Western businesses operating in China are vulnerable to the BAT blind spot – or a failure to understand the impact of Baidu, Alibaba, and Tencent, collectively known as BAT.

No matter how experienced they are, western businesses in China usually underestimate BAT, creating a blind spot that hinders them from creating lovable products that will endure in the world’s largest retail market.

Alibaba and Tencent operate extensive commerce and lifestyle ecosystems, and it’s not always easy for a business to operate in either. Baidu dominates online search activity, but it’s also building a set of products based on artificial intelligence. All three shape the way Chinese consumers live. And they continue to change.

This blog post — the first of a two-part post — will get you started on your journey to appreciating BAT. This journey will require you to constantly re-assess your understanding of Baidu, Alibaba, and Tencent, like going back to school for an occasional refresher on an essential topic.

In a follow-up blog post, I’ll share the key to succeeding in BAT’s world: navigating these firms through the lens of your people, processes, and platforms.

A Snapshot of BAT

Together, Baidu, Alibaba, and Tencent have a collective market capitalization of more than $1 trillion (as of April 6, 2018), with Alibaba and Tencent easily accounting for the lion’s share. (In 2017, Tencent’s market capitalization overtook Facebook’s in size.)

Financial size is but one perspective. To understand BAT you also need to appreciate their impact on the behaviors of Chinese consumers (who comprise the world’s largest retail market)

For example, BAT are responsible for influencing China’s transformation into a cashless, mobile economy. A 2017 Forrester Research report, Keep an Eye on Baidu, Alibaba, and Tencent, asserts that BAT have “have shifted Chinese commerce from cash-heavy to cashless” by introducing ecommerce and digital payments; innovating with peer-to-peer funds transfers; promoting the widespread use of codes for in-store mobile payments; and investing in innovative businesses that boost digital lifestyles. And Baidu is investing heavily into artificial intelligence. These are indeed movers and shakers.

When we talk with our clients about BAT, here is how we characterize them:

Baidu: Search Giant

Baidu (with a market capitalization of $79 billion) is the second largest search firm in the world, and it commands 76 percent of the search market in China. Baidu is also renowned for its development of artificial intelligence capabilities through Baidu Research, located in Beijing and Silicon Valley, and via relationships such as the recently announced partnership with Skyworth to develop an in-home ecosystem powered by AI. The company is also investing into the development of self-driving cars with a goal of having them on the road in China within three-to-five years – another example of the influence of BAT on the behaviors of Chinese consumers.

Building your brand in China means first and foremost having a searchable presence on Baidu, akin to being findable by Google in the United States. Get the basics right, as you would in the U.S.: have a Chinese website optimized for search, participate in Baidu’s advertising programs, and manage your online presence with localized content. In addition, according to China Briefing, you’ll probably need to participate in a China-based payment system such as Alipay (whose functionality we discussed in our post on the rise of the super apps), thus drawing you into the orbit of Alibaba.

Finally, be aware of the rise of Tencent-owned WeChat as a search engine. As discussed in the following section, WeChat is the dominant mobile app in China, and Tencent is developing its search functionality. And WeChat’s search tool will act as a walled garden, keeping users inside WeChat to find everything they need, just as Amazon acts as a quasi-search tool. For now, Baidu is Number One for search. But just as Baidu ascends in areas such as AI, it may lose its dominance in search.

Alibaba and Tencent: Rival Ecosystems

Alibaba (market cap: $442 billion) and Tencent (market cap: $500 billion) both operate commerce ecosystems that act as walled gardens. Any company that wants to succeed in China must pick either as their primary, although not exclusive, platform for tapping into the wallet of the Chinese consumer. As you can see from the following diagram from Chinachannel.co, they compete in a number of ways:

Source: Chinachannel.co

Alibaba owns Taobao and Tmall (spun off from Taobao), both of which compete with JD.com. These marketplaces are similar to Amazon in that their primary function is to connect merchants with consumers. But they operate in radically different fashion, using virtual reality, livestreams, and celebrities to create experiences on top of commerce.

As noted in The Chinese Consumer’s Online Journey from Discovery to Purchase, by the Boston Consulting Group:

On Taobao, Tmall, and JD.com, China’s leading online marketplaces, merchants can promote their products by live streaming events, not unlike the TV shopping channel QVC in the US. For instance, rural farmers used Taobao’s live-streaming feature to market their kumquats for the Chinese New Year. But China’s live streams tend to engage more consumers, since they often feature well-known experts or popular internet celebrities—and a direct purchase link, of course.

In addition, online marketplaces are hubs for innovation. For instance, in 2017, Alibaba launched the Tmall Genie, an Amazon Echo alternative that people can use to shop for products on Tmall and do all the things an Echo does, such as controlling one’s smart home.

The following graphic from The Chinese Consumer’s Online Journey from Discovery to Purchase illustrates the consumer’s path to purchase on a site like Taobao – a path that is more of a journey of discovery than Amazon offers:

Source: The Chinese Consumer’s Online Journey from Discovery to Purchase

In addition, Alibaba operates Alipay, which overtook PayPal in 2013 to lead the global mobile payment platform market. Alipay is based on a third-party services/partnership model, upon which the app introduces new capabilities to allow users to accomplish a variety of tasks, such as purchasing movie tickets, booking a ride, or getting lodging.

But Alibaba is not putting all its eggs in one online mall. The company recently rolled out its “new retail” strategy, through which Alibaba will step up its integration with offline retailing. As reported in eMarketer:

The idea, exemplified by Alibaba’s Hema Supermarket expansion, is to make the transition between online and offline channels as seamless as possible. For example, during the Singles’ Day online shopping event, Alibaba set up 1,000 smart pop-up stores outfitted with quick response (QR) barcodes, smart speakers and other IoT devices to more easily enable online purchases. The firm also rolled out an augmented reality game—similar to the smash hit Pokemon Go game—to help drive traffic to retail stores.

The implication of new retail for brands is clear: having a strong online/offline presence is mandatory. As Moonshot discussed in a May 2017 post, Chinese consumers are shaping an omnichannel future. Consumers in China are comfortably navigating an online/offline world through QR codes and self-service retail, and Alibaba seeks to capitalize on the very behaviors that BAT helped shape. But in doing so, Alibaba will increasingly come head to head with Tencent for one big reason: WeChat.

Tencent has captured the loyalty of the Chinese consumer through the one app that rules them all: WeChat. WeChat is a mobile, social, and commerce platform that combines the best features of apps such as Amazon and Uber into one experience. Together, WeChat and Alipay command 90 percent of mobile payments in China. In a previous blog post, “The Rise of the Super App in China,” I discuss the importance of WeChat and its competing apps. I refer you to that post for more insight.

If you’re a retailer, CPG firm, or any other kind of business for that matter, you have to do business in the ecosystems Alibaba and Tencent have created – in fact, it’s to your advantage to do so. But:

  • You need to understand how to create the right kind of experiences within their ecosystems, going beyond transactions and leveraging entertainment and celebrity influencers, akin to Instagram and Snapchat
  • Also know that doing business in one ecosystem makes it harder for you to do business with its rival

We cannot overstate the consequences of the competing ecosystems. For example, if you do business in Tmall – which, as noted, is operated by Alibaba – realize that it supports Alipay and bank cards, whereas rival JD.com supports WeChat Payment, JD Pay, and bank card.

Separate Ecosystems

The separate ecosystems don’t make it easy to jump from WeChat to Tmall. Or to pay with a purchase on Tmall using WeChat Pay. But the self-contained ecosystems have their upsides, too. You have to play by their rules, but they also give you a measure of quality control because they are careful to vet businesses that can play in their ecosystem, meaning that once you’re inside their world, you can rest assured that the other players in their ecosystems have passed a standard of quality and reliability. In other words, you won’t find yourself partnering with a bunch of start-ups that might go belly-up. Moreover, Alibaba and Tencent can track all customer behavior for you inside their ecosystems, making attribution less of a challenge.

In Part 2 of this examination of BAT, I’ll share with you an approach for navigating the BAT ecosystems. Meanwhile, contact us if you’d like to discuss in more detail how to thrive in China. We have a wealth of insight based on our client experiences and association with Pactera, a global consulting, solution and outsourcing services provider strategically headquartered in China.

Mike Edmonds

Mike Edmonds

Managing Director, VP Product