Sally White considers the latest manoeuvres in China’s online world

Just when a grasp of China’s complex online travel industry seems within reach, a new permutation appears! It has happened again. This time the counters in play are the two leaders in the group buying market, Meituan and Dianping, often dubbed the Groupon and Yelp of China. Pushing the counters are their backers, China’s internet Big 2. Meituan, with around half its market, includes Alibaba among its investors, and Dianping, with perhaps 30%, is a Tencent protégé.

The first part of the manoeuvres seemed clear enough. In what was seen as an attempt by the Big 2 to halt an expensive and escalating price war, they announced last month that bitter rivals in the group-buying market though they may be, Meituan and Dianping were to form a joint venture.

Such consolidation is becoming familiar in China as the tech services markets get overcrowded – to name just one that happened this year, arch-rival taxi-hauling firms Didi and Kuaidi got together. But this time all does not seem to be going so smoothly.

Brokers are following the moves closely as Meituan had been rumoured to be on the verge of an IPO. Meituan has recently acquired travel search engine Kuxun from TripAdvisor, and its hotel booking revenues are also growing rapidly. That was seen as aimed at enhancing Meituan’s portfolio for a quote. Now, post the deal, brokers hope that the new JV will come to the stock market.

Both companies have benefited from investment of hundreds of millions of dollars by the tech giants and venture capital funds. These are looking for profits. Meituan’s last funding was $700 million in January, which put a value of $7billion on the company. (It was thought to be going for another $1 billion, to help speed its development as a merchant’s marketplace.) Dianping (which focuses on restaurant reviews as well as group deals) raised $850 million in April, gaining a valuation of $3 billion.

It was the venture capital funds, according to Beijing-based internet consultants, Analysys International, that were behind the deal. The Beijing Review quotes its analyst Liu Xuwei as believing that the funds are losing patience over the endless price wars, plus constant calls for investment and want to get some return on their money. The new JV would dwarf group buying No.3, Nuomi, which is owned by Alibaba and Tencent rival, Baidu. But Baidu has indicated that it is prepared to chuck in millions over the next three years, making the competition even tougher.

Despite their history, the respective CEOs of the two companies have gone public, welcoming the deal as the chance to offer “more value” and to “better serve” customers and merchants. The announcement from Dianping CEO Zhang Tao, said it reflected recognition of the “enormous potential” of O2O in China. Thus, he added, “this strategic cooperation was a shared and almost inevitable decision”.

Fireworks promised

So amity all round? Seems not! Last week, just when the market thought it was clear on everyone’s strategy, in stepped Tencent with a $1 billion of new funding for the JV. While it is not surprising that the new company wants some money – O2O marketing budgets are punishing - this move caused more than a little confusion. None of the announcements named Alibaba, so, the question being asked was - is Tencent trying to steal a march and up its JV share?

If this is the case, there is no reason to believe that Alibaba’s chairman Jack Ma Yim, known for his aggressive tactics, will ignore the challenge. Fireworks seem to be promised!

Of course, Tencent’s move could be just the first part of a whole new round of funding. However, the local press, such as the Hong Kong Economic Journal, thinks otherwise – ‘Tencent makes an awkward bid for Meituan-Dianping’, says one of its headlines. It adds that Tencent ‘has never been very good at public relations’.  While the $1 billion was not itself a bid, Tencent was “voicing its future intent”.

Tencent’s tactic may be, says the Hong Kong Economic Journal, to invest $1 billion to up its JV stake from around 10% to 15% of what could become a $20 billion company. While that does not win it control, it is a strong signal that it wants to be the main strategic partner. That means the chance to grab the most commercial advantages.

Tencent did something similar last year in its deal with Alibaba rival JD.com, buying a 15% stake. And as for past ‘awkward’ behaviour, it made a surprise lunge for eLong last year even though the company already had a large shareholder in Ctrip.

The value put on the Meituan-Dianping JV right now is around $15-17 billion, which makes it the largest company in a new Chinese business model coined online-to-offline (O2O). While O2O is still in early stages in China, it is showing very strong growth. According to a report in the Beijing Review, Analysys International has a figure of $40 billion for Chinese O2O by the end of this year. Group buying, it says, is taking a large chunk of that, with sales up 167% in H1 2015 to $12 billion.

Business website, Taiwan-based Want China Times, says that while meals and movie tickets are the top group-buying purchase in China, hotel booking is coming up fast and could close the year not far behind. It has a forecast figure of 30 million nights booked through group buying for 2015. Leisure and travel are, of course, sectors on which all China’s major OTA’s are focusing.

So, given the attraction of its market, will this JV turn out to be the site of yet another BATs battle? (The oft-used local acronym is short for Baidu, Alibaba and Tencent, since they fight so often.) Or will there be agreement on consolidation and  “better together”? Heaven help a poor foreign investor trying to find a profit through this maze! Local money says the fighting has not finished yet.