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Alibaba and Tencent Join Forces in a New Joint Venture

By Leo Sun – Updated Apr 17, 2019 at 1:52PM

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The two tech giants make a rare co-investment in China’s new ridesharing service.

Alibaba (BABA -3.11%) and Tencent (TCEHY -0.08%) are fierce rivals in China's mobile payment, smart retail, media streaming, cloud, and artificial intelligence (AI) markets. That's why it was surprising when the two tech giants recently joined forces with home appliance maker Suning, a trio of Chinese automakers, and other entities to form a new ridesharing joint venture called T3.

Suning is T3's largest stakeholder with a 17.4% share. Automakers FAW Group, Dongfeng Motor, and Changan Automobile each acquired 16.4% stakes, while Alibaba, Tencent, and the remaining affiliates split the remaining stakes.

A lit-up view of Shanghai at night.

Image source: Getty Images.

T3 is receiving $1.45 billion in funding from those backers, and plans to launch a fleet of 5,000 cars in Nanjing by late May or early June. This makes T3 a potential challenger to Didi Chuxing, the market leader that was engulfed in controversy after drivers at its subsidiary, Didi Hitch, killed two female passengers in two separate incidents last year. 

Alibaba and Tencent both still own stakes in Didi Chuxing, which was formed from a merger between Alibaba-backed Kuaidi Dache and Tencent-backed Didi Dache in 2015. However, their stakes in T3 indicate that both companies want to spread out their ridesharing bets.

Check out the latest earnings call transcripts for Alibaba and other companies we cover.

Why Alibaba cares about ridesharing apps

Alibaba generates most of its revenue from its Tmall and Taobao marketplaces, and a smaller percentage of revenue from its cloud and digital media and entertainment businesses. Ridesharing platforms like T3 don't initially seem to fit into that ecosystem.

But if we dig deeper, some synergies start appearing. Alibaba-backed Ant Financial's Alipay, which shares a duopoly in China's mobile payments market with Tencent's WeChat Pay, is widely accepted by ridesharing services across China.

By retaining significant stakes in top ridesharing services, Alibaba can prevent them from ever dropping Alipay in favor of WeChat Pay. We're already seeing a similar battle between Alibaba and Tencent in the retail market, where both companies are investing in brick-and-mortar retailers to tether them to their payment platforms.

In 2017, the Chinese Ministry of Science and Technology declared that the country's first wave of open AI platforms would rely on Alibaba's technology in smart cities, Baidu's (BIDU -5.44%) technology in driverless cars, and Tencent's technology in healthcare services. This makes ridesharing apps a natural fit for Baidu, but they also will function nicely in smart cities, where they can help Alibaba track traffic trends.

A smiling, bespectacled woman entering a yellow cab.

Image source: Getty Images.

Why Tencent cares about ridesharing apps

Tencent generates most of its revenue from video games and ads. However, its flagship app, WeChat, is the most popular messaging app in China with 1.1 billion monthly active users. Ridesharing apps can extend the reach of WeChat Pay, which is integrated into the app, but that's just one piece of the puzzle.

Tencent's long-term play is the expansion of WeChat as a platform for Mini Programs, which run within the messaging app and help users order products, make payments, play games, or hail rides. This strategy lets Tencent dominate smartphones, without owning a mobile OS like iOS or Android, and corral users into its walled garden.

Last November, Tencent declared that it had over 1 million Mini Programs with 200 million daily active users. Last quarter, it stated that total active users of Mini Programs rose more than 250% year over year, and that daily visits per user jumped 54%.

That growth, along with the strength of its private photo-sharing network Weixin Moments and entertainment news feed QQ Kandian, boosted Tencent's "social and others" ad revenue by 44% year over year to 11.85 billion RMB ($1.8 billion), or 14% of its top line, last quarter.

To keep users locked into WeChat, Tencent must fill its Mini Program library with popular apps. It can leverage WeChat's popularity to bring companies aboard, but taking a stake in a company -- as it did with Didi and T3 -- can nearly guarantee cooperation.

The road ahead

Alibaba's and Tencent's investments in T3 won't significantly boost either company's revenue anytime soon, but they highlight both tech giants' longer-term strategies. But over the short term, these investments might spell trouble for Didi Chuxing, which is desperately trying to resolve its safety issues amid its ongoing push toward an IPO.

Leo Sun owns shares of Baidu and Tencent Holdings. The Motley Fool owns shares of and recommends Baidu and Tencent Holdings. The Motley Fool has a disclosure policy.

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