Chinese tech giants Tencent (OTC:TCEHY) and (NASDAQ:JD) recently invested a combined $863 million in e-tailer Vipshop (NYSE:VIPS). It will cost Tencent $604 million to buy a 7% stake, while will put up the remaining $259 million to increase its existing stake from 2.5% to 5.5%.

Vipshop shares surged more than 40% after the announcement. Let's take a closer look at its business, why Tencent and invested in it, and what this could mean for e-commerce market leader Alibaba (NYSE:BABA).

Two young women smiling while shopping at a mall.

Image source: Getty Images.

What does Vipshop do?

Vipshop is a smaller business-to-consumer e-tailer that mainly sells apparel, accessories, and other products through ongoing flash sales. Its 3.5% market share makes it the fourth-largest B2C player in China after Alibaba's Tmall,, and Suning -- in that order, according to iResearch.

Vipshop's flash sale model has stayed surprisingly resilient amid competition from those larger rivals. Its average revenue per user (ARPU) rose 11% annually to 643 yuan ($98) last quarter, fueled by its higher average ticket sizes and shopping frequencies.

Its total active customers over the past 12 months rose 22% to 6.5 million, as the company expanded into new product categories like pharmaceuticals. Its total orders during Singles Day (Nov. 11), China's equivalent of Black Friday, exceeded 10 million. Analysts expect Vipshop's revenue and earnings to grow 33% and 43%, respectively, this year.

Why does Tencent need Vipshop?

Tencent owns WeChat, the most popular messaging app in China, as well as the older messaging platform QQ and the social network Qzone. It also owns a massive portfolio of games, including League of Legends, Clash of Clans, and stakes in major publishers like Activision Blizzard.

Over the past few years, Tencent turned WeChat into an all-in-one "super app" for mobile payments, deliveries, games, and other services. A big part of this expansion is a push into the e-commerce industry, where it's launched multimedia ad campaigns and in-app shops.

WeChat's mobile app.

WeChat's mobile app. Image source: iTunes.

Many big brands -- including Longchamp, Burberry, and LVMH's Louis Vuitton -- now sell goods on WeChat. Some others are testing out flash sales on the platform, and payments are processed via WeChat Pay. But for this platform to flourish, it needs more allies -- like JD and Vipshop -- to challenge Alibaba's Tmall and Taobao marketplaces.

Tencent and JD are already allies

Tencent already owns a 21% stake in, which integrates its platform into WeChat and QQ. Tencent partnered with ahead of Singles Day earlier this year, as merged its customers' shopping histories with data from WeChat users. uses that data to make predictions and suggestions for customer purchases, and helps vendors promote their goods. also grants customers discounts at brick-and-mortar stores when they use WeChat Pay.

Another major investor in is Wal-Mart (NYSE:WMT), which owns a 10% stake in the company. Earlier this year, and Wal-Mart merged their membership platforms so members could receive the same discounts and other benefits at both retailers.

By lowering the barriers between each other, Tencent,, Wal-Mart, and Vipshop are widening their moats against Alibaba. But Tmall is still a behemoth -- iResearch estimates that it controlled almost 57% of China's e-commerce market last year. JD, in second place, controlled about 25%.

The key takeaways

The combination of Tencent's 980 million monthly active users on WeChat,'s 266.3 million annual active customer accounts, and Vipshop's 60.5 million active customers give these companies a lot of ways to hurt Alibaba. However, all three companies still face a tough battle against the latter's ever-expanding ecosystem of websites, mobile payments (Alipay), and cloud services.

This is analogous to the current battle against in the U.S.: Smaller players are teaming up and overlapping their ecosystems, but they're still struggling to match Amazon's first-mover advantage, brand recognition, customer base, and pricing power. Just like Amazon, Alibaba will be a very tough opponent to beat.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.