Tencent restructures with eye on industrial internet as gaming business slows
Tencent Holdings, which derives two-thirds of its revenue from online gaming and social media, reshuffled its business units this week in a bid to focus more on the industrial internet, as China seeks to upgrade its manufacturing amid a trade war with the world’s biggest economy.
The restructuring, the first in six years for the Shenzhen-based company, will see the creation of a new business group devoted to cloud and smart industries. Another new group will combine its social media, mobile internet and online media operations, a nod to the need for more strategic coordination with the emergence of competitors like ByteDance Technology, whose artificial intelligence-driven recommendation algorithms for news and short videos have captured market share and eyeballs away from Tencent’s own video and news platforms.
Tencent will also form a new technology committee that will create an internal platform for the sharing and collaboration of fundamental technologies within the company and apply them to different industries.
The restructuring marks a “significant strategic upgrade” for the company, which had connected users with consumer services in the past, Tencent chairman and chief executive Pony Ma Huateng said in a statement. Given that “the next era of the internet is the industrial internet”, Tencent will connect “industries and consumers to build a more open ecosystem”, he said.
With the reshuffling, Tencent will have six business groups, down from seven previously. Four existing business groups – corporate development, interactive entertainment, technology and engineering, and WeChat – remain unchanged.
Tencent’s restructuring is also taking place against a backdrop of a trade war with the US, which earlier this year brought Chinese telecommunications equipment maker ZTE Corp to its knees by banning American firms from supplying it, exposing the latter’s dependence on US technology. The debacle prompted a period of national soul-searching that has seen both Ma and Alibaba Group Holding executive chairman Jack Ma call for the country’s enterprises to own “core technology”.
With the next wave of advanced technologies set to infuse machines with artificial intelligence and connect industrial objects in an internet of things, China has been determined to upgrade its manufacturing base so as gain leadership in what has been dubbed the Fourth Industrial Revolution.
Tencent’s restructuring has also come amid concerns about its core video games business, which has seen a slowdown amid a regulatory reorganisation in China. Approvals of licences for new games had been suspended since the end of March, and a government source recently said it may take a further four to six months to finalise the new licensing system.
China’s online game market, the world’s largest, has experienced dramatic growth in recent years, but the government is showing increased concern about what it sees as the industry’s negative aspects, including violent content and its effect on the eyesight of the country’s youth.
“It’s already October but we haven’t seen much progress in game approval yet,” said Norman Hui, a Hong Kong-based analyst with Zhongtai International Securities.
As a result, Tencent has lost more than US$180bil (RM745bil) in market value from its peak of US$578bil (RM2.3tril) in January. The company’s price-to-earnings ratio, a key valuation metric, has now slipped from a 12-month high of 53.9 in November 2017 to 33.4, according to Bloomberg data.
Tencent’s previous corporate structure, which was set up in 2012, helped drive the growth of the company’s consumer-focused internet products. Tony Zhang Zhidong, a co-founder of Tencent, said in an event in last month, that the structure created an internal problem in which there was inefficient sharing of innovation in AI, big data and cloud technologies between business groups.
“We need to stay awake at all time, be alert of crises and be forward-looking,” Tencent president Martin Lau Chi-ping said in the statement.
The restructuring and sharpened focus on cloud would appear to reinforce Tencent’s role as one of China’s designated AI champions, which include Alibaba, Baidu, iFlyTek and start-up SenseTime.
At the opening of the 19th party congress last year, President Xi Jinping called for deeper integration between the real economy and advanced technologies, including internet, big data and AI.
Despite its mandate in AI, Tencent has been on the crosshairs of industry regulators as Beijing tightened its scrutiny on video games because of the impact on children’s health.
China’s video games market, the world’s largest, has experienced dramatic growth in recent years, but the government is showing increased concern about what it sees as the industry’s negative aspects, including violent content and its effect on the eyesight of the country’s youth.
In response, Tencent last month launched its strictest real-name verification system yet to detect and protect minors in China.
Tencent’s new cloud and smart industries business group, led by subsidiary Tencent Cloud, will cover solutions for smart retail, education and health care, among a range of sectors under the so-called industrial internet.
Cloud computing enables companies to buy, sell, lease or distribute online a range of software and other digital resources as an on-demand service, just like electricity from a power grid.
“Despite fast growth in recent years, Tencent is still seen as the underdog to Alibaba in terms of cloud,” Zhongtai’s Hui said. “We expect the gap to narrow with the restructuring.”
Hui said Tencent’s recent string of investments, including in smart retail, will help drive its shift to more enterprise solutions. The investee companies will serve as both clients and partners of Tencent’s cloud business, he said.
Hong Kong-listed Tencent reported in August that it doubled cloud revenue for the second quarter, compared to the same period last year, without revealing the exact number. It credited that growth to “deepened penetration in key sectors including finance, smart retail and municipal services”.
Last month, the company announced a new effort to push its advances in artificial intelligence technology as the operating platform for other companies to pursue their own AI initiatives. Tencent Cloud will enable individual developers and enterprises to access Tencent’s open AI platform.
Still, Tencent has a lot of catching up to do before it can mount a strong challenge against Alibaba’s cloud operations.
Founded in 2009, Alibaba Cloud had a 48% share of China’s public cloud services market last year compared with about 10% for Tencent Cloud, according to data from technology research firm IDC. Alibaba Cloud was also ranked fourth in the global public cloud services market in the second quarter, behind Amazon Web Services, Microsoft and Google, according to Synergy Research.
Meanwhile, Tencent’s new platform and content business group, which combines the firm’s news, long-form video and short video apps, including Weishi, under one leader is expected to help it better compete against fast-growing rivals, according to Hui.
Start-up ByteDance, the company behind popular Chinese news app Jinri Toutiao and short-video app Douyin, known as Tik Tok overseas, looks to be Tencent’s biggest competitor in those segments. A recent financing round, which is said to have put the value of ByteDance at US$75bil (RM310bil), is likely to intensify the start-up’s ability to compete with the likes of Tencent and Alibaba.
While there is reason to be optimistic, Hui said Tencent’s latest restructuring will be judged by the innovations it can foster.
“Tencent’s previous restructurings in 2005 and 2012 have been very successful in helping spur the growth of (social media apps) QQ and WeChat,” Hui said. “So this reorganisation’s success will depend on whether Tencent is able to offer strong, new products in the future.” – South China Morning Post