Tencent's investment strategy disclosed - Matthew Brennan

Matthew Brennan

Tencent's investment strategy is mostly a black box, where observers try to find a red line by looking at what the internet giant is doing. Tencent analyst Matthew Brennan got the unique possibility to discuss those issues with Tencent Investment Partnership Manager, Li Zhaohui, and published a translation on China Channel.

China Channel:

Q：There is a view that Tencent’s focus on investment is now hindering its own business innovation. What do you think of this? 

A： It’s totally wrong to place the investment performance and one’s own business as opposing goals. i.e. if the investments are doing well, it will lead to a bad core business, or saying business is turning bad because Tencent has placed more energy into investing. This is a misunderstanding. On one hand Tencent’s investment contributions to the main business can be very direct, such as our investments into the gaming industry. In this way, we have established long-term strategic relationships with our core partners to ensure that we have access to the best games in the world. On the other hand, other investments can have very strong synergies and mutual promotional relationships with Tencent’s core businesses. These relationships are far from being as simple as how much money is reported on our financial statements. 

Q：What synergies are there with the main business? 

A： Investments provide Tencent with many opportunities and possibilities for expansion into new areas. The classic example is e-commerce. If there was no investment, it would be difficult for Tencent to enter this field. Before Tencent had （拍拍网）PaiPaiWang, which it was running for many years. After entering the e-commerce business, it was through investments that we gained controlled of 51buy.com, which was the biggest competitor of JD at the time. After that, we invested in some vertical e-commerce players and new format e-commerce, such as Pinduoduo. Some investments also combine offline operations, for example we are not likely to run our own offline bike rental business. In this way it’s only through the strong binding of interests through investment, that Tencent will use its huge traffic and user base to help these business. In this process, Tencent’s investment department plays a very important role.    

Q：But the establishment of partnerships is possible not only through investment. For example, Starbucks and Ali have recently reached a cooperation, but they do not have an equity partnership. 

A： The Tencent business unit has done many things on its own. We are the biggest proponents of the “Internet+” policy and have business partnerships with various entities including local governments. Another example is that every year we distribute thousands of games, and it is impossible to have an investment relationship with every company. 

Q：Why are you entering so many industries? This type of investment has been referred to as “sprinkling pepper”. 

A： The investment reflects to some extent Tencent’s attitude of restraint towards other industries. Our thinking is relatively clear, only invest in areas related to Tencent’s business, mainly consumer Internet (tips: Consumer Internet refers to the application of internet across an individual’s daily life. Specifically, the comprehensive digitalization of personalized needs regarding clothes, food, housing, travel, medical and other daily life situations). If you say that we are constantly entering new areas, there are only two reasons. First, the Internet is also expanding and entering many new areas. We are simply following the trends of how the Internet is expanding. Secondly, too many industries and fields are converging. It’s getting difficult to easily categorize what field companies are in. 

Q：Are there any areas you absolutely will not invest in? 

A： Many. For example, in the past few years, many companies that have nothing to do with our core business have asked us to consider investments, some of which are very certain to be profitable, but we won’t do it. New materials and communication equipment in the TMT sector, we are very clear not to invest there because we do not understand this area. Alternatively, if we see a loss-making company with a lack of experienced management, but we believe the company holds value and can meet the needs of a large number of users, even if it faces many difficulties, we are willing to invest. 

Q：Some investors suggest that you should learn from Alibaba, to do more mergers and acquisitions, integration, do you think that makes sense? 

A： It’s not a case of black and white. Regarding mergers and acquisitions, we are quite strong willed. M&A itself is a very difficult thing. Alibaba has done very well, I think they’ve done amazing and it’s worth learning from. If you look at Alibaba’s mergers and acquisitions, they are all in the fields that they are relatively familiar with. We also do similar things in the areas of gaming and literature for example.

The full interview you can read at the China Channel.

Tencent's Li Zhaohui

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