Is China safe for westerners
With the WeChat app, Tencent has achieved what Facebook and Google dream of
David Wallerstein was looking for investment opportunities in China for his client. When he came across the startup Tencent, he was one of the first employees to join. An American of all people contributed to the success of the all-purpose WeChat app, which the US government is now trying to ban.
When we meet David Wallerstein in Zurich, the world is still another. In the industrial hall where ships were once built, nobody pays attention to the rules of distance. Visitors to the Digital Festival do not wear face masks either. The American Wallerstein, Vice President of the Chinese technology group Tencent, greets the journalists with a handshake. Nobody suspects that a pandemic will radically change people's everyday lives a few months later.
At the time, the thought that Tencent could be targeted by the US government also seemed absurd. The group is headquartered in the same city as Huawei, namely in Shenzhen. But that's where the similarities stop. Unlike the telecom equipment supplier, Tencent does not build critical infrastructure, but focuses on entertainment.
Given that the group, with a market capitalization of 575 billion Swiss francs, is one of the ten most valuable in the world, the interest in Tencent in the west has so far remained manageable. This is probably also due to the fact that customers mainly live in the Middle Kingdom. The company, founded in 1998, is best known for WeChat. And the days of this all-purpose app will soon be numbered in the USA - but more on that later.
Not an "alibi Westerner"
The Californian Wallerstein witnessed Tencent's WeChat rise up close. Globally active Chinese companies are now increasingly relying on Western personnel. But it is not always clear whether the "long noses" - as the Chinese call Europeans and Americans occasionally unflattering - really have something to say. Sometimes they mainly take on representative tasks in contact with non-Chinese customers and authorities. They are intended to bridge cultural and political divides.
Wallerstein does not belong to the category of "alibi westerners". He started working for Tencent back in 2000, when the company was still a young company with around 45 employees. He is now the Chief Exploration Officer (CXO). In an interview with the NZZ, Wallerstein said that the job title should be understood with a twinkle in the eye: "When we invented the role six years ago, we thought it would be a funny name for what I've been doing for Tencent over the years." In his Silicon Valley office, housed in a former church in Palo Alto, he looks for new investment opportunities for Tencent.
Investments in "Fortnite" and Tesla
Tencent has been on a shopping spree for years - especially outside of China. The focus is on the gaming industry. Video game manufacturers such as Epic Games (known for “Fortnite”), Activision Blizzard (“Call of Duty”) or Riot Games (“League of Legends”) are wholly or partially owned by Tencent. But the company is also involved in the car maker Tesla and the music streaming service Spotify. It is now also trying to gain a foothold in business with corporate customers, for example with cloud solutions. This makes it more and more difficult to pigeonhole Tencent. The quick-talker Wallerstein also needs a few seconds to think about it. "We are a large technology ecosystem in China," he finally replies.
WeChat made the rise possible. This “super app” is omnipresent in everyday life for the Chinese. Comparisons with Facebook or Whatsapp, which are occasionally employed, lag; a real western counterpart does not exist. The fact that the app is sometimes referred to as a “remote control for life” is only slightly exaggerated. It has blurred the line between the online and offline world: it can be used to open the locks of rental bicycles, pay the restaurant bills, make medical appointments or order taxis. It is Facebook, Whatsapp, Uber, Netflix, Skype and Amazon in one - and the list is far from complete.
The dream of Facebook and Google
WeChat is not an app in the traditional sense, but an ecosystem. New mini programs are constantly being added to expand the range of functions. This is convenient for users. You don't have to switch between apps. Like an operating system, WeChat covers many needs. Tencent has achieved what Facebook or Google dream of - and what European and American competition watchdogs would hardly tolerate: Those who do not use WeChat pay a social price.
Tencent had to work hard to achieve this dominant position. The “Great Firewall” may shield Chinese technology companies from US competitors such as Facebook or Google. Even so, the competition in China is brutal. Copying is less frowned upon. What brings economic success is good. Tencent in particular has a reputation for copying the business ideas of other companies. The company bosses are less missionary and more concerned about originality than in the West. Wallerstein explains the difference as follows: "In the West we tend to say: Let's not attack giants like Facebook, they are already too big." In China, the opposite happens: "When someone sees how big Tencent is, for example, they want a piece of the pie."
"It was like Steve Jobs"
And yet, to a certain extent, the company's success was mapped out. Wallerstein came across Tencent while working for Naspers. The South African media group started investing in small Chinese Internet companies in 1999. Unlike today, Shenzhen, where Tencent was founded, was not known to many non-Chinese at the turn of the millennium. "It was more difficult for the founders to find investors than if they had been in Shanghai or Beijing," says Wallerstein. "They were there because their families lived there." When he first heard about Tencent, he was determined to "go down there." He suspected that something was being created there that others did not appreciate. According to the motto: They are not in Beijing or Shanghai, we are not going there.
When he meets the two Tencent founders Pony Ma and Tony Zhang, Wallerstein feels that his premonition has been confirmed. “These guys were so different from the people I'd met before. To be honest, you just looked smart. It was as if Steve Jobs were suddenly standing in front of me. " He asked his usual questions about strategy and goals. But the answers were completely different from those of other startup founders. "It was like Steve Jobs with whom you are always a little ashamed for your questions."
Ma and Zhang were very self-confident, but not arrogant. Back then, everyone in China was fighting for capital; there weren't many venture capitalists. “Usually we were swarmed by the young founders,” says Wallerstein. But Ma and Zhang weren't particularly interested. They didn't seem to expect much from meeting him. "They turned the tables and asked me questions about Naspers."
"It can't be us!"
Wallerstein's interest grew even more when Ma and Zhang showed him the number of users on the Tencent platforms. “They went to the server and took out the data,” he recalls. The figures did not seem plausible: “There were more users than, according to official figures, used the Internet in China. What was happening?" But the numbers seemed right. Apparently the statistics hadn't kept pace with reality.
They then looked at the geographic distribution of users on Tencent's servers. “Then I noticed that traffic was not only increasing sharply in the usual hotspots such as Beijing, Shanghai or Guangdong (Canton). But also in provinces like Sichuan or Henan - that is, provinces with almost 100 million inhabitants. " Wallerstein was able to deduce from this: If Internet usage rose to the level of South Korea or Japan, the Tencent platform could one day have 600 million users. «We could hardly believe that. As an investor, you always say to yourself: It can't be us! "
Backwardness as an advantage
But it was like this: A man in his twenties who moved to China after attending a Japanese high school in 1994 had discovered a startup with enormous potential. The forecast at the time turned out to be too pessimistic, as we know today. WeChat currently has 900 million users in China; worldwide there are around 1.2 billion. As a reminder: The Middle Kingdom has around 1.4 billion inhabitants. His client was able to cope with the fact that the “sniffer dog” Wallerstein hired the startup, which he had actually put under the microscope for Naspers, without further ado. The South Africans bought a 47 percent stake in Tencent in 2001 for $ 32 million. When they sold a block of shares two years ago, they earned $ 10 billion for it. The remaining 31 percent stake that Naspers still owns is worth around 180 billion Swiss francs.
Tencent's first successful product was QQ. It was essentially a clone of the ICQ messenger, which was popular at the time. One inhibitor to growth was that QQ was designed for desktop computers. Many Chinese could not afford a PC shortly after the turn of the millennium. They were only online thanks to cheaper smartphones. The supposed handicap turned out to be a blessing for WeChat. Unlike many competitors from Silicon Valley, the company resisted the temptation to develop a QQ smartphone imitation with little effort. When WeChat was launched in 2011, the app was tailored for the smartphone. The ability to send voice messages was particularly important. Because at that time it was very difficult to type in Chinese characters on the mobile phone.
Pearl Harbor attack on Alipay
The fact that Tencent consistently relied on the smartphone with WeChat was an important prerequisite for its success. More importantly, WeChat managed to break into users' wallets. It was not easy. Because with Alipay, the e-commerce company Alibaba dominated the market for mobile payments. But with a clever marketing campaign, Tencent was able to land a coup in 2014. A tradition was transferred to the digital world: for the Chinese New Year celebrations, relatives and family members give each other red envelopes containing banknotes. Tencent introduced the red envelopes within WeChat for the celebrations. When users linked their bank account to the app, they could give away real money with the digital envelopes. Tencent managed to convince millions of Chinese to use the WeChat payment system.
Jack Ma, the founder of rival Alibaba, described the competitor's action as a "Pearl Harbor attack" on his company. The next cornerstone for the success of WeChat was laid with the red envelopes: the ability to pay for all kinds of services and products with the smartphone. Only in this way could the app develop into a comprehensive ecosystem in which you can buy train tickets, stream live concerts or pay for parking busses.
It is noteworthy that Tencent pursues a different business model than Google or Facebook. While the two US tech companies finance themselves mainly through advertising, which they can display precisely thanks to the data collected, Tencent sells subscriptions. The scheme is always the same, says Wallerstein: “We earn our money with premium services. About 90 percent use the free version; the remaining 10 percent of users appreciate our services in such a way that they pay a few dollars for a better option. "
This is also the case with online games: the majority play them for free, but a minority pay for weapons, armaments and other virtual goods. This strategy requires constant improvements. Ultimately, the free users should be persuaded to switch to the paid premium version. That was already the case with Messenger QQ. "We had to constantly look for ways in which we could generate additional benefits to keep people happy," says Wallerstein. As the top dog, Tencent had to be careful not to make any wrong decisions.
That wasn't easy in the early days. There have not yet been any A / B tests to randomly distribute the users to two different versions of the app and to empirically determine which of them is better received. Data mining, i.e. the evaluation of large amounts of data, was also still in its infancy. "We therefore chose an anthropological approach," said Wallerstein, looking back. Tencent invited users, interviewed them and looked over their shoulders. «We have always asked ourselves: How do we turn Messenger into something interactive? Do people want to listen to music together while chatting? Or watch a movie? " Gradually, avatars, a kind of digital personality, as well as more and more games, music or videos were integrated.
Advance obedience to Beijing?
This led to an increasing interdependence with the US entertainment industry. Tencent not only invests in American video game developers, but also finances Hollywood shoots and owns shares in film studios. In addition, the group has acquired a license from the NBA basketball league for 1.5 billion US dollars to broadcast their games in China. American critics fear that this will lead to premature obedience to the Chinese government.
The concerns do not seem entirely unfounded: Last year, when the general manager of the NBA team Houston Rockets showed solidarity with the protest movement in Hong Kong on Twitter, Tencent dumped his team's games from the streaming service. A Taiwan flag was removed from the Tencent co-financed film "Top Gun: Maverick" - probably out of consideration for Beijing, which regards the island as a breakaway province.
An iPhone without WeChat is useless
The bridge that Tencent built across the Pacific now rests on wobbly pillars. At the beginning of August, President Trump issued an order banning US companies from "any transaction that relates to WeChat" since September 20. According to the American government, the app poses a threat to national security. The data of American users could end up in the hands of the Chinese Communist Party, she argues. It is still unclear what consequences the order will have for Tencent. A California court has suspended the effectiveness of the ban with an injunction - at least for the time being.
If WeChat could no longer be offered in the Chinese app store in the future, this would hit Apple hard. An iPhone without WeChat can hardly be considered a functioning smartphone in China. And Apple achieves around a fifth of its sales in the Middle Kingdom. For other US companies, WeChat is an important sales and advertising channel in China. The US government has been able to reassure the companies. The main thing is that WeChat is disappearing from the app stores in the USA. This would “only” affect Chinese students and expats, but also American citizens and companies with ties to China. Until the details of the ban are on the table, there is tough lobbying behind the scenes. David Wallerstein should not only speak to startup founders at the moment.
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