Will Tencent, parent of WeChat, make its way to U.S. markets?

Man working at a computer and pointing to a chart

By Gil Rabinowitch, MBA ’19

*Opinions in this article are of the author and do not necessarily reflect those of Cornell, Johnson, or the Emerging Markets Institute.

As a person that tries to be updated with local and international financial news I have never heard about this company before and could not believe it when I learned that it is the sixth most valuable internet company in the world (following Amazon, Alphabet, JD com, Facebook, and Alibaba).

Tencent Holdings LTD. is a private Chinese investment holding company that is traded in the Honk Kong stock exchange with a market capitalization of $474 billion as of March 2018. The core of Tencent’s vast product universe is made up by its massaging and social network with almost 2B users across platforms and gaming offerings. The success of Tencent is driven by WeChat, likely the world’s comprehensive mobile app. Tencent today is more than just a company, it is an entire universe of inter-linked businesses. The company’s operating profit was $13.87 billion in 2017—up 61% from the year before—and its revenue was $36.52 billion, up to 56% from the corresponding values in 2016.

Founded in 1998, Tencent modeled itself after the Israeli ICQ and launched its own instant massaging product a year later. The founders had encountered funding issues due to different regulations until two companies were willing to buy 40% of Tencent’s shares for $2.2 million which allowed Tencent to develop and reach 10 million users. From then till today, Tencent made several moves to increase its users share and funding. First, to establish its own revenue stream, it launched its online currency “Q coin”. Second, Tencent launched its website which became the QQ portal. Third, initiated the Freemium model in which users could enjoy free services and, for a fee, could enjoy additional features. Fourth, launched a gaming portal. Furthermore, Tencent developed WeChat which combines messaging features, quick photo chat, social network, and photo sharing.

In 1999 Tencent started making very successful VC investments mostly in China (59%) but also in the U.S. (26%) and other Asian countries. Those diverse investments helped Tencent to control the Chinese market and made a shift in the company’s strategy to focus on VC investments for future growth.

In recent years Tencent is making efforts to penetrate the U.S. market and/or other markets across the globe by applying to international patents (6,285 patents by 2017), internationalizing WeChat (expanded from 50M users in 2011 to 963M as of 2017), and global gaming expansion (bought many gaming companies including Riot Games).

Tencent’s Advertising contributes only 17% if revenue whereas Facebook and Google/Alphabet gets 98% and 86% respectively.

The case

The case describes Tencent’s huge success in the Chinese market and the main question that the reader must ask himself/herself is what should be Tencent’s next move? Should they try to penetrate the U.S. market? Continue to pursue other Asian markets? European markets? Or maybe they should stay within the familiar Chinese market and expand or find different ways to diversify their revenue stream?

Overall

Although Tencent’s success in China is huge, one must bear in mind the Chinese culture and legislations. up until recent times, The Chinese government has prohibited its citizens from using Facebook or other social media platforms which allowed Tencent to grow to its tremendous size. Maybe, if the Chinese market was open to international competition, the company would have not been able to win over 93% of the market.

Another interesting point which we discussed in class was, the customization that needs to be done on Tencent’s products when introducing them to the international market. Games are pretty easy to translate to different languages and no other “cultural” changes needs to be made. This fact is another contributor for Tencent’s games to be successful worldwide. On the other hand, WeChat and other products would require a lot of customization to different markets and those changes would probably change the product and would make it less attractive as it is for the Chinese customers.

U.S. market strategy

So far, Tencent is an unfamiliar company in the U.S. which made several meaningful M&As, the most familiar one (to me) is Riot games. Some of the most popular online games that are being played in the U.S. and the world, are owned by Tencent. As I mentioned before, I have never heard about this company and during the class discussion, I noticed that a lot of my classmates are familiar with those games and Riot but were not aware that they are playing a game which is owned by a Chinese company. Tencent’s acquisition of Riot Games and other companies seems to work very well and allowed the company to benefit from the U.S. market.

Tencent wants to have an enormous power in the U.S. and the best way for it to do that is to expand WeChat’s penetration into the U.S. customer’s life. Even though WeChat already has many customers in the U.S., I believe that in order for them to take control of the North American market, there are some things that are needed to take into consideration. The main concern that I have with WeChat is that the company is cooperating with the Chinese government by sharing data and who knows what else. The U.S. customer is very cautious and concerned with data sharing and this subject is largely covered in the media which increases awareness. One example of this concern is Facebook’s recent scandal which was largely covered by the U.S. news and social medias. The U.S. customers are having trouble trusting Mark Zuckerberg because they think that he is selling their information, so I highly doubt that they would trust an unfamiliar Chinese company which shares information with the Chinese government.

When I first read the case, I thought that the best solution for this problem is pretty easy to implement and is actually in line with Tencents’ business strategy, buy an American trustworthy company and with that brand name Tencent would be available to get some of the huge American market share. After careful thinking about this solution I highly doubt that the American customers and/or government would be that easily “fooled”. In todays modern world, it is not easy to hide the true nature of things especially for a market leader. For example, Nike had a bad reputation for employing kids at the other side of the world. Those kids were not hired directly by Nike and the CEO of Nike probably was not even aware of their existence and most certainly never step foot in that factory which is not one of Nike’s assets.

Summary and other thoughts

I think that it is inevitable for Chinese companies such as Tencent to penetrate the U.S. market, but I am not sure that the U.S. is ready for that. Considering the fact that only 17% of Tencent’s profit is coming from ads, compared to 98% and 86% for Facebook and Google respectively, I would suggest that it should focus on their current market and try to squeeze the lemon harder and get more revenues of its’ current market share.

I look forward to learning what is Tencent’s future strategy would be and how would it impact the company.

Link to learn more about the Emerging Markets Institute

About Gil Rabinowitch, MBA ’19

Gil Rabinowitch

Gil Rabinowitchs econd-year MBA student from Israel. Gil started his professional career as a team leader at the Israeli Paratroopers brigade in which he served for five years. After the military, Gil earned his BA in finance and started working as a sales representative at a boutique foreign exchange company; several months later, Gil was promoted to be a sales manager. Before joining Cornell, Gil worked at PWC in Tel Aviv, Israel as a financial consultant. Gil worked as a sale operations intern at HelloFresh after completing his first year in the MBA program.