shopping apps.

Enormous reach, plus a blanket ban on Alibaba. If Tencent commits, its e-commerce companies look like they have a chance.

WeChat funnels traffic to shopping apps smoothly, but it is not yet a competent shopping search engine

WeChat started adding doors for e-commerce in 2015. Those doors have not been enough to catch Tmall and Taobao.

JD.com was the first with a permanent slot inside WeChat. In May 2014, a "Shopping" item appeared under Discover; tap it and you are inside a full version of JD.com. Recently the word "JD" was added in front of it, and for Double 11 a line of gray text was tacked on beside it: "11.11: good stuff, good fun, on JD."

In the first and second quarters of the following year, 20% of JD.com's new user growth came from WeChat and mobile QQ, and on 618 in 2015, nearly half its new users came through Tencent's entry points.

The other doors are in Wallet, where nearly half of the 12 third-party services are partner shopping platforms.

But the gap between JD.com and Alibaba only widened from 2015 to 2017, so these old doors are not enough. As Pinduoduo's founder said in an interview before this year's listing, Taobao's penetration in China is not merely high. Hardly any WeChat user has failed to hear of Taobao.

WeChat Search began covering products this year, but it is not yet a good search engine. In practice, finding a product is awkward.

Search for a product or a brand from the box on WeChat's home screen and the results arrive in this order: contacts, group chats, official accounts you follow (if you follow any), chat history, favorites — and only at the bottom, a link to search again in "Search." Only there does a "Products" category appear, supplied by JD.com, and not every JD.com product is in it. What comes up by default is still official accounts, mini programs, related Moments posts, or stickers.

Search for something mainstream and it works: you can jump to JD.com for the product page.

Make the keyword a little less mainstream and it fails. "PS4 game console" returns no products at all; you have to scroll to "related searches," pick "Sony PS4," and only then does the product list appear.

If a user comes up empty a few times, WeChat will not become the first place they look for something to buy.

What WeChat is still best at is social sharing, and inside WeChat, Tencent's partners get an experience far better than Alibaba's.

Offline, you can tell whether a retailer belongs to Alibaba's camp or Tencent's by whether Alipay or WeChat Pay comes first at checkout. Online, the simplest test of who stands where on China's e-commerce map is whether a product link opens inside WeChat and lets you finish the purchase there.

During Double 11, a friend posted a coupon in Moments with a Suning mini program code on it. To claim that 30-yuan coupon I started at "identify mini program code," left WeChat, downloaded the Suning.com app from the app store, and was walked through registration, login, real-name verification, and setting up express payment. My phone took seven verification codes along the way. I never got the coupon. In those ten minutes, starting from a single share in WeChat, there were endless points at which a would-be new user would run out of patience and let the discount go.

To share a Taobao link in WeChat you have to generate a Taokouling, a string of gibberish, inside Taobao first. Apps like Hema are a little better, but a link opened in WeChat still has to pass through a browser before it can reach the app.

Send a friend a JD.com, Mogujie, Pinduoduo, or Vipshop link in a WeChat chat, by contrast, and you can browse and buy right there — using your WeChat identity, pulling in your WeChat shipping address, with no extra login and no detour into a separate app. And if you do want to continue in the app, the handoff is smooth.

This is the green light Tencent has given the big shopping platforms it owns pieces of.

Their links are not merely unrestricted; you are encouraged to pass them around. One of WeChat's strictest rules bans "induced sharing," and it has killed off many a popular campaign.

But links from these partners can jump into their app with one tap, or, if the app isn't installed, into the App Store with one tap.

Or the link you open is itself a mini program, and the purchase never leaves WeChat. If you have ever saved an address in WeChat, you don't even type that; pick WeChat Pay and you're done. The ten minutes of identity checks and bank-card binding that Suning demanded are gone. At most you link your WeChat account to a phone number.

Sending a shopper straight to a store matters a great deal. When brands buy ads on Toutiao or Weibo, much of the point is to push people into a JD.com or Tmall flagship store to order on the spot. Inside WeChat, which has more traffic than any of them, only the shopping platforms Tencent has invested in may do that.

There is more. If you have bought something through a mini program, or followed a particular brand, it turns up in your search results — search Uniqlo and the first page of results takes you into Uniqlo's WeChat store. Going back into a small merchant's mini program through "recently used mini programs" to buy again is easy enough as well. Add the shopping list WeChat launched recently, which gathers items you have added to carts in various corners of the app, and WeChat is now reasonably good to small sellers.

Even so, unseating the habits Alibaba has built will take Tencent and its whole cohort of shopping platforms pushing together.

On every measure, Tencent's shopping platforms are struggling to close on Alibaba; the one exception is Pinduoduo

In the most recent quarter, Alibaba's net profit reached 18.241 billion yuan, up 5% year on year, and its revenue has now grown more than 50% for 10 straight months.

On profitability, the Tencent camp cannot fight Alibaba at all.

Mogujie is a rare case among the Chinese companies recently listed or about to list in the US: its revenue for the period is lower than a year earlier.

It presents the 22% annual growth in China's online fashion marketing spend as an advantage of its business, yet the prospectus shows its fiscal 2018 marketing revenue — the equivalent of the ad fees Taobao charges shops — shrank 36% year on year.

JD.com has not yet reported its latest quarter, but after all these years the cost of manufacturing a shopping festival is still proportionally higher for JD.com than for Alibaba.

In the fourth quarter, the one that holds Double 11, Alibaba needs only 42 yuan of spending for every 100 yuan of revenue, nearly 10% less than usual. JD.com spent slightly more than usual relative to revenue during this year's 618: 93 yuan to earn 100.

Double 11 has trained shoppers into a habit. 618 still runs on JD.com's money.

In prospectuses and on earnings calls, several of these companies return again and again to WeChat's traffic as proof to investors that partnership with Tencent will bring fast growth.

Leave games aside and Chinese users spend a third of their time on Tencent. That traffic is genuinely valuable. Tencent's e-commerce investments have not yet turned it into growth that lasts.

JD.com's growth has slowed. Alibaba has worked to hold its own pace: without a traffic gateway that fully belongs to it, Alibaba is using content and traffic distribution to make Taobao and Tmall the place where traffic gets handed out.

Pinduoduo's user base is growing fastest in the Tencent camp. By September the number of people opening its app had come close to half of Taobao's, more than 80% above JD.com. In October, Pinduoduo got a slot in WeChat's Wallet. That alone guarantees nothing: the earlier Tencent-JD.com traffic tie-up, the "Jing-Teng Plan," ran out of power to bring in new users within six months.

Reading these companies' numbers is not easy, because they do not count the same things.

Vipshop discloses its sales only partly and does not publish GMV for every year. This year it abruptly switched monthly active users from a monthly count to an average over the trailing 12 months; two analysts asked about it on the earnings call and neither got a straight answer.

Mogujie no longer reports how many people use its app each month or each day, but it counts a single mini program open as an active user.

JD.com has tried to convince investors that WeChat is not what carries it, saying that over the past year the share of transactions completed inside its own app rose from 80% to 86%. But a product spotted through JD.com can also be bought by jumping into the app, so the figure says nothing direct about how much JD.com leans on WeChat.

Pinduoduo has been around a short time, and in that time it swung from a self-run store like JD.com's to a marketplace resembling Taobao's, so its revenue history means little. It is also the only rival whose user base comes anywhere near Taobao's.

None of these companies has moved closer to Alibaba. Alibaba's growth is slowing too, but it is simply far bigger than they are.

On cash, Alibaba is far out in front. The measure here is cash reserves minus debt, the money actually available: under 100 billion yuan for Alibaba in 2015, 150 billion now. JD.com's increase is under 20%.

If it comes to buying traffic and fighting a price war, Alibaba has far more money on hand than any of them. Only Tencent could take it on.

Beyond the big four, Tencent has invested in a scattering of smaller shopping companies. Some have simply disappeared — Yixun, bought years ago, vanished after it was folded into JD.com. Others are WeChat-based social commerce plays that have not grown big enough, and are nowhere near taking on Alibaba.

What Pinduoduo shows is the opening: social-sharing commerce grown out of WeChat.

The world outside has changed sharply, and Tencent will only get more serious about e-commerce

WeChat still holds back. Moments ads are few, no more than two a day per user, and apart from a handful of special campaigns with JD.com and Pinduoduo, they generally do not push people to buy.

But all that restraint rested on games delivering huge profit growth, and games have stopped delivering.

In March, the regulator halted game approvals, and they have not resumed. Tencent's game business hit the brakes, taking two-thirds off the company's profit growth.

Games, long Tencent's main source of revenue, fell 9.5% quarter on quarter in the fourth quarter of 2017 — the first decline the business had ever recorded, and the first since it finished shifting to mobile.

This year's interim report shows quarterly profit falling as well: down 2% year on year and 23% from the previous quarter, the first year-on-year drop in quarterly net profit in 13 years. Tencent's social business is growing fast, but a large part of that revenue comes from video subscriptions, and Tencent executives have said more than once on earnings calls that video loses money.

To keep games growing, Tencent raised marketing spending for two quarters in a row after the fourth quarter of 2017, trying to pull people back into old titles. The revenue did not follow.

According to Bloomberg, Tencent has told its game operations teams to hand marketing money back. A letter sent days ago to game marketing executives asked them to control cash flow and cut spending in order to "get through the hard times together": games still waiting on government approval, for instance, must return what is left of their budgets to Tencent.

Of Tencent's three main businesses, the only one with real promise now is advertising, and the most direct kind of advertising is helping shopping platforms move goods. Alibaba takes in more than 100 billion yuan a year from ads; Tencent's ad business would have to grow more than 160% to match that. Tencent's own filings say plainly that WeChat shows far fewer ads than comparable products, leaving it enormous room to grow.

Beyond traffic and ads, what else can a platform offer? After-sales service, payments, support teams. Alibaba has 50,000 people doing this work, and although merchants complain about ever more rules, this "business operating system" is also why they cannot leave.

The weather is turning colder generally: growth in China's internet population has essentially run out this year, and smartphone sales have turned negative. Online shopping is one of the less-affected corners, still growing 24% this year.

In e-commerce, Tencent is going to do more.

This September brought the third big reorganization in Tencent's 20 years. With the traffic windfall of China's mobile internet receding, a company built on consumer users does need to change direction.

How well Tencent can lead its cohort in the chase after Alibaba is hard to judge now. What is certain is that the contest over how Chinese consumers shop is about to get far more direct, and far tenser.

Graphics / Xiuxia Feng, Fangyi Gong, Xu Tao

Data / Fangyi Gong, Zhang Dan

Cover image / Yunlu Tang