E-Commerce Competition Intensifies in China

Visitors walk past a Tencent Holdings Ltd. game booth at the ChinaJoy Expo, also known as the China Digital Entertainment Expo and Conference, in Shanghai, China.
Bloomberg | Bloomberg | Getty Images
Visitors walk past a Tencent Holdings Ltd. game booth at the ChinaJoy Expo, also known as the China Digital Entertainment Expo and Conference, in Shanghai, China.

An arms race between the two most powerful Internet companies in China has escalated again, with one of them, Tencent, announcing an investment that pushes it further into e-commerce — territory long controlled by its rival, Alibaba.

Tencent said on Wednesday that it would pay about 1.5 billion Hong Kong dollars, or $193 million, for a nearly 10 percent stake in China South City Holdings, which operates warehouses and factory outlet malls and provides a variety of other logistical services to retailers. Both companies' shares are listed in Hong Kong.

(Read more: Bitcoin safe despite Alibaba ban: BTC China)

Until recently, Alibaba and Tencent seemed largely content to develop their own areas of expertise without moving too aggressively onto each other's turf. Alibaba owns e-commerce sites like Taobao and Tmall, while Tencent operates messaging services like QQ and WeChat.

But over the last year or so, with Alibaba positioning itself for an initial public offering and Tencent eyeing the lucrative earnings from the boom in online retailing in China, the gloves have come off.

"Tencent is absolutely trying to get more aggressive in the e-business space, challenging Alibaba, as most of their services are now overlapping," said Bryan Wang, an analyst at Forrester Research.

In October, Jack Ma, the chairman of Alibaba, announced that he was shutting down his WeChat account and moving to a new Alibaba messaging service called Laiwang. He urged his followers to do the same.

Last week, Alibaba said that it was planning to set up a mobile game platform from which it would offer applications developed by outside programmers, sharing the revenue with them. Tencent generates more than half of its revenue from games. Most are free, but it relies on the vast reach of WeChat, which says it has more than 270 million active monthly users, to fuel demand for subsequent in-game purchases by players determined to stay ahead of their friends.

(Read more: China reforms create bigger stage for online business)

The video game market in China increased 38 percent last year, to $13.8 billion, according to a government agency that monitors the industry. Mobile games were the fastest-growing segment, with revenue more than tripling to $1.8 billion.

E-commerce is a much bigger business. Last year, sales in China, including online transactions between businesses, rose to $335 billion from $221 billion in 2012, according to an Alibaba research center.

Alibaba.com's headquarters in Hangzhou, China
Thomas Lombard | Wikipedia
Alibaba.com's headquarters in Hangzhou, China

On an unofficial holiday for single people in November that has turned into the equivalent of Cyber Monday in the United States, Chinese online retailers run a huge amount of promotions. Alibaba recorded $5.75 billion in transactions processed by its online payment system on the sales day this year.

But Alibaba is not resting on its laurels. In December, the company said it was investing about $360 million in the Haier Group, one of the biggest appliance makers in China. The companies said they would set up a logistics joint venture that would support Alibaba's delivery operations. Alibaba also struck a deal last year with Sina Weibo, the operator of China's leading microblogging platform, that is aimed at countering the popularity of WeChat and driving more users to Alibaba's e-commerce sites.

(Read more: Apple takes a fresh bite into China's market)

Tencent has responded with investments of its own, including the purchase of a stake in a search engine called Sogou. And the company has moved to build up its own e-commerce capabilities, which include sites like 51Buy and QQ Wanggou, by adding a payment feature to WeChat.

Tencent said the agreement with China South City would enhance its e-commerce reach. The companies will work together to help small and midsize companies develop their online retailing operations, they said.

More from the New York Times:

Millions in MetroCard Money Goes Unspent
Poll Finds Most N.Y. Voters Hopeful About de Blasio
Judge Disallows Plan by Detroit to Pay Off Banks

"Cooperation with China South City enables us to jointly facilitate such enterprises migrating online, utilizing China South City's physical locations and logistics capabilities, together with Tencent's Internet user platforms and technology capabilities," Martin Lau, the president of Tencent, said in a statement.

In addition to warehouses and other logistical facilities, China South City operates factory outlet malls featuring brands like Nike and Adidas. Tencent and China South City said they would "explore opportunities for cooperation with respect to online outlet services for branded goods."

Tencent has its headquarters in Shenzhen, where China South City also has its operations hub.