Tencent published its third quarterly report on 14 November. The revenue rose 24% annually to CNY 80.6 billion (USD 11.7 billion) and profit in July-September quarter rose by 30% to CNY 23.3 billion (USD 3.36 billion), the report noted.
Its social platform Wechat’s monthly active users reached 108 million- a year-on-year growth of 10.5%. QQ reported 803 million users- a decline of 4.8% compared to last year. Advertising, payment methods and cloud computing services leveraged Tencent’s bottom line in the last quarter.
Tencent in transition
The company underwent a major restructuring in September. Although the performance in third quarter surpassed analyst expectations, the company’s transition towards B2B services is not going to be a smooth ride. Tencent’s executive director, Liu Chiping (also known as Martin Lau), is tasked with seeing the company through the hard times.
Tencent's share price has plunged almost 40% after it hit a high in January 2018. The falling stock has put Liu in a difficult position, tech media Geek Park quoted Tencent insiders as saying.
“Liu has usually kept a low-profile and likes to keep a distance with the media in public events”, the source said. “He manages Tencent’s daily operations and challenges. He is also the go-to-person for analysts and investors after every financial report”.
Liu has been a key element in Tencent’s success story. He helped CEO Pony Ma to implement major restructurings in 2005 and 2012. Liu’s role in Tencent’s investment in tech company Sogou (搜狗) and e-commerce platform JD and his overall contributions to the company’s growth trajectory accounted for his appointment as the in-charge for the latest upgrade as well.
“Tencent needs to strengthen its B2B capability and rethink the company’s structure,” said CEO Pony Ma in a December 2017 staff meeting. Tencent has a loose management style. But since the company is focusing on B2B services now, the decentralized structure will no longer fly. On 11 September, during the Tencent’s 20th anniversary, the higher-ups conceded the point.
Zhang Lei, founder of Hillhouse Capital and an early investor in Tencent, was quoted by Geek Park as saying,“Liu Chiping is a great business analyst. He knows what to do”.
Under the new framework, Tencent’s activities are divided into following project groups: enterprise development business group (CDG), interactive entertainment business group (IEG), technical engineering business group (TEG), Weixin business group (WXG) and social network business group (SNG). The erstwhile mobile Internet MIG and OMG are now recouped under Cloud and Intelligent Industry Group (CSIG) and Platform and Content Group (PCG).
Back to the drawing board
On 1 January 1, Liu Chiping held a meeting with the managers at Tencent’s headquarter to do a 360 degree differential. “It is not easy to reform a company of 40,000 people. Moreover, Tencent is a cautious company that first clearly identifies problems before solving them,” said Liu Shengyi, one of Tencent’s executive vice chairmen.
Post deliberations, Tencent released an ambitious plan of action. “Liu Chiping showed great courage by breaking up the old business groups, which was a very complicated process in itself,” said a source from Tencent. The decentralized structure resulted in business groups competing among themselves and their functions overlapping. During the upgrade, Liu was quoted as saying: “In future, we will commit resources to teams based on breakthroughs accomplished, contributions to the company and coordination with other groups”.
In 2005, immediately after Tencent’s IPO, CEO Pony Ma invited Liu Chiping, who was working for Goldman Sachs Asia Investment Bank, to join Tencent. Liu told Pony Ma that, as a chief strategic investment officer, he would like to be in charge of strategy, mergers and acquisitions, and investor relations. And the appointment paid of big time.
Tencent was at a crossroads at the time of Liu’s appointment: Video game sector was still in the nappies, instant messaging app QQ was facing stiff competition and Chinese Internet regulations were harsher. When Liu Chiping entered Tencent, he managed to check Tencent’s stock free-fall and oversaw high-profile operations, winning investors’ trust. A year later, he was promoted as chairman.
In 2010, he dealt with a dispute with tech company, Qihoo, over competition practices. He also oversaw the strategic investments in Sogou, JD, Didi and Meituan later on. For Tencent, Liu is not only an expert on capital operations; he also brought a high standard of efficiency by setting sales targets and giving an overall direction to the company. Tong Shihao (also known as Hans Tung), partner associate at GGV Capital, told Geek Park: “Those concepts are extremely important for a young company that wants to develop fast”.
After years of exponential growth, the number of Chinese internet users has peaked. Liu helped Tencent during its transition from a small company to a conglomerate. Now, Tencent has to be creative and quick if it wants to thrive as a B2B-focused company.
A year after joining Tencent, Liu told media: “Although I would like Tencent to have a flat management structure, the fact is that a company works better if not everyone is allowed to make important decisions. At Tencent, if someone wants to take part in the decision-making, that person needs to be promoted to manager level”.
Whether Tencent has a B2B DNA has been widely discussed in the Chinese media during the last few weeks. Liu Chiping was once quoted as saying: “Many people say we do not have a B2B DNA. I do not agree. If you look at evolution, species undergo mutations and do not have the same DNA from the beginning”.
Most B2B services come under the Cloud and Intelligent Industry Group (CSIG) that covers healthcare, education and transportation. Tencent’s financial report showed revenue from cloud services has reached CNY 6 billion (USD 864 million).
“The profit margin for this business line is quite low, but we are thinking in the long term. New business opportunities will emerge. We are now focused on infrastructure, but will gradually shift our focus to platform services and software services. Profit margin will improve then,” Liu said.
Tencent and Alibaba can’t escape comparisons in China. While Alibaba is quick get in on the act, Tencent is a cautious player. Alibaba embraced cloud computing as one of its core activities right away, but Tencent took its own sweet time to jump on the bandwagon.
“Liu Chiping’s pressure does not come from Alibaba, but from within Tencent. Liu has to quickly reorganize Tencent’s troops to face a new battle,” according to experts familiar with the matter.
Maybe that is why Liu assumed the position of chairman of the enterprise development business group (CDG). This group includes some of the business activities that come under most public scrutiny: investment, financial technology and advertising. Also, CDG works as an incubator for Tencent. Wechat was incubated under the aegis of CDG group.
Meanwhile, Tencent’s investment group is in the process of setting up a fund of USD 650 million. Currently, the group has 30 investment projects in more than 120 companies, a notch above Baidu and Alibaba. Tencent’s investment strategy is clear from 2010: Symbiosis, not absorption. Tencent keep a more open approach and wants the companies it invests in to preserve their independence. The company sees its investment projects as part of an open ecosystem and thinks in the long term.
Currently, Liu Chiping’s main task is to help Tencent find a more optimized income structure before it sinks its teeth into B2B services. After the video game business line (one of Tencent’s main sources of revenue) took a blow with fresh government regulations, Tencent is looking to pivot. In order to fight public backlash, Tencent has decided to implement measures to protect kids and teenagers from video game addiction.
“Every company’s situation changes like seasons. When winter comes, we have to keep working out. That way we will be stronger at spring’s arrival,” Liu said.