Tencent Restructures Ecommerce Business

On May 30, Tencent, one of the most profitable Chinese internet giant, restructured its ecommerce business in its latest effort to catch up in the booming internet shopping market and compete against Alibaba, the de facto Chinese ecommerce tycoon. Along with the restructuring came internal reorganization and position transfer of executives.

Tencent replaced the current ecommerce division with the newly formed ecommerce LOB (line-of-business), which boasts multiple units including operation, platform, virtual services, life services and research and development unit. Head of Paipai, Tencent’s online auction site, has been transferred, while Wu Youguang, one of the co-founder and EVP of Tencent, heading the new ecommerce LOB, according to people familiar with the matter.

One Missing Piece

With the popularity of Taobao, Tencent which is publicly criticized for following suit released its own online auction initiative Paipai in Sept. 2005 in hopes of taking a chunk of market share from Taobao. According to a report by marketing research firm iResearch, Taobao accounts for 88.4% of Chinese C2C market while Paipai holds an small slice of 10.1%.

It seems Paipai didn’t progress much in 5 years. Tencent’s first foray into Chinese ecommerce didn’t live up to what the company desired. Taobao is still the No.1 choice for Chinese customers who want to shop online. And more and more ecommerce sites ranging from verticals including Redbaby, Letao to general ones including 360buy, Yihaodian have grown into big-time players.

While Tencent, which is extremely profitable with respect to its VAS (value-added services), online gaming portfolios, etc, has always been lacking behind in the ecommerce area. One piece is still missing for a long time from the Maps of Tencent Empire.

Consolidating Ecommerce Forces

“By 2015, Chinese ecommerce market size will reach RMB 40 billion (US$ 6.17 billion), which is still not big enough. The size is estimated to double or even triple, quadruple by then. It’s bound to be one of the biggest revenue sources of all internet services. ” remarked Tencent founder and CEO Pony Ma when he was delivering an open speech in Shenzhen city in southern China, where Tencent is headquartered.

Ma’s speech speaks to Tencent’s lately attempts in strengthening the largest Chinese instant messaging network’s online shopping offers; also justifies the greedy shopper’s recent investing moves. Beginning year 2011, Tencent has fastened steps to spend its way into ecommerce magnate:

Also, it was rumored Tencent had talks with Yihaodian and Dangdang, but failed to come to any agreements.

A Tencent Dream For Online Shopping

Tencent has numerous user numbers that everyone would crave for, and lucrative game portfolios which enable the company to tower over its competitors. But it seems to Lv Benfu, a renowned internet analyst in China, that these advantages do little to boost Tencent’s ecommerce venture, for payment solutions, operational experience and making of trading rules involved in the transaction of ecommerce require long-term accumulation. Rome isn’t built in a day.

Compared to Alibaba, the Chinese ecommerce giant which has been engaging in the area for more than a decade and owns the largest Chinese B2C site(alibaba.com), C2C site(taobao.com) and online payment solution(alipay.com), Tencent still has a long way to go and a lot to learn.

But according to a research report released in Sept. 2010 by Deutsche Bank, Tencent is forecasted unlikely to gain material benefits from ecommerce business in the coming 3 years on the grounds that Tencent adopts an “Asset-Light” model which only provides online platform for 3^rd party business to operate virtual online shops without involving in offline logistics, hence it’s difficult for Tencent to transform traffic into revenue.

The report points out that, with such an business model, Tencent needs to be sizable in ecommerce market to be profitable.

Tencent has been doing very well in many areas, such as instant messaging, email, news, games and so on; ecommerce is the latest waterfront that the Chinese online giant hopes to conquer.