Review: Tencent reflects China’s blunted tech edge

Tencent’s Chief Executive Officer Pony Ma waves next to Alibaba’s Executive Chairman Jack Ma at an event marking the 40th anniversary of China’s “reform and opening up” at the Great Hall of the People in Beijing, China December 18, 2018. REUTERS/Jason Lee

HONG KONG, Sept 23 (Reuters Breakingviews) – To many foreigners, Chinese innovation has negative connotations. The People’s Republic was long known for churning out cheap manufactured goods, while spawning corporate copycats which took full advantage of the country’s vast market, domestic protectionism, and a relative lack of intellectual property rights. Over the last decade, the rise of internet giants like Tencent (0700.HK) exposed the flimsiness of the stereotype. The problem is that they became so powerful they drew Beijing’s ire.

“Influence Empire: Inside the Story of Tencent and China’s Tech Ambition” by Lulu Yilun Chen tracks the company’s evolution into a $350 billion social media and gaming behemoth. What started as a Chinese replica of ICQ, an instant chat platform invented by five Israelis, is now WeChat, a superapp that offers news, music, games, videos and payments and is used by more than 1.2 billion people. Its features were often far ahead of American rivals. According to Chen, Tencent staff mocked Facebook’s business model: “When you have a billion users, the last thing you should be thinking about is how do I sell them a ton of ads.”

To fend off competitors, Tencent and its Chinese rivals constantly implemented small innovations. Chen recounts a showdown with Hong Kong-based startup TalkBox, a WhatsApp-like service that invented a voice messaging function. Tencent judged that the most important factor was the speed at which the voice chats could be sent, not their quality. It turned out to be a crucial decision that eventually cost TalkBox.

Tencent founder Pony Ma nurtured star executives like former Goldman Sachs banker Martin Lau and Microsoft (MSFT.O) veteran Jeff Xiong Minghua. They instilled Western-style governance and helped engineer bold expansions, leaving Chinese state champions far behind in exploiting internet and fintech innovations. Tencent became the crown jewel of China’s private sector. Investors who bought shares at the time of its Hong Kong initial public offering in 2004 had by late 2020 earned a whopping annualised return of 51%, according to Refinitiv.

As in the West, however, the growth of giant tech companies drew a backlash from Chinese regulators. In China, the turning point came in October 2020 when Jack Ma, the outspoken founder of rival internet giant Alibaba (9988.HK), lectured senior Chinese leaders about how their regulations were obsolete and stiff. A regulatory crackdown ensued, scuppering the planned $35 billion IPO of Ant, Alibaba’s financial affiliate.

By comparison, Pony Ma kept a lower profile and doggedly complied with rules. Nevertheless, Tencent could not avoid the backlash. Authorities found fault with the company’s lucrative games, labelling them as the “spiritual opium” enslaving the country’s youth. They ordered Tencent to cap the amount of playing time for minors. This month, authorities approved its first new game since last year.

The ferocity of the crackdown may also have reflected nervousness among China’s leaders about the company’s potential power. According to unnamed sources quoted by Chen, a Bloomberg journalist, now-disgraced Public Security Vice Minister Sun Lijun asked Tencent to monitor some of the country’s most influential politicians. Last year the Communist Party expelled Sun for “cultivating personal power” and he pled guilty to taking bribes. Tencent declined to comment.

The company’s fall from grace has had severe consequences for investors. Tencent shares have dropped by 60% since a February peak in 2021, erasing nearly $600 billion of market value. The backlash also undermined confidence in China’s private tech sector. U.S. venture capital investment has dwindled, and even Chinese tech investors are now venturing abroad.

The humbling of China’s privately owned internet giants contrasts with Xi Jinping’s push for technological self-sufficiency. The Chinese president is pouring state investment into semiconductors and other high-tech industries, where the country still lags the United States. But, as Chen argues, an environment where corporate success could be viewed as a threat to political stability hardly encourages risk-takers to blaze new trails. Indeed, the generation of Chinese entrepreneurs inspired by Silicon Valley’s startup culture have mostly retired or disappeared from public view, while selling their investments and donating to public causes to reduce their perceived influence.

Pony Ma has so far not followed peers like Jack Ma and Pinduoduo’s (PDD.O) Colin Huang in stepping aside. According to local media, he told staff at an internal meeting last year that the company should ensure it “doesn’t overstep, be a good assistant” while serving the country. A humbled Tencent bodes ill for China replicating its past tech successes.

Follow @ywchen1 on Twitter

CONTEXT NEWS

“Influence Empire: Inside the Story of Tencent and China’s Tech Ambition”, by Lulu Yilun Chen, was published by Hodder & Stoughton on July 14.

Editing by Peter Thal Larsen and Thomas Shum

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