The Chinese Internet industry is experiencing continuous growth and evolution, with the emergence of outstanding players such as Meituan (Chinese: 美团), Douyin Group (Chinese: 抖音集团), Jingdong (Chinese: 京东), and Pinduoduo (Chinese: 拼多多). Notwithstanding, it is impossible to talk about digital business in China without focusing on either Alibaba, Tencent, or both. The business ecosystems built by the two Mr. Mas cannot easily be avoided, either by consumers, businesses, investors, or competitors. These two Chinese tech giants are undoubtedly the top Internet companies in China in terms of market capitalization, profitability and business ecosystem. The constant "separation and integration" between them has garnered significant market attention.
Alibaba and Tencent have been competitors since China's Internet industry boomed. In 1999, Jack Ma founded Alibaba for USD 60,000 and grew it into China's foremost e-commerce platform. In 1998, Ma Huateng created the instant messaging service QQ for Tencent in Shenzhen, which now has over 1 billion users for its games, communications, and social services.
Alibaba is one of the world's leading online marketplace and business exchange communities. Its businesses cover a wide range of areas including China Commerce, International Commerce, Local Consumer Services, Digital Media and Entertainment, Innovative Initiatives and Others, with products such as Taobao, TMALL, AliExpress, YOUKU, Quark, Alibaba Health, etc. In terms of total revenue and net profit, in Q1 2023, Alibaba's total revenue exceeded CNY 868.69 billion, slightly lower than American E-commerce giant Amazon's USD 127.36 billion (CNY 911.53 billion); Alibaba's net profit of CNY 65.57 billion exceeded Amazon's USD 3.17 billion (CNY 22.70 billion).
Tencent is one of the world's leading Internet technology companies, with businesses covering social media（core business）, finance, entertainment, consulting, etc., with products including WeChat, QQ, Tencent Video, Tencent Maps, Tencent Gaming, Tencent Meeting and others. Its major revenue includes value-added business, online advertising, financial technology & corporate services, and other businesses. In terms of revenue and net profit, in Q1 2023, Tencent's total revenue exceeded CNY 149.99 billion, lower than American Internet giant Meta's USD 28.65 billion (CNY 205.55 billion); Tencent's net profit of CNY 32.54 billion exceeded Meta's USD 7.23 billion (CNY 19.57 billion).
Rival Billionaires
(Alibaba's) Taobao and (Tencent's) WeChat had been blocking each other for eight years.
According to Xinhua News Agency, the blocking of Taobao and WeChat originated in 2013. In July 2013, Alibaba announced the suspension of WeChat-related third-party application services and cut all access to WeChat data. Soon afterwards, it banned Taobao sellers from posting WeChat QR codes.
In November 2013, WeChat users, who could not visit Taobao’s website via a link in WeChat, were led to a download page for the Taobao app and thus could no longer buy commodities from Taobao on WeChat.
At the time, Alibaba stated that this was for security reasons: WeChat's browser could not distinguish between the real Taobao page and the phishing page. If the user entered the account password on this page, then the user's account password would be stolen. Therefore, the Taobao links opened in WeChat could not be opened directly, nor could it jump directly to the Taobao app.
Tencent promptly responded by obstructing Taobao's download hyperlink and redirecting users to a webpage that displays the message: "The Taobao website you are attempting to access has been obstructed. If you wish to browse, you may long-press the URL, copy it, and utilize your browser to visit." This measure has been upheld for a duration of eight years.
It is widely perceived that Alibaba and Tencent are engaged in a competition for dominance in the realm of network traffic. In an article titled "Alibaba and Tencent, who actually blocked who" in 2015, it was mentioned that “Despite the relatively small scale of WeChart business (Chinese: 微商) and fishing activities during that period, the occurrence of theft was deemed an intolerable loss for individual users. Moreover, there was a need to prevent WeChat business from transforming into a mere shelf entrance for business competition on Taobao. To address these concerns, Alibaba's product director collaborated with the technical team to develop a program, internally referred to as the Cuckoo Plan.”
Since then, the battle between the two sides has gradually escalated. After Alibaba launched the chat app "Laiwang" (Chinese: 来往), the registration links appended with the app suffix were obstructed by Tencent. In February 2014, Alipay implemented a measure to restrict WeChat and terminated the payment interface for merchants using WeChat. In 2015, Tencent promptly restricted Alipay following the introduction of the red envelope function, which was not amenable to being disseminated through QQ or WeChat.
In response, Tencent's explanation is: "We will never allow anyone to carry out malicious marketing in the name of red envelopes to harm the user experience in the Moments (Chinese: 朋友圈)." In addition to Taobao, WeChat and Tiktok also have a history of blocking each other. In February 2021, Tiktok filed a lawsuit against Tencent at the Beijing Intellectual Property Court, claiming that Tencent's restriction of users' sharing of content from Tiktok through WeChat and QQ constituted a "monopolistic act of abusing a dominant market position to exclude or restrict competition" prohibited by the Anti-Monopoly Law, and asked the court to order Tencent to stop this act and compensate Tiktok with CNY 90 million.
According to the report released by ByteDance, Tencent blocked a total of 6 products under ByteDance, affecting more than 1 billion users. Because of Tencent's restrictions, more than 49 million people are blocked from actively sharing Tiktok videos on WeChat and QQ every day.
Breaking the Ice, Starting to Cooperate
The cooperation between Alibaba and Tencent dates back to 2021.
In September 2021, WeChat announced that it would adjust the external link content management specifications: users could access external links in one-to-one chat scenarios, but group chats were not open yet; external links shared to WeChat were still in password mode; after the external links were clicked, WeChat would let users make a secondary confirmation. Taobao's product links could then be opened in WeChat. In the following year, the two sides began to test the "tear down the wall" step by step.
According to a previous announcement by WeChat, WeChat "will promote a 'phased, step-by-step' interconnection program based on relevant legal requirements and with the approval of regulatory authorities, with security as the bottom line." In the past year or so, the two giants have collaborated progressively on payment, small programs, private domain traffic, and ecological construction. In the process of attaining interconnection, payment interconnection has emerged as one of the world's most pressing concerns.
In September 2021, Alibaba's apps, including Ele.me (Chinese: 饿了吗), YOUKU (Chinese: 优酷), Damai (Chinese: 大麦), Koala Haigou (Chinese: 考拉海购), Shuqi (Chinese: 书旗) and other apps have been connected to WeChat Payment. Apps such as Taote (Chinese: 淘特) and Freshippo (Chinese: 盒马) had also applied for access to WeChat Payment.
In March 2022, many netizens found two more entrances to WeChat Payment when using Taobao, namely "Scanning WeChat Code to Pay" and "Go to WeChat to Find Your Friends to Pay".
In October 2022, #Alipay supports transferring money to WeChat and QQ friends# was on the top of China's Weibo Hot Search List. Users found that "Transfer Money to WeChat Friends" was a new method of transferring money without an actual Alipay account.
After the continuous cooperation in terms of payment, the two giants began to explore more diversified cooperation. In October 2022, an Alibaba employee on Momo (a job information sharing platform) broke the news that Taobao's 88VIP credits could be exchanged for free Tencent Video Membership. Furthermore, in the same month, TMALL (Alibaba's app) launched a WeChat applet called "Tmall SupermarketXiaodangjia" (Chinese: 天猫超市小铛家) on WeChat.
During the 618 Shopping Festival in 2022, WeChat's Moment has been opened to promote some of the Tmall global brand flagship stores' products. By February 2023, we found that Taobao had a new network portal in WeChat in the ad space at the bottom of the article in the official WeChat account. After clicking on the Taobao page in this location, customers can jump directly from WeChat to Taobao to complete their purchase and return to the Taobao home page to browse more products. It is reported that this new function was initiated at the end of 2022, which was not exclusive to Taobao, but also for many WeChat ecological business partners and Tencent investment system platforms, such as JD Mall (Chinese: 京东商城), Pinduoduo (Chinese: 拼多多), Meituan (Chinese: 美团).
In an era of information explosion and advertising shrinking, this cooperation has the potential to generate a surge in network traffic for Taobao, to provide a substantial boost to advertising revenue for WeChat, and to drive sales growth for merchants. Amidst the repercussions of the pandemic and the swift emergence of competing platforms such as Tiktok and Little Red Book, Tencent and Alibaba have been gradually collaborating with each other in the domains of electronic payments, private domain, and ecological expansion. However, the scope and depth of this collaboration is quite limited. In the future, as the market becomes increasingly saturated and competition intensifies, it is possible that the two giants may enhance their collaboration in more fundamental areas.
PEST Analysis
From "mutual blackout" to "mutual cooperation", what kind of factors are at play behind? We apply PEST (i.e. macro environment analysis) to analyze the internal and external drivers of this change in four dimensions: Politics, Economy, Society and Technology.
From a policy perspective, China’s State Administration for Market Regulation, Ministry of Industry and Information Technology of the People’s Republic of China, the National People's Congress of the People's Republic of China and other departments have been attaching great importance to the implementation of the anti-monopoly law and promoting the interconnection and cooperation among enterprises.
In October 2021, China’s State Administration for Market Regulation organized the drafting of the Guidelines for ImplementingEntity Responsibilities of Internet Platforms, indicating that Internet platform operators should comply with laws and regulations in the field of anti-monopoly and should not engage in monopolistic acts such as monopoly agreements. In September 2021, Ministry of Industry and Information Technology of the People’s Republic of China took the lead in proposing platform interconnection and cooperation, and held a meeting to propose compliance standards regarding instant messaging softwares, requiring that the platforms must be unblocked according to the standards within the deadline, otherwise disposal measures would be taken in accordance with the law. In June 2022, the 35th session of the Standing Committee of the 13th National People's Congress voted to amend the Anti-Monopoly Law, from which it can be found that the anti-monopoly regulation of the digital platform economy has focused on the level of specific indicators.
Enterprise interconnection and collaboration is the trend of the times, which can not only help maintain the survival of large enterprises, but also enable innovative small and medium-sized enterprises to get support, thus promoting the whole industrial development. Chinese companies are becoming more and more open, and have reached a critical point.
From an economic perspective, export has always been an important force in accommodating employment and driving GDP growth.
However, exports, as one of the "troika" of China's economic growth (namely, investment, consumption and imports and exports), have performed poorly recently. The General Administration of Customs of the People’s Republic of China (GACC) recently released trade statistics for May 2023, indicating that China's May exports drop 0.8% in yuan terms; China's May exports drop 7.5% in dollar terms, shrinking far faster than expected. The main reason may be the reduction of exports to Japan and the United States, as well as foreign companies shifting their production capacity from China to other countries. Following a counter-trend surge in March, China's export figures have exhibited indications of a declining trend subsequent to April. The deceleration of China's exports continued until May, a trend that was also observed in South Korea and Vietnam.
Another piece of data comes from the National Bureau of Statistics of China. In May, China's manufacturing Purchasing Managers' Index (PMI) recorded 48.8%, down 0.4% from the previous month, and down for the third consecutive month-on-month. New export orders fell back 0.4% to 47.2%, down for the third consecutive month-on-month. PMI continued to decline, indicating that economic development continues to fall. Weak endogenous power, insufficient demand and lack of confidence are still prominent issues. Combined with overseas recession and weakening external demand, the overall economic pressure remains high.
Under this background, it is not surprising that Alibaba and Tencent are working together. Both sides face the challenges of slow Internet flow growth, insufficient internal and external demand, and strong rising competitors. Pinduoduo reported better-than-expected results in Q1 2023 and reached 910 million active buyers for the full year 2022, right on top of Alibaba China's 1 billion annual active consumers. According to the UK's Financial Times in April 2023, Douyin's FY2022 EBITDA soared 79% year-over-year to USD 25 billion, a figure that surpassed Tencent and Alibaba's USD 23.9 billion and USD 22.5 billion, respectively. Faced with the challenge of rising stars such as Pinduoduo, Douyin and Kuaishou, Alibaba and Tencent can only put aside their preconceptions.
From a societal perspective, the collaboration between Taobao and Tencent is the users' expectation. The essence of the Internet is interconnection, and providing convenience to users should have been the initial goal of every tech company, rather than establishing a monopoly based on market share and sacrificing user rights for competitive advantage. As the main Internet platforms continue to attract more users and expand their business scope, they also assume a monopoly-like position. Under the circumstance, Internet giants give preferential treatment to the group's affiliated companies or investment companies for the same type of links but shield the competing ones, blocking content and services in their own "walled garden" and attempting to prevent the flow of their own platforms. The advantage of its own platform is that it "pays for others' dowry." The blocking of content and services has drastically decreased the efficiency of Internet users' access to information and services, as well as squandered social resources, and certain "Internet majors" have historically possessed public service characteristics. It also impacts social efficiency to some degree.
Domestic demand is one of the main drivers of economic development. Since 2010, China's consumption has been contributing more than 50% to economic growth, especially in recent years with the booming "Double 11" and "618" shopping festivals, which have fully driven national consumption enthusiasm. However the economy is currently in a state of recuperation following the pandemic, rendering employment opportunities scarce. Additionally, consumers are exhibiting a lack of confidence in the future, leading to a preference for purchasing just-in-time products. Chinese consumers are displaying a rational approach towards shopping. In light of this situation, Tencent and Ali encounter various challenges in executing the 618 promotion due to limited consumer awareness. Therefore, it is crucial for them to collaborate in order to pursue business expansion.
From a technical perspective, there is no threshold for opening Taobao links in WeChat, but why has such a simple function not been implemented till now? This is because both platforms have taken the initiative to construct "walls" for their own gain. It is not uncommon for significant traffic platforms to attempt to gain a competitive edge through monopoly. However, as previously stated, business interconnection is the general trend in the context of the policy trend, export and domestic demand slump.