Tencent's AI Restraint Shows Risk of Alibaba, JD Food War
From Meta Platforms Inc. to Google, one topic has dominated the conversation this tech earnings season: how Silicon Valley's leaders will invest to seize the momentum in a game-changing technology. In China, the industry is just as enthralled by a three-way battle to deliver the cheapest meals and knick-knacks, fastest. That conflict between Alibaba Group Holding Ltd., JD.com Inc. and Meituan — both on social media and in the physical consumer arena — isn't just compressing margins and irking investors — it's risking Beijing's scrutiny.
So far this year JD, Alibaba and Meituan have pledged or spent billions of dollars hiring delivery people, creating coupons and plying their millions of daily users with advertising about free milk tea and other instant retail promotions. Investors responded with a sell-off in Meituan and JD, the most exposed to the price war, shedding around a combined $100 billion in market value since late last year. Things came to a head last month when the industry regulator called all three into a private meeting to lay down the law. And days later, the trio coordinated contrite statements promising to end 'disorderly competition.'
But in reality, they've no choice but to keep going, analysts say, because they're essentially fighting for the lifeblood of their business: users. With AI still years away from monetization, that's become the central existential problem to China Tech Inc.
'We want less food delivery wars, and more reasons to be optimistic about AI monetization,' said Vey-Sern Ling, managing director at Union Bancaire Privee. 'Ultimately for tech companies to perform they have to deliver top line growth. Progress on the monetization of AI is one way — whether directly, such as through the provision of cloud services or indirectly by enhancing their respective core businesses.'
After years of regulatory scrutiny and Covid-era disruption, the country's biggest tech firms are once again ramping up deals and competing fiercely for users to propel growth. Investors have piled into China's tech resurgence over the past year, betting on the country's biggest firms after a rapprochement with President Xi Jinping's government in February. Those companies are still trading far below their peak. The food wars didn't help. One outlier however has been Tencent — it's outperformed its biggest peers this summer.
Tencent on Wednesday kicked off earnings season for China's big tech with revenue that beat estimates and a plan for prudence in AI spending, despite faster-than-anticipated growth across its gaming and advertising businesses. Its shares rose as much as 2.4% in Hong Kong on Thursday, reaching their highest level in more than four years.
JD made a sudden foray into food delivery in February, sparking a price war with Alibaba and market leader Meituan. It's what Morgan Stanley refers to as the 'prisoner's dilemma' — three heavyweights locked in a seemingly irrational conflict, none willing to blink first. After making early progress, JD is struggling to attract new users and investors are clamoring for clues about the direction behind the spending spree.
'It's very difficult to guess what JD wants to do. They've been all over the place doing various things, trying to spend a lot of money, but we do not know what they want to achieve,' said Roxy Wong, senior portfolio manager at BNP Paribas Asset Management Asia Ltd. 'All of a sudden they're doing everything at the same time.'
Alibaba's margins are expected to take a toll from its massive spending plans, which include splashing $52 billion on AI infrastructure and forking out $7 billion on food delivery subsidies. Investors are also asking tough questions about its strategy.
'For Alibaba, food delivery business may not be that important, but when it comes to the battle, they cannot retreat,' said Li Chengdong, head of Beijing-based internet think-tank Haitun. 'While the recent huge spending is definitely not what investors are keen to see, Alibaba's investment in AI remains an uncertainty as well as the current investment may not necessarily yield results.'
Meituan is enjoying fresh momentum off the back of a partnership with Kuaishou, a Chinese live-streaming platform. But like JD it's getting distracted at home as it looks to build an empire abroad. The company's successful Keeta app in Hong Kong has set a template for overseas moves. It launched in Saudi Arabia last September and according to Chinese media outlet LatePost, it's now eyeing expansion into Qatar, Kuwait, Oman and Bahrain over the next three years.
'The competition will stop when everyone returns to normal business judgment and rationality,' Wang Puzhong, head of local commerce at Meituan, told LatePost last month. 'Right now we are all in a state of irrational excitement.'
—Charlotte Yang, Claire Che
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