Review: Tencent reflects China’s fading tech edge

Tencent CEO Pony Ma waves next to Alibaba CEO Jack Ma during China’s 40th anniversary of “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) – For many foreigners, Chinese innovation has negative connotations. The People’s Republic of China has long been known for producing cheaply manufactured goods, spawning corporate copycats that have taken full advantage of the country’s vast market, domestic protections and relative lack of intellectual property rights. The rise of Internet giants such as Tencent ( 0700.HK ) over the past decade has exposed the fragility of the idea. The problem is that they are powerful enough to attract the wrath of Beijing.

Lulu Yilun Chen’s “Empire of Influence: Inside the Story of Tencent and China’s Tech Aspiration” traces the company’s evolution into a $350 billion social media and gaming behemoth. The instant messaging platform ICQ, invented by five Israelis, started as a Chinese version of what is now WeChat, a super app 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 its American rivals. According to Chen, Tencent employees scoffed at Facebook’s business model: “When you have a billion users, the last thing you should think about is how to sell them more advertising.”

To fend off competitors, Tencent and its Chinese rivals have consistently implemented small innovations. Chen shares the show with Hong Kong-based startup Talkbox, the WhatsApp-like service that created the voice messaging functionality. Tencent decided that the most important factor is the speed at which voice chats are sent, not their quality. It turned out to be a critical decision that ultimately cost TalkBox.

Tencent founder Pony Ma has nurtured star executives such as former Goldman Sachs banker Martin Lau and Microsoft ( MSFT.O ) veteran Jeff Xing Minghua. They have deployed Western-style governance and helped engineer bold expansions, championing the Chinese state and exploiting Internet and fintech innovations that have lagged behind. Tencent became the crown jewel of China’s private sector. In the year Investors who bought the shares during Hong Kong’s initial public offering in 2004 saw an impressive annualized return of 51% by the end of 2020, Refinitiv said.

But as in the West, the growth of tech giants has prompted a backlash from Chinese regulators. In China, a shift came in October 2020 when Jack Ma, the founder of rival Internet giant Alibaba ( 9988.HK ), lectured China’s top leaders that its rules were outdated and rigid. Regulatory action was taken by rejecting the proposed $35 billion IPO of Alibaba’s financial partner, Ant.

In comparison, Pony Ma kept a low profile and obeyed the rules with gusto. However, Tencent could not avoid the backlash. Officials have found fault with the company’s lucrative games, calling it “spiritual opium” and enslaving the country’s youth. They ordered Tencent to cover the time the minors played. This month, officials approved the first new game since last year.

The brutality of the crackdown reflected concerns among Chinese leaders about the company’s potential power. According to unnamed sources cited by Bloomberg reporter Chen, the now disgruntled Vice Minister of Public Security, Sun Lijun, has asked Tencent to monitor the country’s influential politicians. Last year, the Communist Party fired Sun for “cultivating personal power” and pleaded guilty to accepting bribes. Tencent declined to comment.

The company’s failure had dire consequences for investors. In the year Tencent’s shares have fallen 60% since hitting their all-time high in February 2021, erasing nearly $600 billion in market value. The setback has also undermined confidence in China’s private technology sector. US venture capital investment has slowed, even Chinese tech investors are now moving abroad.

The undermining of China’s privately-owned Internet giants runs counter to Xi Jinping’s technological self-sufficiency. While the Chinese president is pouring government investment into semiconductors and other high-tech industries, the country is still catching up with the United States. But, as Chen argues, an environment where corporate success is seen as a threat to political stability does not encourage risk-takers to blaze new trails. Indeed, a generation of Chinese entrepreneurs inspired by Silicon Valley’s startup culture have largely retired or disappeared from public view, selling their investments and donating to public causes to minimize their impact.

Pony Ma has yet to sideline peers such as Jack Ma and PinduoDuo’s ( PDD.O ) Colin Huang. According to local media reports, he told employees at an internal meeting last year that the company must ensure that it is “uncrossed, a good helper” while serving the country. A disgraced Tencent is sick of duplicating past technological successes for China.

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(The author is a Reuters Breakingviews columnist. Opinions expressed are her own.)

Context news

“Empire of Influence: The History of Tencent and China’s Tech Aspiration” by Lulu Yilun Chen was published by Hodder & Stoughton on July 14.

Edited by Peter Tal Larsen and Thomas Schum

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