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JD.com Inc., the largest Chinese direct-to-consumer e-retailer and Tencent Holdings Limited, one of the largest Chinese internet companies, have announced a strategic partnership that includes merging their web retailing businesses.
JD.com Inc. is aligning itself with Tencent Holdings Limited, the operator of major social and messaging platforms in China, in a challenge to China’s dominant e-commerce player, Alibaba Group.
JD will acquire Tencent's two e-retail sites, wanggou.com and PaiPai.com, and a minority stake in Tencent’s major e-retail site, Yixun.com. In addition, JD has the right to acquire the remaining stake of Yixun in future.
Tencent will promote JD.com in its popular Tencent’s mobile messaging platforms, the WhatsApp-like Wechat, and its QQ instant-messenger service.
In connection with the transaction, Tencent will pay US$214.6 million to buy an approximately 15% stake in JD. JD announced in January plans to go public, and Tencent also agreed to acquire a 5% stake in JD at the IPO price when shares go on sale.
JD is based in Beijing and ranks No. 1 in the newly released Internet Retailer 2014 China 500. Based in Shenzhen, Tencent operates several popular social media platforms, and its own e-retail business ranks No. 5 in China 500.
Richard Liu, founder, Chairman and CEO of JD.com says this partnership will enhance JD’s ability to provide a high quality and enjoyable shopping experience and build the retailer’s mobile and Internet sales.
With the deal, JD.com eliminates a competitor in online retailing and strengthens its competitive position, says Mo Daiqing, an analyst with research firm China E-Commerce Research Center.
“After this deal, JD’s value at IPO could increases from around US$9 billion before to around US$11 billion.” He says “Also, JD could get a lot of traffic from Tencent’s social media platforms, especially from Wechat. “
Wechat is a mobile messaging application and Tencent says it has more than 300 million active monthly users now. It is similar to WhatsApp, which had 400 million active users at the end of 2013, and which Facebook acquired this year for US$19 billion.
If the JD-Tencent alliance looks like a Chinese version of Facebook+WhatsApp, with Amazon.com Inc. it’s because JD and Tencent both face competition from Alibaba, which dominates e-commerce in China and also has made major investments in social media. Alibaba paid $586 million in April 2013 for an 18% stake in Weibo, a popular Chinese social media platform that combines elements of Facebook and Twitter.
Alibaba Group declined to comments on JD and Tencent’s partnership.
Alibaba, which has disclosed plans to go public but not set a date, also has invested in mobile companies. For example, it offered US$1.13 billion last month to acquire a 72% stake in AutoNavi Holdings Ltd, a Chinese mobile navigation services provider.
JD filled IPO prospectus in this January, and is planning an initial public offering of stock in the United States to raise $1.5 billion.
Due to fierce competition and huge investments in logistics, JD’s gross margin is only around 10% now, versus around 28% for Amazon in 2013, according to their recent financial reports.
Tencent operates and invests many large e-commerce sites in China but before this deal, but its e-retail scale is far smaller than that of dominant players such as Alibaba Group, which operates the massive Taobao and Tmall.com marketplaces, and JD.com.
For example, JD.com’s annual web sale reached US$18.18 billion in 2013, while Tencent’s e-retail sales were only US$2.48 billion during the same period. While Alibaba, like eBay Inc., does not sell merchandise itself, it hosts millions of merchants that sell on Taobao and Tmall. The combined value of merchandise sold on those two marketplaces in 2013 was $245 billion, according to the Internet Retailer 2014 China 500.
“This partnership will enable Tencent re-focus on its strengths,” says CERC analyst Mo, “such as social media platforms and user relationship management.”