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Alibaba Tethers Connected Cars to Its Smart Speaker Ecosystem

Leo Sun, The Motley Fool

Most investors know Alibaba (NYSE: BABA) as China's top e-commerce player and cloud platform provider. However, like many other tech giants, it has diversified far beyond its core business. For instance, Alibaba also was the maker of 39% of the smart speakers sold in China last year, giving it the leading share of that nascent market, according to Canalys.

Alibaba's Tmall Genie smart speakers house its AliGenie virtual assistant, which competes against Xiaomi's Xiao Ai, Baidu's (NASDAQ: BIDU) DuerOS, and Tencent's (NASDAQOTH: TCEHY) Xiaowei. AliGenie is tethered to Alibaba's Taobao and Tmall marketplaces, its Alipay payment platform, and other services. It also acts as a hub for a wide range of smart home devices.

Alibaba's Tmall Genie.

Alibaba's Tmall Genie. Image source: Alibaba.

Last year, Alibaba introduced Tmall Genie Auto, a version for connected cars. BMW and Volvo initially agreed to install Alibaba's speakers in their cars, and the company recently added Volkswagen's Audi, Renault, and Honda to its customer list.

Why Alibaba is interested in the auto market

The Taobao, Tmall, and Alipay apps already have massive presences on Chinese smartphones. However, China's smartphone shipments fell 14% last year, according to Canalys, due to the saturation of the market. Alibaba also faces tough challengers in the smart speaker market -- among them, Baidu, which is growing its shipments at a much faster clip than either Alibaba or Xiaomi.

That's why Alibaba is turning toward China's automotive market. The country had 403 million drivers and 322 million motor vehicles (including 235 million cars) in 2018. Auto sales in China declined last year -- the industry's first contraction there in over two decades -- but Accenture estimates that only about 10% of the country's vehicles have standalone data connections to the internet.

Meanwhile, the Chinese government is trying to boost internet penetration rates by forcing its state-backed telcos to lower their data fees and supporting their 5G upgrade plans. China is also aggressively investing in the development of autonomous vehicles. McKinsey estimates that driverless cars could account for up to two-thirds of China's auto market (in terms of passenger kilometers traveled) by 2040.

By making deals that build its smart speakers into connected vehicles today, Alibaba could get a jump on rivals like Xiaomi, Baidu, and Tencent. And as vehicles become autonomous, Alibaba could integrate more services -- like its streaming video platform Youku Tudou or its UC web browser -- into car displays to entertain passengers. Over the long term, Alibaba could even turn driverless cars into "mobile malls" for online purchases.

But Alibaba's rivals are eyeing the same market

Alibaba's long-term strategy is clever, but Baidu and Tencent -- the two other members of China's "BAT triumvirate" -- have similar ambitions.

A woman reads a book as she sits in a driverless car.

Image source: Getty Images.

Baidu has already established a major presence in the driverless vehicle market with Apollo, an open-source operating system that has already attracted more than 100 partners, including Intel, Microsoft, Ford, and Honda.

The company has begun testing out its self-driving cars in China and the U.S., and it plans to start mass-producing autonomous vehicles in partnership with major automakers by 2021. And it's also aggressively promoting its virtual assistant, DuerOS, which was active in more than 275 million devices last quarter, seeking deals that will put it in more speakers, smart home devices, and connected cars.

Baidu recently developed a full AI operating system that bundles together DuerOS' voice commands, face-scanning for payments, AR enhanced navigation, and the ability to remotely control smart home devices. That OS will be installed in a new version of Chinese automaker Chery's electric SUV, the Exeed TX.

Tencent isn't as active in smart speakers or driverless cars as Baidu, but it recently stated that it would bring Xiaowei, its new voice assistant for WeChat, to more smart home devices and connected cars. WeChat is already the most popular messaging app in China with 1.1 billion monthly active users, but it's running out of room to grow.

The company is still expanding WeChat as a platform -- it includes more than a million Mini Programs for games, food deliveries, purchases, payments, and other tasks -- but its ecosystem is still largely confined to smartphones. Therefore, it also makes sense for Tencent to expand into the automotive market.

What investors should keep an eye on

These moves into the automotive market won't move the needle for Alibaba, Baidu, or Tencent anytime soon. However, they're building the foundations for ecosystems that go beyond smartphones -- and that might give one of these tech giants a competitive edge over the next few decades.

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Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. Leo Sun owns shares of Baidu, Ford, and Tencent Holdings. The Motley Fool owns shares of and recommends Baidu, Microsoft, and Tencent Holdings. The Motley Fool recommends Accenture and BMW. The Motley Fool has a disclosure policy.