Tencent E-Commerce: Price Wars II?

Tencent's big new e-commerce push could prolong the sector's state of overheated competition through the end of 2013 or longer.

PUBLISHED : Wednesday, 10 October, 2012, 11:04am
UPDATED : Wednesday, 10 October, 2012, 11:09am

Less than two months after the latest flare-up in an ongoing battle for supremacy of China's e-commerce market, we're getting word that Tencent (0700.HK), a relative newcomer to the sector, may be preparing to turn up the heat again with yet another massive spending blitz. This potential new flare-up, which should come as a surprise to no one, could be particularly worrisome as it shows that the cash-rich Tencent is willing to spend big bucks and fight a long war to win a piece of an already overcrowded Chinese e-commerce market.

Let's have a look at the latest news, which has media reporting that Tencent's newly formed e-commerce unit has budgeted 300 million yuan, or nearly US$50 million, for a new promotional blitz as it looks to gain market share from rivals. The company says it will make the money available as gift coupons to some 50 million participating customers, with a target of generating more than one billion yuan in sales through a promotional event set to take place towards the end of this month.

Industry watchers will know that Tencent is China's biggest Internet company, rising to prominence a decade ago on the strength of its QQ instant messaging platform that it later leveraged to become China's biggest online game company. Tencent generally has a strong execution record, using its large and loyal user base to muscle into other areas of the Internet.

With that in mind, the company formally spun off its relatively small e-commerce unit into a separate business entity back in May as part of a broader reorganization. Since then the unit's chief executive has mentioned a potential future IPO, and now word of this new promotion indicates he is prepared to spend big money to try and grab a bigger slice of China's e-commerce sector. That could be bad news for a space that has been plagued by rampant competition for more than a year now, pushing most players deeply into the red.

Privately held industry leader Alibaba is believed to be one of the only major players still making a profit, though even its profits are likely shriveling due to the competition. Meantime, privately held Jingdong Mall, the second largest player, is believed to be losing big money, forcing it to briefly consider an IPO earlier this year to raise more funds as it now reportedly looks for new money from private investors. Dangdang (NYSE: DANG), the only major player that is publicly listed, has fallen sharply into the red for more than a year now, with its losses ballooning in the last few quarters. 

The near non-stop price wars came to head in August, when Jingdong and (Shenzhen: 002024) launched a series of discounts that later went on to infect much of the sector, with sellers of electronics and household appliances especially hard hit. Adding to the misery are recent e-commerce ramp-ups in China by cash-rich US giants Amazon (Nasdaq: AMZN) and Walmart (NYSE: WMT).

So the question becomes: with the situation already so overheated, will Tencent's new drive into the space really make a difference? Unfortunately the answer could quite possibly be yes, since Tencent is quite a cash-rich company that is showing it wants to get a bigger piece of the market and is willing to spend lots of money to achieve that goal. At the end of the day, look for 2013 to be another bloody year in Chinese e-commerce, with perhaps one or two major mergers or closures possible as the industry makes its slow and painful march towards a more sustainable future.

Bottom line: Tencent's big new e-commerce push could prolong the sector's state of overheated competition through the end of 2013 or longer.

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