Romance of the Three Kingdoms: Marriott’s China Ambitions Caught in Struggle Between Tech Giants

(Saam Gwok 262 CE by Ian Kiu – CC BY 3.0)

In a previous post, we discussed how Marriott and Alibaba agreed to promote Marriott in China through Alibaba’s subsidiary Fliggy at the same time that the partnership between Marriott and Ctrip, the leader of the Chinese online travel market, was unraveling. The competition between Ctrip and Fliggy is a microcosm of a much larger on-going battle between three Chinese tech giants: Baidu, Alibaba, and Tencent (the trio is often referred to as BAT).[i]

This post offers an overview of how the competition between these giants has played out in various sectors of the Chinese tech industry, and in particular within the online travel agent (OTA) market. While Marriott has allied itself with Alibaba and Fliggy, the larger struggle for market dominance raises many challenges for the Bethesda-based company. With Fliggy’s competitors commanding over 90% of Chinese online lodging bookings, what are the implications for Marriott? [ii]

Baidu – Alibaba – Tencent

Although these three companies compete in multiple areas, they each have a different core business. Baidu, often compared to Google, is the operator of Baidu.com, China’s leading search engine with a 73% market share.[iii] [iv] The primary business of Alibaba, the “Amazon of China,” is e-commerce.[v] [vi] Tencent, which operates the social media app WeChat, temporarily surpassed Facebook in November 2017 to become the world’s fifth largest public company by market value.[vii]

Each of the three Chinese giants operates and invests in a large variety of sectors complimentary to its core business, leading to fierce competition.[viii] In recent years, the three companies and their allies have fought over dominance in industries as diverse as food delivery, bike sharing, and trucking.[ix] [x] [xi] Bloomberg labeled a running battle between rival trucking apps backed by Tencent and the head of Alibaba as “toxic.” [xii]

A key area of competition between the BAT companies is payment systems. Alibaba introduced its payment system Alipay in 2004 to facilitate transactions between buyers and sellers using its platform.[xiii] In 2013, Tencent created its own payment system WeChat Pay; Alipay saw its share of mobile transactions by value fall from 80% to 54% in the three years between 2014 to 2017.[xiv] Baidu launched its own mobile payment service in 2014.[xv]

According to CB Insights, over 40% of the “unicorns” in China – privately held companies worth over $1 billion – are backed by Baidu, Alibaba, Tencent, and the e-commerce company JD.com, or their affiliates.[xvi] The latter, a competitor of Alibaba in the retail sector, is itself backed by Tencent.[xvii] [xviii]

The Baidu – Tencent Alliance in Online Travel

Between the three companies, in 2016 Tencent earned the most revenue and profit, followed by Alibaba and Baidu.[xix] However, Baidu is the largest shareholder in Ctrip,[xx] the leader in the Chinese online travel market with a 65% market share (compared to Fliggy’s 15%).[xxi]

Over the past two years, Ctrip made a series of major acquisitions in the online travel industry, including its OTA rival Qunar, and the travel search site Skyscanner.[xxii] In an interview with China Daily, Ctrip’s CEO stated that the company is successfully digesting recent acquisitions and is poised to capture a bigger slice of the business travel market from the country.[xxiii]

What could further bolster Ctrip’s dominance in the OTA sector is its alliance with Tencent. On December 29th, 2017, Ctrip announced that two of its portfolio companies, Toncheng Network and eLong, agreed to merge as Tongcheng-eLong.[xxiv] According to Ctrip’s press release, Ctrip and Tencent planned to act as strategic major shareholders of the company, and the merger will enable the new company to provide wider traveler coverage and deliver greater online travel services and products while benefiting from significant traffic via Tencent’s WeChat and Mobile QQ platforms.[xxv]

The synergistic relationship between Baidu’s Ctrip and Tencent is further strengthened by their mutual connection to the Priceline Group. The Priceline Group has been a partner of Ctrip since 2012, and invested $500 million in Ctrip via convertible bonds in 2015.[xxvi] Tencent is a major backer of Meituan-Dianping, a startup operating a wide variety of business including delivery, local business reviews, and discounted group-buy (similar to Groupon).[xxvii] Meituan-Dianping launched its travel service Meituan Travel in 2017.[xxviii] Following the launch of Meituan Travel, Priceline became a backer of Meituan-Dianping, and Meituan Travel entered into a partnership agreement with Priceline’s Agoda.com. [xxix]

Online Lodging Booking: The Turf of Baidu and Tencent

2016 Chinese Online Lodging Market Share (by Trade Volume). Source: iResearch [xxxi]

This network of interests between Baidu, Ctrip, and Tencent represents a significant challenge to Fliggy’s attempt to grow in the Chinese OTA market, especially when it comes to online hotel bookings. According to a study by the Chinese consulting group iResearch, the various OTA portals operated by Ctrip, Tencent and their affliates occupies an overwhelming majority of the online lodging booking market. The combination of Ctrip, Qunar, Meituan, eLong, and Toncheng corresponds to 94.1% of the total trade volume in term of online lodging bookings.[xxx] The report did not specify the market share of Fliggy, and instead includes it in the category “Other,” which represents a total of 2.5% of total online lodging bookings.

Fliggy is at a disadvantage in the Chinese OTA market against the combined forces of Baidu, Ctrip, and Tencent.

 

[i] Bloomberg (2017, June 27th), Tech Titans in China Take Their Battle to a New Frontier, retrieved April 25th, 2018, https://www.bloomberg.com/news/articles/2017-06-27/china-s-tech-titans-take-their-battle-to-a-new-frontier-travel

[ii] iResearch, 2017年中国在线旅游度假行业研究报告, p. 20, retrieved April 25th, 2018, http://report.iresearch.cn/report_pdf.aspx?id=3025

[iii] Investopedia, Baidu Vs. Google: How Are They Different?, retrieved April 25th, 2018, https://www.investopedia.com/articles/investing/051215/baidu-vs-google-how-are-they-different.asp

[iv] Statcounter, Search Engine Market Share China: Mar 2017 – Mar 2018, retrieved April 25th, 2018, http://gs.statcounter.com/search-engine-market-share/all/china

[v] Investopedia, Understanding Alibaba’s Business Model, retrieved April 17th, 2018, https://www.investopedia.com/articles/investing/062315/understanding-alibabas-business-model.asp

[vi] The Sydney Morning Herald (2017, August 27th), ‘Amazon of China’ Alibaba already has supermarkets. Now it wants our food, retrieved April 17th, 2018, http://www.smh.com.au/business/retail/alibaba-already-has-supermarkets-now-it-wants-our-food-20170825-gy4aqf.html

[vii] Bloomberg (2017, November 21st), Tencent’s $292 Billion Rally Ousts Facebook From Global Top Five, retrieved April 25th, 2018, https://www.bloomberg.com/news/articles/2017-11-21/tencent-s-292-billion-rally-ousts-facebook-from-global-top-five

[viii] The Economist (2017, April 20th), China’s internet giants go global, retrieved April 25th, 2018, https://www.economist.com/news/business/21721203-tencent-leading-acquisition-spree-alibaba-close-second-chinas-internet-giants-go

[ix] Bloomberg (2017, May 25th), Alibaba to Lead $1 Billion Funding for Chinese Food Startup, retrieved April 25th, 2018, https://www.bloomberg.com/news/articles/2017-05-25/alibaba-said-to-lead-1-billion-funding-for-chinese-food-startup

[x] Bloomberg (2017, April 26th), Chinese Bike Wars Drive Didi, Tencent Into Rival Camps, retrieved April 25th, 2018, https://www.bloomberg.com/news/articles/2017-04-27/china-s-bike-wars-escalate-as-didi-throws-weight-behind-ofo

[xi] Bloomberg (2017, October 25th), China’s Uber-for-Trucks Apps Trade Barbs as Battle Turns Toxic, retrieved April 25th, 2018, https://www.bloomberg.com/news/articles/2017-10-25/china-s-uber-for-trucks-apps-trade-barbs-as-battle-turns-toxic

[xii] Bloomberg (2017, October 25th), China’s Uber-for-Trucks Apps Trade Barbs as Battle Turns Toxic, retrieved April 25th, 2018, https://www.bloomberg.com/news/articles/2017-10-25/china-s-uber-for-trucks-apps-trade-barbs-as-battle-turns-toxic

[xiii] Quartz (2014, June 16th), Alibaba has a new way of explaining its controversial Alipay spinoff, retrieved April 25th, 2018, https://qz.com/221635/alibaba-has-a-new-way-of-explaining-its-controversial-alipay-spinoff/

[xiv] Technode (2017, August 18), Alipay vs WeChat: Challenges and strategies of two payment giants going global, retrieved April 25th, 2018, https://technode.com/2017/08/18/alipay-vs-wechat-challenges-and-strategies-of-two-payment-giants-going-global/

[xv] TechInAsia (2014, April 16th), Baidu dives into China’s mobile payments war, jabs Alibaba with launch of Baidu Wallet, retrieved April 25th, 2018, https://www.techinasia.com/baidu-dives-into-chinas-mobile-payments-war-jabs-alibaba-with-the-launch-of-baidu-wallet

[xvi] CBInsights (2017, May 19th), Nearly Half Of China’s Unicorns Backed By Baidu, Alibaba, Tencent, Or JD.com, retrieved April 25th, 2018, https://www.cbinsights.com/research/asian-unicorns-baidu-alibaba-tencent-jd-investors/

[xvii] JD.com, FORM 20-F (Fiscal Year 2016), retrieved April 25th, 2018, p.12,

https://www.sec.gov/Archives/edgar/data/1549802/000110465917028187/a17-4445_120f.htm

[xviii] The Wall Street Journal (2014, March 10th), Tencent Buys Into JD.com, retrieved April 25th, 2018, https://www.wsj.com/articles/tencent-to-take-about-15-stake-in-jd-com-1394415548

[xix] The Economist (2017, April 20th), China’s internet giants go global, retrieved April 25th, 2018, https://www.economist.com/news/business/21721203-tencent-leading-acquisition-spree-alibaba-close-second-chinas-internet-giants-go

[xx] Ctrip.com, FORM 20-F (Fiscal Year 2016), p.67, retrieved April 25th, 2018, http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9Mzc0Mjg2fENoaWxkSUQ9LTF8VHlwZT0z&t=1&cb=636277375345954893

[xxi] Thomas Cook (2017, September 17th), THOMAS COOK CHINA STRATEGY UPDATE, pp. 4 and 15, retrieved April 18th, 2018, https://www.thomascookgroup.com/wp-content/uploads/2017/09/Thomas-Cook-China_Morgan-Stanley-Investor-Trip_19.09.17_v-FINAL.pdf

[xxii] China Daily (2017, March 3rd), Ctrip CEO says acquisitions starting to pay off, retrieved April 25th, 2018, http://usa.chinadaily.com.cn/business/2017-03/03/content_28415728.htm

[xxiii] China Daily (2017, March 3rd), Ctrip CEO says acquisitions starting to pay off, retrieved April 25th, 2018, http://usa.chinadaily.com.cn/business/2017-03/03/content_28415728.htm

[xxiv] Ctrip.com International (2017, December 29th), Ctrip’s Invested Companies, eLong and Tongcheng Network, Announce Agreement to Merge, retrieved April 25th, 2018, https://www.prnewswire.com/news-releases/ctrips-invested-companies-elong-and-tongcheng-network-announce-agreement-to-merge-300576010.html

[xxv] Ctrip.com International (2017, December 29th), Ctrip’s Invested Companies, eLong and Tongcheng Network, Announce Agreement to Merge, retrieved April 25th, 2018, https://www.prnewswire.com/news-releases/ctrips-invested-companies-elong-and-tongcheng-network-announce-agreement-to-merge-300576010.html

[xxvi] Ctrip.com International (2015, December 10th), Ctrip Announces Investment by The Priceline Group and a Long-Term Equity Investment Firm, retrieved May 2nd, 2018, http://ir.ctrip.com/phoenix.zhtml?c=148903&p=irol-newsArticle&ID=2121699

[xxvii] Bloomberg (2017, October 19th), This Little-Known Startup Just Hit a Valuation of $30 Billion, retrieved April 25th, 2018, https://www.bloomberg.com/news/articles/2017-10-19/china-s-meituan-raises-4-billion-at-30-billion-valuation

[xxviii] Meituan-Dianping (2017, May 22nd), Meituan-Dianping Cements Its Market Leading Position in the Travel and Leisure Industry with the Official Launch of Meituan Travel, retrieved May 2nd, 2018, https://www.prnewswire.com/news-releases/meituan-dianping-cements-its-market-leading-position-in-the-travel-and-leisure-industry-with-the-official-launch-of-meituan-travel-300461260.html

[xxix] Tnooz (2017, October 19th), Priceline Group hedges its Chinese bets with Meituan Travel tie-up, retrieved Aril 25th, 2018, https://www.tnooz.com/article/priceline-group-hedges-its-chinese-bets-with-meituan-travel-tie-up/

[xxx] iResearch, 2017年中国在线旅游度假行业研究报告, p. 20, retrieved April 25th, 2018, http://report.iresearch.cn/report_pdf.aspx?id=3025

[xxxi] iResearch, 2017年中国在线旅游度假行业研究报告, p. 20, retrieved April 25th, 2018, http://report.iresearch.cn/report_pdf.aspx?id=3025