Chinese internet giant announces mega spending plans on 'new infrastructure' | Article – HSBC VisionGo

What is Tencent planning to spend Rmb500bn ($70bn) on and which companies will be the beneficiaries?

Technology  ·    ·  5 mins read

In its early days Tencent’s reputation was more that of a fast-follower than a pioneer. While Alibaba was introducing e-commerce and taking its first steps towards fintech with the payment tool Alipay, Tencent adopted a more cautious approach, growing its customer base through instant messaging platform QQ and monetising it with sales of video games.

Pony Ma, Tencent’s founder, even questioned whether first-movers got much of an advantage in his home market. “In America, when you bring an idea to market you usually have several months before the competition pops up. But in China, you can have hundreds of competitors within the first hours of it going live,” he told a tech conference. The mantra was that “execution” mattered just as much as “ideas”, if not more so.

But the market view on Tencent as ‘steady’ rather than ‘spectacular’ started to look outdated after the launch of WeChat in 2011. As China’s dominant social media network it was soon an indispensable part of the daily lives of hundreds of millions of people. Its success also supercharged Tencent into a leading investor in the tech world, with more than 800 companies in its portfolio at the beginning of this year. More than 70 of its picks have made it to IPO and another 160 have been classed as ‘unicorns’ with market values of $1 billion or more.

That kind of pedigree means that Tencent is tracked closely for signals on where it plans to focus next, prompting another round of headlines last week when it announced it would be spending Rmb500 billion ($70 billion, or about five times last year’s profit) on ‘new infrastructure’ over the next five years.

The concept is fuzzy but the new infrastructure campaign generally refers to investment that accelerates advances in technology or science. On similar lines, the Shenzhen-based giant says it will be concentrating on fields like cloud computing, artificial intelligence (AI), blockchain technology and the Internet of Things (IoT), as well as the physical infrastructure that supports them, such as advanced servers and supercomputers, data centres and 5G networks.

Inevitably the media is excited by the size of the investment plan, despite a shortage of detail on how it will be delivered. But another question worth asking is how much of a transformation it implies for Tencent and how it does business.

Expertise in online games and social media made Tencent one of the biggest winners in the first chapter of China’s internet revolution, an era powered primarily by sales to consumers, or what is often described as a B2C model. A showdown with regulators over its gaming division, which garners more than a third of its revenues, then saw its shares slump in the first half of 2018, prompting an additional focus on the opportunities of the ‘industrial internet’ too. Shaped by more of a B2B ethos, the plan was to create more products for companies in sectors like education, healthcare and smart retail (see WiC427).

The rethink was a realisation that future growth would need to be fuelled by sales to companies, and not just consumers. The latest commitment to Rmb500 billion of investment goes further in stiffening the backbone of the digital economy in general. In gold mining folklore, sales of picks and shovels bring more profit than panning for the precious metal. But Tencent’s plan is to do both in tech terms: delivering the systems and applications that power China’s digital infrastructure, as well as selling the next generation of services that the new infrastructure is going to support.

In part Tencent will be ploughing investment into areas in which it has already built large-scale businesses. Its video game portals and social media platforms rely on huge server capacity and the scalability of its cloud-based networks, for instance. And WeChat is one of the biggest generators of information on user behaviour anywhere in the world, so it makes sense for Tencent to invest in AI, developing algorithms that derive new insights from such deep pools of data.

Another positive is that the bid to bolster the digital economy aligns with priorities at central government level – a better position than three years ago when Tencent’s key division was cold-shouldered by regulators in a bid to limit gameplay time for children. This time Tencent is dovetailing diligently with official thinking, including billions of yuan of spending that the government is promising itself, as highlighted in Premier Li Keqiang’s address at last month’s National People’s Congress in Beijing (see WiC497).

Tencent’s Ma was one of the delegates at the CPPCC, the NPC’s advisory body, and the seven proposals he submitted to the annual parliamentary session were clearly positioned to appeal to policymakers. What was also noteworthy about the session is that other business bosses did something similar, talking up areas where their firms could benefit most from following the official line. As a brief selection: Baidu’s Robin Li responded to government calls for advances in smart transportation (Baidu is investing heavily in the autonomous driving sector); Zhou Hongyi, boss of cybersecurity giant Qihoo 360, championed a national security system to protect the nation’s digital infrastructure; and Lei Jun from Xiaomi – a cheerleader for IoT technology – supported plans for a network of connected devices to counter natural disasters and public health crises.

Of course, business leaders are always looking for ways to tap into trends in national policy in the hope of winning contracts or making it easier to raise new capital. News that Tencent plans to raise up to $20 billion through bond sales to fund its investment plan falls into a similar bracket: state-controlled banks and investment funds will look more favourably on financing that sits well with government priorities.

The most specific of Tencent’s commitments is a pick-up of investment in cloud computing, supported by huge new data centres housing more than a million servers each. The idea is that these clusters will mostly serve commercial clients, helping them to prosper from the 5G era.

Tencent trails Alibaba by some distance in China’s cloud services market at the moment, capturing about a fifth of spend, versus half for Alibaba. It has closed a small portion of the gap in recent quarters, although Alibaba will be hard to dislodge at the head of the market after announcing plans to spend $28 billion on its own cloud division over the next three years.

Maybe there will be a shake-up in the sector in the aftermath of the Covid-19 crisis, however, which saw households double down on the digital economy. That wasn’t just in providing entertainment and a sense of community during the lockdown but also in the surge of new services like online schooling or office apps that helped people working from home (see WiC486).

Tencent has been making a more direct contribution to countering the pandemic as well. Its health QR codes on WeChat have been used over eight billion times, according to company data. As of late last month Tencent Healthcare had received more than 10 billion inquiries on Covid-19 updates and provided online clinical services over 15 million times.

But while all of this signalling on new technology takes centre stage in policy terms, it’s worth taking note of how Tencent is actually spending its investment dollars. And in this regard, the consumer internet still looks pretty fundamental to its prospects. Two weeks ago we reported on an investment in the Chinese franchise of Canadian coffee chain Tim Hortons (see WiC496) and shortly before that we mentioned its new stake in Afterpay, an Australian firm that offers short-term loans to shoppers. In late May the Wall Street Journal reported that Tencent was in talks to buy a $200 million stake in Warner Music, ahead of the company’s IPO (which occurred on June 3). That follows another investment in Universal Music at the start of the year in a bid to boost Tencent Music, China’s leading music streaming service (see WiC478).

Tencent Music has signed deals with Universal, Warner and Sony Music Entertainment for exclusive rights to songs that account for about three quarters of global music sales. Rival streaming services are furious, complaining that the costs of licencing music in China are much higher than other parts of the world. An antitrust investigation went on hold in February when Tencent did a deal with Bytedance to licence music for the short-video apps Douyin and TikTok. But the row is a reminder that content is still king in the Tencent universe and that consumers are still its main focus, despite its plans to become a player in digital infrastructure.

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