Alibaba invests in Meizu smartphone maker
Alibaba has invested $590 million for a minority stake in tiny Chinese smartphone maker Meizu. The question is why?Reuters

Alibaba, the Chinese ecommerce giant seen as a mixture of Amazon, eBay and Google, became front page news last year when it went public, raising $25bn (£16.4bn) in the world's largest ever IPO.

And while Alibaba dominates the internet in China - accounting for $4 out of every $5 spent online in the country - it is no where near as dominant on smartphones and has taken a big step to address the issue.

Alibaba has invested $590m in Chinese smartphone company Meizu for an undisclosed, minority share of the company.

Meizu is a company very few people outside of China will have heard of, and it accounts for less than 2% of the Chinese smartphone market.

So why has Alibaba paid so much money to invest in a tiny smartphone company you have never heard of?

YunOS

The first reason is that Alibaba already has a stake in the smartphone market in the shape of its homegrown YunOS operating system which promotes the company's variety of online services over those of Google or other rivals. The deal will see Meizu replace Android with YunOS on its smartphones from now on.

YunOS (also known as Aliyun OS) is based on the Android Open Source Project (AOSP) and was developed by the AliCloud subsidiary of Alibaba. This model of using a forked version of Android is an increasingly popular one, particularly in China, where Xiaomi shot to prominence in 2014.

Xiaomi sells smartphones featuring high-end specs at a relatively low price, promoting its own online stores through its Mi operating system.

While Xiaomi has become of the largest smartphone makers in Chinesa, with 16% market share, Meizu has a long way to go to replicate that success.

Mobile strategy

However, with the investment from Alibaba, and the company's online expertise, it could be just the boost it needs to make a move in the smartphone market.

"The investment in Meizu represents a significant expansion of the Alibaba Group ecosystem and an important step in our overall mobile strategy as we strive to bring users a wider array of mobile offerings and experiences," said Alibaba chief technology officer Jian Wang in a statement.

Wang's comments highlight the fact that as more and more people connect to the internet using their smartphones, it will be vital to the future success of Alibaba that it has a strong presence in this area.

While China is the world's biggest smartphone market, growth is slowing as the market becomes saturated meaning that it will become even more difficult for Meizu to stand out in a market which is crowded with homegrown companies like Lenovo, Xiaomi, Huawei and ZTE as well as overseas brands like Apple and Samsung, with the iPhone in particular seen as a status symbol.

Alibaba's competitors Tencent and Qihoo have both already make strategic investments and partnerships in the Chinese smartphone industry ahead of Alibaba, with Tencent working with Xiaomi while Qihoo invested $400m in smartphone maker CoolPad last year.

For Meizu the deal is a no-brainer. Not only will it get a financial boost, but the potential exposure on Alibaba's hugely popular online stores will propel the brand to new heights in terms of brand awareness.

Considering Alibaba's financial muscle, if this investment doesn't work out, it is unlikely to damage the company significantly, but if it does work out then if could be hugely lucrative for the company.