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Alibaba and Tencent to Tap the Fast-Growing O2O Market

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Alibaba and Tencent try to leverage the O2O model

Previously in this series, we discussed how Alibaba (BABA) seeks to give Tencent (TCEHY) some stiff competition in the food-delivery market. This market allows these companies to leverage the growing trend of mobile phone owners, combining e-commerce with the traditional way of selling products.

The common term used for such a practice is online-to-offline (or O2O) service. It includes services ranging from taxi booking to clothing to meals, for which consumers use smartphone apps. Alibaba and Tencent merged their taxi booking apps a few months ago, and they now completely dominate this industry. This growth signifies the growing concept of the O2O model.

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The O2O market is growing at a rapid rate in China (FXI). According to a report from iResearch China, online shopping and O2O will be the fastest-growing segments of the e-commerce market in China. Overall, China’s e-commerce market grew by 21.3% year-over-year in 2014. This growth is expected to remain healthy as well, as the above chart shows.

Dalian Wanda Group launches the O2O model

To leverage the growth of O2O market, last year Dalian Wanda Group, which is the biggest commercial land developer in China, announced a partnership with Baidu (BIDU) and Tencent to promote the online-to-offline retail model. We discussed this aspect in Why Alibaba’s investing in offline-to-online retail opportunities.

Investors can gain portfolio exposure to Chinese stocks by investing in ETFs such as the iShares MSCI China ETF (MCHI), which has about 10% of its portfolio invested in Tencent Holdings.

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