Will Tencent Challenge Baidu in the Driverless Market?

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Baidu (NASDAQ: BIDU), the top search engine provider in China, is considered a major player in the driverless market. Its open-source Project Apollo software platform has already attracted about 140 major partners, including Intel, Microsoft, Ford, and Honda.

Baidu is also testing its driverless cars on roads in China and the United States, where it operates a research lab in Silicon Valley. Baidu Maps helps its vehicles navigate roads within China, and a partnership with HERE enables it to map roads in other countries.

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In late 2017, the Chinese Ministry of Science and Technology officially designated Baidu to launch the country's first wave of open AI platforms for driverless cars. All those factors make Baidu a best-in-breed play in this nascent market.

However, Tencent (NASDAQOTH: TCEHY), which owns China's largest mobile messaging platform and the largest gaming portfolio in the world, is also quietly creeping into the driverless market. Could these moves undermine Baidu's dominance?

Tracking Tencent's driverless moves

Tencent owns stakes in electric vehicle makers NIO and Tesla, as well as the ridesharing platforms Didi Chuxing and T3. It launched an autonomous driving lab in 2016 as part of its broader expansion into AI-related fields.

The following year, Tencent started testing driverless cars and formed a new alliance for developing driverless AI technologies. Members of that alliance included Sebastian Thrun, a Stanford computer scientist who helped develop driverless cars for Alphabet's Google, NIO founder Li Bin, and Xu Heyi, the chairman of the state-owned automaker BAIC Group.

Last May, Tencent was cleared to test its driverless cars on public roads in Shenzhen. In November, it started recruiting driverless vehicle engineers in Silicon Valley but didn't disclose any additional plans for the US market. Unlike Baidu, Tencent isn't cleared to test its cars on public roads in California.

Tencent also recently partnered with South Korean automaker Hyundai (NASDAQOTH: HYMLF), one of Baidu's Apollo partners, to install infotainment systems in its cars. Hyundai stated that the partnership would not extend to driverless cars, but it could allow Tencent to tether its sprawling ecosystem of social media, payments, streaming media, and gaming services to Apollo's open-source platform.

What's Tencent's long-term plan?

Much of Tencent's future growth hinges on the growth of WeChat (also known as Weixin), the most popular mobile messaging app in China with 1.1 billion monthly active users (MAUs). As WeChat runs out of room to grow its MAUs, Tencent needs to boost its revenues per user.

It's accomplishing this by expanding WeChat as an all-in-one platform for ordering food and services, making payments, playing games, hailing rides, and more -- which are provided through "Mini Programs." Tencent's total number of Mini Programs topped 1 million last November, and the platform's daily active users (DAUs) hit 200 million.

Corralling users into that expanding ecosystem enables Tencent to control a mobile app ecosystem without owning an OS like iOS or Android. It also helps Tencent expand WeChat's reach into adjacent markets like e-commerce, which is reinforced by the strength of its WeChat/Weixin Pay platform.

Launching a platform for driverless cars complements that expansion. In a few years, WeChat users could hail driverless cars through dedicated Mini Programs. It could also integrate its WeChat messaging and payment systems, Tencent Music and Tencent Video streaming platforms, and its mobile games into those cars' infotainment platforms.

Furthermore, investing in driverless cars enables Tencent to keep pace in its escalating AI arms race with Baidu and Alibaba (NYSE: BABA). All three companies are testing driverless cars, promoting the use of virtual assistants in smart speakers, investing in facial recognition technologies, and exploring other AI markets. Tencent doesn't want to get left behind in that race -- especially after its AI Lab chief abruptly resigned earlier this year.

Should Baidu worry?

Tencent's driverless investments probably won't move the needle for its core business or threaten Baidu's lead anytime soon. However, they offer investors a glimpse of the tech giant's longer-term plans beyond video games and ads, as well as the ongoing land grab in China's AI market.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. 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 Alphabet (A shares), Alphabet (C shares), Baidu, Microsoft, Tencent Holdings, and Tesla. The Motley Fool recommends Ford. The Motley Fool has a disclosure policy.