Tencent is China’s largest online media company. It owns and operates social networking sites, gaming platforms, and instant messengers that are used by more than half a billion people. The company was recently restructured as part of an effort to build a leading e-Commerce business. Technically, Tencent has always been an online retailer, selling virtual goods and other services under its gaming business. But the recent effort to convert social media into a vast marketplace is a different play. In essence, Tencent is at the forefront of the online world – trying to become what Facebook, Amazon, Google, and Apple all wish to be and aren’t. Here’s why it can, and can’t, pull it off. 

Tencent’s e-Commerce business has been growing quickly, following the recent restructure. Revenue for the first quarter of 2012 reached RMB 750 million, and the company targets a turnover of RMB 200 billion for the e-Commerce business within the next five years. According to data released by CNNIC and Yiguan, China’s top e-Commerce operators during the first quarter of 2012 were Taobao’s Tmall, 360Buy, Suning.com, Tencent, and Amazon. While Tencent is already a contender, local analysts are divided on whether the company can make the most of synergies with its social media business (here, in Chinese; main points below, in English). The main concern is Tencent’s apparent lack of operational focus. But having its hand in too many pies is not necessarily to the company’s detriment.

Tencent’s various web sites command a massive flow of online traffic, which the company should be able to divert towards its e-Commerce platform(s). But traffic does not necessarily mean commerce. Baidu, China’s leading search engine is a case in point. The company tried to graduate from online gatekeeper e-Commerce operator and managed to drive a lot of traffic to its e-Commerce business. But the conversion rate from visitors to buyers was low, and Baidu recently decided to put its e-tailing aspirations on hold. Baidu is now pushing for more control over mobile operating systems and even hardware, probably on the assumption that these provide a better foundation for an online commerce empire.

On the other hand, Tencent’s traffic is different from Baidu’s: Its users are mainly from QQ’s messaging and gaming platforms and many of them are already spending money on Tencent’s virtual goods and services. Tencent also has more data on its user’s habits, friends, and location than Baidu does. Tencent’s early e-Commerce efforts are already showing signs of success. One example is OKBuy, an online shoe retailer in which Tencent is invested. In Guangdong alone, Tencent’s recent cooperation with OKBuy drives more than 1,000 new orders per day.

The ability to turn Tencent’s social media users into buyers on one of the company’s partner web sites is impressive, but it is still a long way from an integrated e-Co-system. Local industry experts have been vocal about Tencent’s “disordered” network of platforms and partnerships, and pointed that the company’s flagship B2C site, 51buy.com, does not have a clear positioning and merchandising strategy. On the other hand, following the acquisition of 51Buy.com, Tencent’s e-Commerce strategy is now clearer: It plants to integrate its existing C2C and B2C web sites –  PaiPaiQQ Mall and QQ Buy – into a single platform; to expand its current offering from consumer electronics to general goods; and to expand geographically from north and east China towards the country’s west and southwest.

Which brings us to another challenge – logistics. China’s delivery business has been sizzling in recent months, with large web sites launching their own courier services, and local courier companies  launching their own e-Commerce platforms. Tencent’s B2C flagship 51buy is plagued with logistical mishaps, and experienced delivery delays on a massive scale during a recent promotional push. But Tencent is aware of the challenges and is planning to spend a significant share of its billion dollar e-Commerce budget on bolstering its logistics capabilities. The company is already in the process of establishing new distribution centres in Shanghai, Beijing, Shenzhen, Wuhan, Chengdu, and Xi’an and it should not take it too long to reach infrastructure parity with e-Commerce giants like 360Buy and Amazon.

The final challenge seems less pressing, but it might prove most critical: Tencent does not have direct control over a mobile gateway. Alibaba and Baidu are already pushing their own smartphone brands and operating system iterations through cooperation with handset makers. Global competitors like Google, Apple, and Amazon already rely on integrated hardare and software to track and engage their users. But Alibaba and Baidu’s share of the mobile market is negligible; and each of the three American giants has either great hardware, great user tracking capabilities, or an all encompassing e-Commerce platform, but none of them has all three: Apple is good at designing handsets and selling digital media; Google has the world’s most popular mobile OS and advertising platform; and Amazon is a fearsome retailer, but its hardware is limited to the relatively niche Kindle line and the feature-less Kindle app. Oh, and then there’s Facebook, with a large user base but no e-Commerce strategy to speak of.

What Tencent does have is hundreds of millions of users on QQ Mobile and Weixin, two of the world’s most popular online messaging apps. These give it access to users on iOS, Android, Windows Mobile, and even Symbian. Tencent is also working on closer integration with some hardware manufacturers, including Xiaomi, China’s most popular homegrown smartphone brand. If the company can integrate its mobile messaging, location services, and online payment platform, its popular mobile apps can serve as the ultimate trojan horse to undermine its competitors’s e-Commerce efforts from within. That’s still a big if, but not a huge one. We’re not sure if Tencent can build the world’s first mass market e-Co-system, but it seems to stand a better chance than anyone else on the horizon.