Tech's Top Ten Now Includes Two Chinese Companies, Alibaba and Tencent

Twice as valuable as IBM and growing faster than Facebook or Google. JL

Paul Mozur reports in the New York Times:

Alibaba and Tencent are now among the world’s most highly valued public companies, each of them twice as valuable as Intel, Cisco and IBM. (They) owe part of their success to China’s censorship of foreign tech firms. But the two dominate smartphone culture in ways superior to the US. Chinese use mobile payment systems to settle restaurant tabs, shop online, pay their utility bills, rent bicycles and invest. The revenue for both jumped 50% from a year ago, meaning they are growing more quickly than Facebook and Google.

The technology world’s $400 billion-and-up club — long a group of exclusively American names like Apple, Google, Facebook, Microsoft and Amazon — needs to make room for two Chinese members.

The Alibaba Group and Tencent Holdings, Chinese companies that dominate their home market, have rocketed this year to become global investor darlings. They are now among the world’s most highly valued public companies, each of them twice as valuable as tech stalwarts such as Intel, Cisco and IBM.

While American technology giants dominate people’s online lives in Western countries, Tencent and Alibaba have soared by essentially carving up China, the world’s single-largest internet market with more than 700 million online users. That is roughly twice the size of the population of the United States. Chinese people also spend more money online than Americans.

Their surge, which has taken place inside a tightly controlled internet space that has blocked international companies like Facebook, has increasingly set them apart from the rest of China. Despite headline numbers that suggest stable growth, the Chinese economy is grappling with many problems, including heavy debt and continued reliance on rusty industries like steel. Yet Alibaba and Tencent this week both reported financial results that blew past investor expectations, suggesting the future of the Chinese technology world is bright.

Their rise is emblematic of a rebalancing of global technological influence. In recent years, places from Paris to Seoul have claimed the mantle of the next Silicon Valley. Yet the cluster of fast-growing start-ups and internet behemoths coming out of China has emerged as the one true rival in scale, value and technology to the West Coast homes of the American technology renaissance.“We’ve come to the point where China has finally caught up with the U.S. in the internet space,” said Hans Tung, a managing partner at venture capital firm GGV Capital.

Mr. Tung, who invests in many Chinese start-ups, said the main advantage for Alibaba and Tencent was that the United States still had efficient “offline” — or non-internet — options for shopping or entertainment. But in China, where there are fewer appealing options offline, Tencent and Alibaba play a central role in how people buy and pay for goods and services, communicate and entertain themselves.

The ascendance of Tencent and Alibaba is evident in their scale. Soon, Tencent will be the only company other than Facebook to have a social network with more than one billion users. (Facebook is still ahead with more than two billion members.) Tencent recently said its messaging app, WeChat — which includes payments and a social network — had 960 million monthly active users.

Alibaba has more than 500 million monthly active users for its online shopping apps. Over the past three months, the revenue for both Tencent and Alibaba jumped more than 50 percent from a year ago, meaning they are growing more quickly than both Facebook and Alphabet, the parent company of Google.

In Hong Kong, Tencent’s market capitalization rose above $400 billion in early trading on Thursday before closing just below that threshold at $396 billion. Alibaba closed in New York trading on Thursday with a market value of $415 billion. The two companies still lag Amazon and Facebook, which are valued at more than $450 billion, and are significantly smaller than Apple, the world’s most valuable public company with a market capitalization exceeding $800 billion.

In Silicon Valley, some tech companies have begun taking cues from their Chinese rivals. Tencent’s WeChat offered speedier in-app articles before Facebook, created a walkie-talkie function before WhatsApp, and made use of QR codes as a way to connect on a social network long before Snapchat.

Both Alibaba and Tencent have long been successful in China, but recent events have given them an added push. In China, people often talk about three internet companies that dominate the technology world: Alibaba, Tencent and a search company called Baidu, which is sometimes called the Google of China.

But Baidu has stumbled as Chinese users skipped personal computers entirely and turned to smartphones, and it has had trouble competing in a financial arms race between Tencent and Alibaba. The two companies have been plowing money into new businesses like food delivery and online video.

Alibaba and Tencent owe part of their success to China’s censorship and suspicion of foreign tech firms, which have kept American giants like Facebook and Amazon out of their orbit. But the two have also scored some major technology innovations in their own right. They dominate a smartphone culture that in many ways is superior to that of the United States. Chinese people use their dueling mobile payment systems to settle their restaurant tabs, to shop online, to pay their utility bills, to rent bicycles and even to put money into investments.

Despite their size, Alibaba and Tencent are mostly anchored in China, though both are pushing to expand. Most of Alibaba’s earnings come from its ad and commissions business in China. The company had just under $400 million in revenue from international commerce. While Tencent has games like League of Legends that are played across the world, the bulk of its revenue comes from games and ads in China.

Both have made use of investments and acquisitions to enter into new markets in recent years — with uneven results. Alibaba has invested in a payments company in India, and it bought into three different e-commerce companies in Southeast Asia. With Amazon also readying its own Southeast Asian campaign, the hugely populated region of disparate cultures could be the first place the two e-commerce Goliaths compete face-to-face on neutral ground.

Last year, Tencent paid $8.6 billion for Supercell, the maker of the hugely popular smartphone game Clash of Clans. Tencent also wanted to buy the global messaging app WhatsApp but was outmaneuvered by Facebook.

The two companies and other Chinese technology names have also opened Silicon Valley research centers and become prominent investors in cutting-edge start-ups. They both have backed a Chinese rival to Uber called Didi Chuxing, which trounced the American company in China and is now expanding in other markets. Tencent has been an investor in Snap, the maker of the messaging app Snapchat, and owns some of the world’s most popular games.

Even with their new pre-eminence, Tencent and Alibaba face some daunting challenges. China’s internet world cannot grow forever, and both companies have stumbled in many of their efforts to get their popularity at home to translate into success in the United States and other markets.

Both have made expensive forays into Hollywood with lackluster results. And they face rising pressure from a Chinese government that has become increasingly aware of the power of digital information — and has plans to use it to better track its populations.

Still, there is an opportunity for the companies to emerge as global leaders in areas like gaming, e-commerce and communications, said David Chao, co-founder of the venture capital firm DCM Ventures. “They’re a legitimate force to be reckoned with on the world stage,” he said.

For now, a market of 700 million internet users in China is enough to keep Alibaba and Tencent going.

Consider that the world’s biggest moneymaking smartphone game is a China-only title called Honor of Kings that is more widely played than Pokémon Go at its peak. In the game, players can spend real money to upgrade their online personas and arrange digital fights through social media. Honor of Kings is owned by Tencent.

“The majority of businessmen in China now are playing the game,” said Zhang Guangyi, 25, a businessman from Beijing who estimates he has spent about $1,500 in the game. “Once I met a client and when we added each other on WeChat, I noticed that he was also playing and that my level is higher than his. I proposed that I escort him in the game. Soon after that, we had the contract signed.”