For Naspers’s South African shareholders, based more than 11,000km from the heart of the action, Tencent seems like one of Michael Caine’s ducks, appearing to glide effortlessly and almost regally through the competitive waters. From this distance there is no sign of the intense paddling going on just below the surface.
In Influence Empire, Bloomberg journalist Lulu Yilun Chen provides some fascinating insight into just how much crazy paddling was involved in creating Tencent and then ensuring it remained at the cutting edge of the global tech industry for the next 25 years.
It is a remarkable story, one that has been dominated in that peculiarly understated Chinese way by one person: Pony Ma. This is the man who has made tens of thousands of South Africans much wealthier than they might ever have imagined.
But it hasn’t been a one-man show. In her excellent book, subtitled “The Story of Tencent and China’s Tech Ambition”, Chen does much to dispel the notion that this was all Ma’s work. No doubt it would not have happened without him, but he was very ably assisted by key individuals whom Chen brings to life through insightful brief biographies and entertaining accounts of 18-hour workdays as they fight each battle to secure their dominance in an ever-changing market.
Of course, it is to Ma’s credit that he is not only an excellent capital allocator, but also good at identifying the right people. Indeed, as the book progresses from the early QQ desktop days it becomes increasingly evident that the two skills — capital allocation and people selection — are interwoven. Essentially, Tencent is pumping capital into people who have enticing ideas, reasonably clear plans, lots of passion and a willingness to work every hour of every day of the week.
But let’s begin at the beginning, or very close to it. In 2001, 21-year-old Naspers scout David Wallerstein was drifting around the southern Chinese city of Shenzhen, where Tencent’s head office was located, looking for investments. As Chen tells it, Naspers was on the hunt for investments following a windfall after it went public on the JSE.
“Whenever I visit a Chinese city, I visit the internet cafés to see what games the young people are playing. To my surprise, almost all of the internet cafés had OICQ on their desktop,” Mandarin-speaking Wallerstein told Chen — a reference to the Tencent-owned messaging service now called QQ. “At the time I thought this could be a great internet company.”
While Chen appears to give full credit to Wallerstein, former Naspers chair Ton Vosloo provides a slightly different account of how the Afrikaans media group ended up as the largest single shareholder in three-year-old Tencent. In his autobiography, Vosloo describes how Sinophile Koos Bekker, the Naspers CEO at the time, tagged China as offering the best investment potential on the globe. (It’s worth remembering that at the time the big international investors showed little interest in the country.)
Anyway, in Vosloo’s telling two other Naspers executives were critical to the decision: Hans Hawinkels, CEO of MIH Asia, and Charles Searle, chief investment officer of Naspers’s internet division.
It took six months to close the $32m deal that gave Naspers 46.5% of the loss-making instant-messaging company. There were a few hurdles; Tencent’s founding shareholders refused to give up control and insisted on cash, not Naspers shares. And over in South Africa, in the wake of the dot-com crash, many of the Naspers directors struggled to see the attraction of a little-known Chinese tech company.
Though Naspers’s investment warrants only three pages in Chen’s book, it’s very likely Tencent would not have survived without it. The investors who sold out to Naspers were refusing to provide any additional funds for Tencent’s cash-burning business despite it notching up an impressive 100-million users. Chen says the founders had considered selling out to leading internet portals in China such as Yahoo, Sohu and Sina. Nobody was interested. For many, Tencent was just one of numerous hungry and aggressive hopefuls littering the fledgling Chinese tech industry. Over the following months things began to change.
I don’t blindly innovate. Microsoft, Google are both doing what others have been doing. The smartest approach is to learn from the best examples and then try to surpass them
— Pony Ma
With Naspers’s backing, as well as revenue slowly coming in from advertisers and premium users of its messaging site, life became a little easier for the Tencent team. Of course, it didn’t mean they could relax; not even after the Hong Kong listing in 2004.
From Chen’s telling, the pressure to build and hold a strong position in the ever-changing, ever-growing tech industry was unrelenting.
Tencent had to anticipate changing consumer demands or risk losing out to the next hungry new player. Its market-leading messaging product was constantly being tweaked, with new bells and whistles added on a regular basis.
In the early years, when China was something of an intellectual property pirate, many of these new bells and whistles were “borrowed” from big international companies. In those early years it was like the Wild West — the rules were made by the biggest and the richest companies. All the more reason to make sure, no matter what the cost, that you were one of the biggest and richest.
Even QQ’s original name, OICQ, was a straight crib from an Israeli product. It had to be changed after AOL acquired OICQ and threatened legal action.
For Tencent the real money started to come in with its second foray into gaming. The new gaming strategy was designed around QQ’s 200-million users, with the production team adding casual, easy-to-play card and board games to its interface. Small tweaks were constantly made to designs to improve the user experience.
Tencent’s local and international competitors were not impressed by the startling success of its gaming ventures. One complained it was a blatant rip-off. “Copycatting was rampant in China,” says Chen.
In September 2006 a South Korean company made history when it sued Tencent for copyright infringement and improper competition in Beijing. After the court ruled in Tencent’s favour, Ma told local media, “I don’t blindly innovate. Microsoft, Google are both doing what others have been doing. The smartest approach is to learn from the best examples and then try to surpass them.”
But it seems Ma and his co-executives were tiring of their copycat reputation, and with cash now filling their coffers they looked to a more resilient long-term strategy. The company started licensing the rights to successful games developed by international companies. It had also begun shifting its strategy towards investing in start-ups instead of trying to compete in every sector itself. Tencent’s obvious strength lay in using its hugely successful QQ messaging platform to direct traffic to other content sites such as news portals and gaming sites.
The strategy proved enormously successful and hugely profitable. Tencent developed a reputation for being a patient, long-term investor, quickly becoming an attractive investor for innovative new companies. As Chen explains, it offered smaller companies a way to remain independent and keep growing as opposed to competing in a battle to the death with one of the tech giants.
It’s a little disappointing to consider that so much drive and intense paddling — as well as so many hundreds of billions of dollars — were devoted to something as trivial as social media and games. But that’s business for you
Of course, it wasn’t just smaller, younger, more innovative companies that Tencent had to worry about. There was the other Chinese tech gorilla Alibaba, led by Jack Ma. The two companies and the two CEOs seemed constantly on the alert for signs of weakness in the other. For much of the first two decades of the 21st century Alibaba seemed to have the upper hand, largely because of its financial payments system. But in 2015 Tencent succeeded in winning over food delivery company Meituan and then a few years later, the ride-hailing operator Didi.
And then there was WeChat. In 2010, with Apple’s new iPhone4 about to be launched and 3G on the horizon, Chen recounts how Pony Ma worried that his PC-based empire could get overturned overnight by some new mobile start-up. He decided to “self-disrupt”. WeChat was the mobile product that would lay waste to QQ, but not before loads more management effort and time was invested in developing exactly the right product.
It is in her account of WeChat that Chen’s story bumps up against the darker side of China’s tech industry. The combination of technological developments and President Xi Jinping’s growing authority has resulted in WeChat becoming the Chinese government’s most powerful monitoring tool. “By employing artificial intelligence, the company can automatically detect banned words, images and even screen voice messages,” says Chen. It proved indispensable to Xi’s zero-Covid policy.
Chen’s story is an entertaining and gripping account of an amazing period in China’s recent history. It tells of the remarkable drive of the Chinese people who, until a few decades earlier, had been held back by a viciously cruel regime led by Mao Zedong. To be sure, it’s a little disappointing to consider that so much of that drive — as well as so many hundreds of billions of dollars — was poured into something as trivial as social media and games. But that’s business for you.
While Tencent managed to navigate the Wild West environment very profitably, it has struggled to deal with the Chinese government’s tough new intrusions. It’s not just the monitoring — the huge profits from its gaming business are under threat from tougher licensing laws and its acquisition strategy has been dealt a near-lethal blow by the newly empowered competition authorities.
In the coming years shareholders will learn whether 52-year-old Pony Ma is able to deal with his most formidable opponent to date, who some fear is intent on returning the country to a Mao-type era. That will be another fascinating story.
* Influence Empire: The Story of Tencent and China’s Tech Ambition, by Lulu Chen, is published by Hodder & Stoughton
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