In the war for the Chinese Internet, messaging giant Tencent is taking the battle to rival Alibaba's territory as never before.
Tencent, a leader in online messaging and gaming, said Monday it will pay $215 million for a 15% stake in online retailer JD.com, in advance of JD.com's planned U.S. initial public offering. That appears cheap, valuing the entire company at below tangible book value. But Tencent is also giving JD.com the bulk of its online shopping sites, essentially outsourcing its e-commerce operations.
tangible：有形资产，切实的 outsourcing：外包，外购
Until now, Tencent has struggled to take ground from Alibaba, the dominant player in online commerce. Alibaba's Taobao site has a virtual monopoly in person-to-person online trading, similar to eBay in the U.S. In the business-to-consumer space, Alibaba's grip through its TMall site isn't as tight: about half the market by transaction volume, according to research firm Analysys International. Second place is JD.com with 18%. Add in Tencent's small e-commerce operations and the Tencent-JD.com team commands nearly a quarter of the market.
monopoly：垄断，专卖
That's a good launching pad from which to take on Alibaba. Tencent will direct traffic to JD.com stores from its massively popular WeChat and QQ messaging platforms. And JD.com can leverage Tencent's payment platform, resolving one of the site's main shortcomings, especially in comparison to Alibaba's well-liked Alipay.
leverage：杠杆，手段，影响力
JD.com still faces challenges. Unlike Alibaba, which leaves logistics to third parties, JD.com has an army of 18,000 delivery people and a network of warehouses to maintain. That labor and capital-intensive model left gross margins of just 9.8% in the first nine months of 2013, and on a net basis the company was barely profitable, according JD.com's IPO filings. That compares to a 73% gross margin for Alibaba over the same period.
U.S. investors have long tolerated low margins at Amazon as it pursues growth, on the theory that its dominant position will allow it to tweak its business at some point to turn on the profit gusher. Whether investors show similar patience with upstart JD.com remains to be seen.
For Tencent, betting on JD.com makes more sense than continuing to invest in its own e-commerce sites. Together, the two firms make a formidable rival to Alibaba. Long quiet, China's e-commerce front is about to see some real action.
formidable：强大的，令人敬畏的