In today's Finshots we see if the Tencent meltdown will have an impact on India

The Story

Last week, Tencent, the Chinese company behind the massively popular game PUBG, fired nearly 5,500 employees. It was its first layoff in nearly a decade.

The reason?

The tech company’s revenues fell for the first time since 2004. Its net profits collapsed by nearly 60%. Its share price is down by 40% over the past year. And its future rests on shaky ground.

And if you’re wondering why we’re talking about Tencent, well, the company has invested over $2 billion in Indian companies since 2016 — including names like ShareChat, Lokal, Udaan, Swiggy, and Ola. And since their misfortune may have a bearing on outcomes in India, we need to talk about it.

But before we get there, let’s look at the rise of Tencent. And why it seems to be in a spot of bother now.

Tencent didn’t begin life as a gaming company. Instead back in 1998, they started off with a computer-based messenger service called QQ. Then a few years later, they decided to do more and launched a social networking service. In 5 years it amassed nearly 500 million active users.

Soon, mobiles became ubiquitous and Tencent was quick to capitalise on that. It rolled out WeChat (like Whatsapp), an app for people to message each other. And packaged a payments service into it as well.

But that wasn’t enough. It knew that Chinese citizens loved gaming. So it used its captive user base on QQ and WeChat, launched games and then went on a global acquisition spree. Because it could see how vital gaming would be for its future. By 2018, it had become the world’s largest online gaming company and left legacy companies like Activision and EA in the dust.

And two decades after Tencent began operations, it had morphed into a gaming behemoth with 30% of its revenues coming from this segment alone. It even broke into the top 10 most valuable tech companies in the world.

And this is when problems began to emerge. You see, the Chinese government was watching Tencent’s growth with a hawk’s eye. It could see the impact Tencent’s gaming was having on young kids. They were getting addicted. And the state was worried that this would have an adverse impact on children’s physical and mental development.

So out of the blue, the government slammed the brakes. It made a sweeping decree. Children could only play games on Fridays, Saturdays, and Sundays — for just one hour each. This move came shortly after a Chinese state media entity called online gaming “spiritual opium”.

There’s also the fact that dark memories of 2002 began resurfacing again.

Memories of an event that shook the entire nation.

In 2002, two teenagers burned down a cyber cafe after they weren’t allowed to play games. The kids were livid because they were addicted. And just like any addict, they lost their cool and burnt the whole place down. The fire sadly killed 24 people.

And now, with mobile gaming on the rise, maybe the government feels they have to preempt another crisis. Unfortunately, for Tencent, this has dealt the company a body blow. With 110 million minors playing video games and contributing nearly 3% to the total turnover on Tencent’s gaming platforms, they’ve lost their mojo.

If that wasn’t enough, China even stopped approving new games last year. It wanted developers to make games less addictive. And although it restarted gaming approvals in April, it hasn’t yet approved any new games from Tencent’s stables.

Through it all, Tencent has been losing market share. They’re attracting fewer eyeballs and this has had a visible impact on their top and bottom line.

But that being said — How does this affect India? How does a Chinese company’s fortune have a bearing on our outcome?

Well, Tencent loves investing in Indian companies. This, despite the fact that the Indian government restricts Chinese investments in India. They’ve now set up a couple of entities in Europe and are rerouting investments through the region. For instance, ShareChat counts Zennis Capital BV and Hlodyn BV as investors. But both companies are proxies for Tencent.

So the ongoing crisis could impact these investments in two ways.

One, it’s possible that Tencent may re-evaluate its investing priorities.

When startups go through a cash crunch, they usually reach out to existing investors who have access to company-specific information and are best placed to make a decision quickly. For instance, if a Tencent-backed startup were raising cash right now, they’d probably go to Tencent once again with their pitch for a follow-on round. But if Tencent isn’t on sound financial footing, they may rebuke this proposal. They may even ask Indian startups to pull up their socks and do better, hoping to cash in on investments to bolster their financial position. That’s the extreme case.

However, it could also work out in India’s favour i.e. Tencent could double down on investing overseas. They already sense the obvious risk of doing business in China. So maybe they’d relook at Indian gaming companies and see if there’s more potential here. Maybe they’ll funnel more money into the Indian startup ecosystem.

So yeah, it’s anybody’s guess how Tencent’s misfortune will play out in India. But we will be keeping a close eye on it nonetheless.

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Until then...

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Correction: An earlier version of the article had erroneously noted that the Chinese government banned consoles after the cyber cafe incident. However, the original ban was implemented in the year 2000. The error is regretted.