FINANCE: Alibaba, Tencent Clash in Korea Internet Banking

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Bottom line: Alibaba and Tencent are likely to find themselves in a growing number of clashes in the year ahead due to consolidation involving their investments at home and a limited number of opportunities abroad.

Alibaba, Tencent back rival Korean Internet banks

In what’s shaping up as a trend for the year ahead, Tencent (HKEx: 700) and Alibaba (NYSE: BABA) are clashing once again in a newly announced South Korean Internet bank initiative in which both of China’s top Internet companies have an interest. It may be slightly overstated to call this particular instance a clash, since stakes held by Alibaba-affiliated Ant Financial and Tencent in 2 newly formed Korean Internet banks are probably quite small, probably at 5 percent or less.

But the reality is that these 2 Internet titans are increasingly clashing in a growing number of instances, as each invests in a wide array of areas to expand beyond their core businesses both inside and out of China. Those investments have put the pair in awkward situations in 2 of China’s largest Internet M&A deals this year, one involving the formation of hired car services giant Didi Kuaidi, and the other in a newer deal that has Meituan and Dianping merging to form a new leader in the group buying space.

By comparison, this latest development is relatively modest and probably won’t result in any major conflicts between Alibaba and Tencent for the time being. But it does provide yet another example of the growing competition between this pair, which are 2 of China’s largest companies with market values of about $200 billion. Each company also has billions of dollars in cash and access to billions more in credit, and is eager to put some of that money to work.

The latest clash between these cash-rich titans comes in South Korea, where the local financial regulator has just awarded its first online banking licenses to 2 groups, one including Alibaba and the other Tencent. The actual license winners were groups anchored by local instant messaging leader Kakao Corp and telecoms giant KT Corp, who were among 3 applicants for a first-ever round of Internet bank license awards handed out by Seoul. (English article; Chinese article)

In this particular case, Tencent was part of the KT Corp-led consortium, while Alibaba was part of the Kaokao group through its Alipay electronic payments service that is part of its Ant Financial unit. There’s no word of how much either company will hold in its respective new Internet bank, though I do expect the investments are relatively small, probably involving less than $100 million for stakes of around 5 percent.

Alibaba and Tencent are already banking rivals in their home China market, where each was also among the first private recipients of licenses to operate Internet banks in a pilot program from Beijing. That initiative has been slow to gain much traction due to many restrictions under the program, and separate reports this week point out that Tencent’s WeBank has lost many of its original top managers as it approaches the one-year anniversary of its launch. (Chinese article)

Growing Rivalry

This particular clash in Korea comes after the other 2 much larger deals that I’ve previously mentioned that forced Alibaba and Tencent into uneasy partnerships. The first of those came at the start of this year, when Alibaba-backed Kuaidi and Tencent-backed Didi announced their merger to create a new industry leader, Didi Kuaidi, with a market value of up to $15 billion. That deal was driven by stiff competition by well-funded US giant Uber, which forced the Chinese companies into a costly spending war for market share.

More recently, group buying leaders Meituan and Dianping announced their separate plan to merge, again under fierce competition from online search leader Baidu’s (Nasdaq: BIDU) Nuomi group buying site. In that case Meituan was backed by Alibaba, while Dianping was connected to Tencent following a major stake sale last year.

In the case of Didi Kuaidi, it’s still unclear who will control the company over the longer term, or if Alibaba and Tencent will both remain major stakeholders. But in the Meituan-Dianping instance, Tencent is already moving aggressively to unseat Alibaba for control of the new company. As a result, reports last month indicated that Alibaba is looking to dump its Meituan stake and look for other acquisitions to build up its own related businesses. (previous post)

At the end of the day, the world is certainly big  enough for 2 big Internet companies like Alibaba and Tencent, which will find many more competitors as they seek to expand beyond their home China market. But the pair could find the environment increasingly crowded in their home China market, which could result in a growing number of clashes in the year ahead.

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