Baidu taps US$12 billion to challenge Alibaba in consumer services

[BEIJING] Robin Li wants to tap Baidu Inc's US$12 billion in cash and equivalents to reshape China's largest search engine company.

For the past decade, Baidu has been China's No. 1 choice for search results and online maps. Now the company's billionaire founder is determined to make it the first place consumers go to for movie tickets, home delivery and car services.

"Traditionally, search is considered as a tool to connect people to information, but we think in the age of mobile, search can function as a tool for connecting people with services," Mr Li, Baidu's chief executive officer, told investors during a Monday night call to discuss earnings.

Baidu is transforming into a provider of Internet-based local services to compete with Alibaba Group Holding Ltd, Tencent Holdings Ltd. and newer entrants such as Meituan and Dianping.com. The strategy comes as Baidu missed estimates for last quarter's earnings and this quarter's projected sales, sending its US-traded shares down by as much as 9.5 per cent.

China's economy is on course for its slowest pace of annual growth in a quarter-century, and Baidu earns virtually all of its revenue in the country. China has about 668 million Internet users - or about double the size of the US population.

Earnings Miss Baidu and competitors are pursuing the market for local e- commerce services, known as online-to-offline or O2O, that Mr Li estimated was worth 10 trillion yuan (S$2.19 trillion). Alibaba and its financial services affiliate are investing 3 billion yuan apiece into their local services unit Koubei.

Baidu said it will boost administrative spending as much as 90 per cent in the second half of the year, doubling down on already rising costs that have crimped earnings.

"What worries me about this trend is the impact on the bottom line," said Martina Ma, an analyst at Bocom International Group in Beijing. "I don't think this phenomenon will end soon, it could continue for at least four quarters." Baidu reported second-quarter earnings Monday that missed analyst estimates by 6.2 per cent amid higher costs for its O2O and IQiyi video services. Its forecast for third-quarter revenue of 18.17 billion yuan to 18.58 billion yuan also fell short of estimates.

The company broke out its earnings from the O2O business for the first time. Baidu said gross merchandise value, a measure of total transactions in such services, more than doubled to 40.5 billion yuan in the second quarter.

To sustain that pace of growth, Baidu vowed to ramp up investment.

Mr Li's net worth is about US$14.3 billion, much of that from his 21 per cent of the company, according to the Bloomberg Billionaires Index. His company reported cash, cash equivalents and short-term investments of about 75 billion yuan at the end of June.

"We have many billions of dollars in cash, and if we need to fight the war through subsidies, we're willing to do that," Mr Li said.

Mr Li pointed to group-buying site Meituan as well as Dianping, which provides restaurant reviews and deals, as direct competitors for his own Nuomi and Baidu Takeout Delivery.

Baidu's move into O2O or local services is also prompted by heightened competition on its traditional search turf, Bloomberg Intelligence analyst Michelle Ma.

"It is a double-edged sword," she said. "Some investors may get nervous about the heavy spending, especially on a subsidy model that may not bring back repeated customers when subsidies end.

''However, without spending, Baidu won't have a chance to compete in this market.''

BLOOMBERG