Clash of the Tech Titans

China’s top three tech firms, Baidu, Alibaba and Tencent – or “BAT” collectively – are not only dominant in search, ecommerce and social/gaming respectively; they are also quickly gaining control of many of the country’s startups. The three have already invested in half of the 124 startups counted as “unicorns” by Beijing startup database IT Juzi. By the time young companies reach the $5 billion mark, more than 80% will have taken some form of investment from BAT.

Valued at nearly half a trillion dollars, Alibaba and Tencent are the two biggest players. Both have been expanding beyond their core businesses, into bike-sharing, ride-hailing, food delivery and other areas. Their ongoing one-upmanship is drawing startups into a proxy war over the consumer internet. When Alibaba or Tencent invests in a startup, they often complicate or outright block that company’s products from working with those of firms that are backed by their adversary. Startups are thus forced to fit into the mould set by their backers, leaving less room for innovation.

It is a scenario familiar to venture capital firms in the U.S., where tech startups, particularly in the consumer digital sector, are virtually off-limits due to the acquisitive appetites of giants like Amazon, Facebook and Google. But their Chinese counterparts are outspending them. According to McKinsey, America’s tech giants make just 5% of all domestic VC investments, while Alibaba, Tencent, and to a lesser extent Baidu, account for nearly 50% of them in China. Tencent alone has amassed a portfolio of 600 stake holdings over the past six years.

Most Chinese startups resign themselves to the notion that growth will require joining either Alibaba or Tencent. The giants’ resources are seemingly inexhaustible, and their platforms are practically unavoidable: Together Alibaba and Tencent account for 94% of mobile transactions through their rival payment systems, WeChat Pay and Alipay, according to The Economist.

Despite Alibaba and Tencent’s dominance, some startups are finding ways to thrive as independents. One strategy is to serve markets in which the giants have moved more slowly. For example, Douyin and Huoshan, video apps backed by Bytedance, have caught on with younger users. Other firms focus on loftier goals. Lea Liu of QingCloud, a cloud computing platform, says that “if you want to be IBM for the cloud, you cannot be a pawn in a giant’s data-technology strategy”.

Another challenge to BAT’s total domination is a rising trio of tech firms being hailed as the next generation of tech giants: Toutiao, a news app owned by Bytedance; group-buying service Meituan; and Didi Chuxing, a ride hailing service. Each less than a decade old, they are among China’s fastest-growing platforms. Meituan and Didi were both backed by a giant, but following a clash with Alibaba-backed Weibo, Bytedance has charted its own course.

“For BAT, this will force them to consider… how to create competitive advantage through innovation, either by adopting emerging technologies or by creating better user experiences”, said Yu Xue, a senior analyst at market research firm International Data Corporation. “The competition in China’s internet industry has levelled up.”