Below is a complete transcript of the Sinica Podcast with Lulu Chen.
Kaiser Kuo: Welcome to the Sinica Podcast, a weekly discussion of current affairs in China, produced in partnership with The China Project. Subscribe to Access from The China Project to get, well, access. Access to, not only our great daily newsletter, but to all of the original writing on our website at thechinaproject.com. We’ve got reported stories, essays and editorials, great explainers and trackers, regular columns, and of course, a growing library of podcasts. We cover everything from China’s fraught foreign relations to its ingenious entrepreneurs, from the ongoing repression of Uyghurs and other Muslim peoples in China’s Xinjiang region, to Beijing’s ambitious plans to shift the Chinese economy onto a post-carbon footing. It’s a feast of business, political, and cultural news about a nation that is reshaping the world. We cover China with neither fear nor favor.
I’m Kaiser Kuo, coming to you from Chapel Hill, North Carolina.
This week on Sinica, I am delighted to welcome Lulu Chen, a Hong Kong-based reporter for Bloomberg, who has been covering the tech beat in China for over a decade. She is the author of a terrific book about one of China’s most important and most successful internet companies — Tencent. Best known, certainly among Sinica listeners, for its hugely popular, truly indispensable super app, WeChat, or Weixin, but also for its massive portfolio of game companies and other investments around the internet and around the world, including many of China’s most popular online to offline services. And for the still very, very popular chat messenger, QQ, also for its music streaming services and its online literature, and much else. With a market cap, yesterday, of $425 billion US dollars, it is easily one of the most valuable internet companies in the world. The book is called Influence Empire: Inside the Story of Tencent and China’s Tech Ambition.
And for me at least, it’s right up there among the very best books that I’ve read about the internet in China, offering, as it does, a great historical account of the travails and triumphs of China’s tech entrepreneurs from their very early efforts through the boom years, really, and right up until the recent regulatory tightening. Read the book, and you will learn a ton about Tencent, but also about its competitors and the epic struggles among them. It was a real pleasure to read, and I highly recommend you pick up a copy. Lulu, congrats on the book, and welcome to Sinica.
Lulu Chen: Great to be here, Kaiser.
Kaiser: Yeah, yeah, it was wonderful to have you. So, you know what I want to do? I want to start by giving listeners a sense for just how big and how vital and how important Tencent is today. What would you tell people who aren’t already familiar with the company in order to give them a sense of just how vast the company is and how central its products are to the lives of ordinary Chinese people?
Lulu: Well, for Tencent, I would break down its business largely into three chunks for people who don’t understand what it is. There’s WeChat that you mentioned. So that goes into the social media — instant messaging social media component. WeChat is for mobile, and then during the desktop era, which is where Tencent got its first start was QQ. And then apart from that, you have the gaming sector, which actually generates, or at one point generated, most of its revenue, which is why it got so big and why investors love it. And then there’s the future business: cloud, and also at one point, FinTech was on the rising trajectory. That’s come down a little bit after the crackdowns in the past two years. Largely, I would say you can break it down from a revenue contribution point of view into these three sectors, but on the sidelines, it also had this vast investment component where they were actively seeding and backing, at its peak, more than 800 startups and companies, and many of those investments generated very handsome returns for the company as well.
Kaiser: Wow. 800 investments at its peak. That’s insane. And it’s so central to life that, like, during the pandemic, of course, basically it would’ve been impossible to get around without Tencent because Weixin was like where your health code showed up, right?
Lulu: Yeah. It’s hard for people to understand what it means to live without WeChat in China. I talk about how people sacrifice privacy for the sake of convenience using WeChat. And, well, a common response I get from people who use Facebook is we do the same with Facebook. But it’s on a much more intimate level because this app is tracking your location, all your conversations with most often in China or the closest people around you, your business contacts, your work contacts, and then on top of that, you’re using it for payment — every transaction at the convenience store, what kind of milk product you buy in the morning. And then you’re using the mini apps, the light apps on top for services like unlocking bicycles in Beijing or hailing a cab. So, the data that they have is so much more well-rounded and more conclusive of who you are as a person.
Kaiser: So, Lulu, I remember when you joined the tech beat way back when I was still at Baidu, and you were always one of the tech journalists who I thought really “got it.” So, you started covering tech back in 2012, if I remember correctly. And you talk a little bit about that decision in the book, how you moved to tech from the finance beat up. That wasn’t a decision that just anyone would’ve made. What drew you specifically to tech and kept you on that beat for more than a decade?
Lulu: Oh, I remember those days. I was a spring chicken in the tech beat, and you were already this established person in [the] China internet industry. Also on the sidelines, you were very famous for your music. So, I completely could not fathom why, how a famous music person was also like a very big figure in the Chinese internet industry at the time. I think like part of it was coincidence, but I think what helped me get a job at the time was because I grew up with these products, using these products. So, it just helped me understand where they were coming from and how they matter to people’s lives more as a second nature instead of coming in from the outside. Yeah.
Kaiser: Yeah. That comes across in your book. I mean, you talk about how integral these things were in your life. And when you talk about these games, you actually play these games. I mean, it’s what gives people a real sense of your intimate familiarity with the products, which is super, super important. But back then, I remember you used to lament, and many tech reporters told me how difficult it was to cover Tencent specifically. A lot of people told me that it was really hard to get access to their senior management, how little they would speak with the press generally. So, was this book based mainly on reporting that you’d already done in your many years at Bloomberg, or did you do a whole new round of interviews at Tencent as you started to put the book together, or how did you go about this?
Lulu: Yeah, so a lot of it was based on reporting that I gathered over the years, I consider as a reporter’s notebook, kind of compilation for many parts. Part of it was to give myself closure as well, because after all those years, I wanted… the long form narrative is quite gratifying in many ways for reporters. Then on top of that, I had to fill in gaps here and there and to make sure that there were stories that I didn’t manage to report. And so, I hoped to achieve that through this book and get access to people I wasn’t able to. And I think to me, like, there are regrets writing this book. There was so much I wanted to do, and people who I wanted to interview, which I couldn’t because COVID happened.
Kaiser: Right.
Lulu: And there’s a lot of history in the book, but I tried to make like the forward-looking section also more relevant to what’s happening on the ground right now because things have also changed so much.
Kaiser: So, in the years since I left China, did Tencent get any easier to report on? I mean, did they start maybe making themselves more accessible to journalists at all?
Lulu: Culturally, it’s really, really interesting. At the very top, you have these Wall Street, foreign educated, Ivy League educated, I would say bankers who’s running the show. And then they’re helping-
Kaiser: Yeah. We’re talking about Martin Lau and-
Lulu: Martin, James Mitchell. Yeah.
Kaiser: Yeah, James Mitchell. Right.
Lulu: And they’re working there alongside Pony [Ma]. His co-founding team actually, I think most of them took a smaller role after the company grew. From the phase where the company was growing from zero to one, they were all there, but once the company got from one to a hundred, I think that’s when the Wall Street professionals stepped in. But if you go and talk to people on the ground at the company, the average age of staff at this company is around 25 years old — people who’ve never left the country and they’re hardworking, but also, there’s a disconnect between the staff and also the management. And that’s what makes this company very grassroot, bottom-up in a structural level. But also, if you try to find out what’s happening at the company from a top-down level or from the investor relations department, or from a senior executive level, it’s quite hard to penetrate. Very different from Alibaba, which is more market-friendly and prone to chat with investors and also the media.
Kaiser: Yeah, yeah, for sure. We’ll go more into the culture of the company in just a little bit, but let’s talk about some of the personalities of the really important figures at Tencent, starting, of course, with Ma Huateng, with Pony Ma himself. Can you do kind of a potted biography of him and talk about his personality, his reputation, his leadership style, and that sort of thing?
Lulu: So, Ma Huateng, many people call him a geek because he was a programmer, and he was one of those very studious students who actually was top of his class during the university years, and known for hacking into their university computer systems. I think for his family background, I’m not sure how closely this is correlated, but his father comes from an interesting background because he does have a semi state-owned company background, and he was a senior management at the state-owned company. So, maybe some of that helped impart corporate wisdom on Ma Huateng while he was growing up. They didn’t grow up in the northern part, didn’t grow up in the political capital in China.
He was born in Hainan Province, which was known for its real estate bubble at the time, and being more commercial and entrepreneurial. And then they moved to Shenzhen, which has now become the Silicon Valley of China. So, that more relaxed atmosphere or environment probably was also conducive to him being entrepreneurial. And now, he’s kind of like the face of China entrepreneurship — at one point, one of the wealthiest people in China. But he’s always maintained this very low-profile kind of personality, very different from Jack Ma (马云 Mǎ Yún), who is not related.
Kaiser: Yeah, no. Not related, and not at all the same. I mean, Jack Ma is so flamboyant. Pony is super low-key, right? I mean, you just never hear from him. I mean, he rarely gives public speeches. He does public appearances. He would go to the round table, the internet gathering in Hangzhou every year. I mean, I’ve met him, but I didn’t ever get a read on the guy. I mean, he just seemed a total mystery to me, always.
Lulu: According to people who know him quite well, he actually can get quite… He’s quite playful.
Kaiser: Oh, really?
Lulu: Yeah, he can be, but I guess he plays his cards quite close to his chest. So, you, like most people, would never see that side of him.
Kaiser: Yeah. Do you have any stories about personal encounters with him? I mean, did you ever see anything interesting?
Lulu: Yeah, so I remember there was this one year when the Hong Kong government was trying to attract investment for the Greater Bay Area. And it was one of the few occasions where I think I saw him drop his guard down. Maybe he was in his element. He was surrounded by people who he knew quite well. He was just talking on stage in this very relaxed manner. And at one point, I think the year was also very important, this was pre crackdown and everything. China was still on that very hopeful trajectory where you thought like entrepreneurs would take a larger role in the economy and everything. And he brought up this point about, jokingly, about how if we bring investment into the Greater Bay Area, we need to hold the officials and the government accountable to make sure that the money goes into the right places and the money is used effectively. And if that doesn’t happen, we need to 问责问责 (wèn zé).
Kaiser: Accountability. Accountability.
Lulu: Coming from him, who is so careful about everything that I’m saying so playfully at the time, I think it’s really like a different era compared with where China Internet is right now.
Kaiser: Yeah. We’ll talk about the crackdown that began in November, 2020. Really, I guess that’s what most people became aware of it when the would-be Ant financial IPO would’ve happened. The more accessible and outward facing guy at Tencent has always been Martin Lau. And you described him, he comes from a finance, a banking background, but give us a sense of what he’s like and his own background. And you talked to him a lot more, I imagine.
Lulu: I think on a wider spectrum, he’s on the same end of the spectrum as Pony, in the sense that he’s also low-key, guarded, very careful. His family background is also quite interesting. His parents actually went back to China as that wave of patriots who were going to help build China in the call for reviving modernization of China after the Communist Party took over. And then, in his own words, history happened and they had to leave the country, and they were going to go to, I think they were going to go to Pakistan to go meet up with his grandmother, but then they stopped by in Hong Kong, and then they just stayed on in Hong Kong. Then when he was growing up, his parents always taught him to be an engineer, which is what all Chinese parents tell kids to become, because as an engineer, you’ll always have a skillset and be able to feed yourself.
Whereas like the liberal arts subjects are always frowned upon. So, he wanted to study rocket science, but then when he went to the U.S. obviously that was not a possibility, so he chose computer science [Editor’s note: Lulu corrected this: electrical engineering] instead. But for him, like, I think the family background makes a lot of sense in understanding who he is. You don’t see a lot of… Well, for his era, there weren’t that many Hong Kong bankers who were trilingual in Cantonese, Mandarin, and also English, and understood Chinese private companies that well.
Kaiser: Yeah.
Lulu: Which is what gave him a foothold into this company.
Kaiser: There’s a couple of other people that I want to talk about in a little bit, I want to bring them in, like Wáng Xìng 王兴 and Zhāng Xiǎolóng 张小龙 — Allen Zhang. But one other character that shows up in the book, and it’s interesting because he’s somebody I’ve known for a long time, but your book was the first time I’ve seen an actual account of his role in some pivotal moments. One was getting the Naspers deal. I’m talking about David Wallerstein, who was a really young guy, just sort of an expat kicking around in Shenzhen, I guess, or somewhere in Southern China. Now, when I see him, and I’ve seen him a couple times in recent years, the only thing that we ever talk about is his alter ego. He calls himself Darwin, and he is a beast of a guitar player, and he has some albums that he’s recorded with some legendary musicians.
Just so we’re clear on what the kind of music we’re talking about, it’s sort of extreme chops focused metal. Let me show you how great all these players are on this record. So he is got, like, legendary musicians playing on his records now. I guess that’s what you can do when you’ve been a huge deal maker at Tencent, and you’ve got just all the money in the world. Anyway, talk about this guy. I mean, he, later on went on to make some of the really, really big deals with game developers and publishers. But the first coup is with Naspers, which is a South African company. Can you talk a little bit about that?
Lulu: Yeah. You probably know Wallerstein better than I do, given that you’re so into music. You know what Wallerstein made me realize? It’s this famous saying that Jack Ma likes to throw around, which is, “Don’t be the best, but be the first.” And he absolutely embodies that phrase because he went to Shenzhen out of all places, when for expats hanging in Beijing and Shanghai, it was already considered out there. And he was hanging around in Shenzhen. And then I think like the approach that he took, which was to hang out and see what young people were doing in China back then, which is how he stumbled upon Tencent’s QQ, and these smoke-filled internet cafes.
Kaiser: Internet cafes.
Lulu: Internet cafes, the young people, blood eyes, bloodshot from playing online computer games. But he noticed how all these people were using QQ at the time to communicate with each other. So he thought this was going to be a huge thing. That’s really why Naspers has such a big stake in Tencent. In fact, they’re the largest shareholder. It’s such a coincidence, but I think the approach he took was also very smart.
Kaiser: Yeah. Oh yeah. Genuine grassroots, just get out there and see what people are actually using is kind of amazing. Now he is the Chief Exploration Officer for Tencent. He’s based in the Bay Area and still does deals for them. That’s fascinating, 20 plus years on. Like I said, there are a couple of other people that I want to bring in later, but first I want to get some of your impressions of the…. What’s amazing about this is that you have seen the whole sort of history of not just Tencent, but also the whole transformation of the Chinese internet sector while covering tech. These are massive transformations, including the way that the Chinese tech companies were perceived from the outside of China. Because when you started, we all used to joke C2C meant copy to China, right? They still had this often quite well-deserved reputation as copycats. But just four years in, by 2016, I think it had changed quite a bit. Can you talk about that change and whether, and to what extent the reality matched the perception?
Lulu: Yeah. Before 2012, there is this watershed moment where you can see it happening around 2012, when before, even for Alibaba, they were big, and Tencent was big, but it was very confined. And also, they couldn’t monetize their products to the extent that they’re monetizing their products as they’re doing now. And I think the mobile internet age is when they had this chance to leapfrog their U.S. counterparts and really excel at the UI design, and also incorporate a lot of stuff that U.S. companies and investors were not doing. And in many ways, those designs on WeChat and Taobao, for example, have exceeded, or is more advanced than what their counterparts are doing in the U.S. Part of it is IP rights issues, because in the U.S., a lot of companies couldn’t get away with just incorporating every function there is out there, which is why in China you have these super apps. They went into a virtuous cycle, where because there were more users, they had to compete faster, update, and make small tweaks constantly on a weekly basis. And that in turn, generated more users, brought in more revenue, and the companies became very vigilant and tracking new trends and user behavior habits, which made these apps so easy to use and so powerful.
Kaiser: Yeah. Yeah, for sure. One of the really big changes that took place, not long after you started covering Tencent, was that they went from, I mean, it wasn’t just Tencent, but also Ali, they went from being a company that was notorious for cloning and crushing, as we used to say — clone and crush. Tencent was so notorious that China computer world actually ran this very famous cover story that it said 狗日的腾讯 (gǒurìde téngxùn), which I don’t think I can translate politely, but it’s kind of a Chinese, I believe, swear word that just means…
Lulu: Very bad.
Kaiser: Let’s say it is like those who lie down with dogs. Yeah, 狗日的腾讯. And it had a picture of their very famous penguin mascot. It had like knives and axes stuck in it. Very famous. But they went very quickly to becoming this aggressive investor where they were no longer just doing the clone and crush model, where they would see an idea, a young fledgling company, and then they would just copy its idea, I mean, shamelessly ,and then defeat it because they could push it out just more aggressively. No more of that. They suddenly started becoming an investor. How did this happen? What was the pivotal moment there?
Lulu: Well, the moment on the magazine, that was one for sure. They also brought in these after… I think there was so much criticism on the street against them. They brought in this group of experts or people’s opinion, who matter to them, and they had this conference — Conference of the Gods, they called it. All they did was critique Tencent and its behavior. And it was so shocking to management. They really went into kind of a self-reflect. They really did some thinking in terms of their identity and their strategy. After that, there were two major deals, acquisitions or investments, that they made that were quite symbolic of their strategy. It was like a signaling to the startup community out there. One was their investment in Sogou, which is a competitor for Baidu. So, Baidu was number one and Sogou, I believe at the time, was number two.
Kaiser: That’s right.
Lulu: Or was Sohu number two? So, Sogou might have been-
Kaiser: I think, no, Sogou first. Sogou was number two. Sogou was the search engine that Charles Zhang Sohu had actually launched, but then it became an independent search engine.
Lulu: Yeah. So, there was always a little bit of jockeying, but they invested in Sogou. And then the other deal, I think was JD.com. That was quite symbolic because they actually folded their own e-commerce units into JD. And to the outside, and also internally, it signaled that if, first of all, if you fail as a business, their e-commerce business was not doing that well. So, if you as a unit don’t do well, we could shut you down or sell you off at any given point. Just because we’re a big company doesn’t mean that your job security is there. So, that was signaling to the internally. And then signaling to the outside was that it was willing to invest and then also it was comfortable to just focus on the core, which was being a connector of information and people and platforms. And it would let go of a lot of the other verticals it was competing in at a loss and not very successfully. So, e-commerce was one of them. Search engine was another.
Kaiser: So, they then went on to become a really aggressive investor. I remember watching this, and they were doing so many deals, and I was working at Baidu at the time, and Baidu was very, very, very slow and very conservative. You made some very unflattering, but alas, all too true comparisons in your book to the way that Baidu was doing things because all three of the big companies back then, the BAT, Baidu, Alibaba, Tencent, started to really look at a lot of deals and were trying to do them. Baidu was relatively slow for sure. Talk about the strategy from Tencent and how it relates to the culture of the company itself.
Lulu: I remember talking to companies that were getting offers from Baidu, Alibaba, and Tencent at the same time. And this was during the years when capital was so abundant. The interest in investing in startups was immense. Also, it was right before the leap to mobile internet. So, investing in the right companies really mattered at the time. And it was all about investing in products that were of high frequency usage. Like ride-hailing was the typical example where a person would have to click on the button and tap and use it, at least I don’t know if you have to make a trip, then you’d be tapping on it four, three times a day, right? And it was about finding those gems to ensure that people were using your payment system and making sure that people would want to use your mobile app.
And I think for Tencent, they were super fast in giving term sheets and also very militant in ensuring that the founders wouldn’t backtrack. Baidu, Robin was very careful with his budget. It’s interesting, there were characters that they brought into place as well. Like Richard [Peng] is one of the person I profile in this story. It’s funny that the head of investing in M&A at Baidu and Tencent were actually close friends, but they were also competing for the same deals. Richard was very competitive. And in the book, I mentioned this story where he actually locks the founder of Didi in a room just to make sure that he signs the contract with him. But that’s what it was like for making deals at the time. And you would sign term sheets and contracts over napkins and make deals within 24 hours. At one point for the mergers that I talk in the book, they’re moonlighting at Richard Liu’s wedding and hashing out these deals.
Kaiser: The founder of JD, and he got married somewhere like in Indonesia, in Thailand or something, Bali or something, right?
Lulu: Yeah, one of those beautiful destination weddings. But on the sidelines, you had these bankers and top executives moonlighting and hashing out deals at his wedding. Speed really, really mattered. And the fact that I think Baidu lost on some of those pretty important key deals is what differentiated and put them in a different tier or put Alibaba and Tencent in a different tier.
Kaiser: Yeah, for sure. I mean, at the time, I mean, it felt like we could always offer a really, really clear explanation of why this particular deal had to do with our core business and how there were obvious synergies. And it all made sense to the people who I was talking to. And then a lot of the ones that Ali and Tencent were making seemed so irrelevant to their core business, and it seemed like they were throwing money away, but it turned out they were right.
Lulu: At the time, because we were in this upward cycle, right? And it was the transitioning to a different platform, so for them, they kind of used the machine gun approach, which is… I mean, Sequoia China would argue against this and say that was not their approach, but it was a 500 startups approach, which is an upward cycle up cycle, you machine gun everything and see what sticks at the end because you have so much money, and you don’t know what’s going to work.
Kaiser: Yeah. Well, they turned out to be right. I think this really reflects a lot about the company’s cultures as well, so I want to ask you about that. I mean, I had always heard really scary stories about how cutthroat things were at Tencent, and there’s this possibly apocryphal story about the creation of WeChat, Weixin, for example. I don’t know if you’d heard it because you seem to kind of allude to it, but you never quite spell out the version. The version I heard was that there were multiple teams, three teams working on this product, and that one team, the team that actually delivered the chosen product would get lavish promotions. The second team would keep its jobs. The third team, bye-bye. Is that true?
Lulu: I’m not sure what happened to the third team, but I think it’s true that it’s very cutthroat at Tencent. And especially even like right now, I think people are even more scared of holding onto their jobs in a down cycle. This culture that you’re talking about, which is, have multiple teams compete internally, that’s the grassroot culture that we were talking about earlier, where at Alibaba and Baidu, I feel like a lot of the decisions were more top-down. Like Jack Ma would have this brilliant idea, and they would throw all their money and resources at the project, which sometimes didn’t pan out. Whereas Tencent seemed to allow their teams to… there is this term that the executives use where they democratize innovation. So, they don’t have an innovation center. Every team is in charge of their own innovation.
And if they don’t swim, they sink. So, everyone is on alert and always tracking competitors. It creates internal cannibalism because very often people would be encroaching on other people’s turf internally. But that kind of is how WeChat was created because Allen Zhang’s team was not in charge of social media. They were an email product. He had this idea very early in the morning, in the wee hours, and he wanted to try out, and Pony said, “Yeah, go ahead.”
Kaiser: Yeah. So, Allen Zhang, let’s talk about him because he is Zhang Xiaolong. He’s a cult figure, a real guru, the object of almost an of mystical admiration from a lot of young people in the tech world. He was the creator of Foxmail, and he built it singlehandedly — this really popular mail, email service. And that was, I guess, eventually folded into Tencent. And then he led that team, like you said, doing email and came up with the idea of WeChat. So, what is Allen Zhang all about? What made him such an object of worship as a product manager? And I mean, because there’s sort of a cult-like obsession with this idea of what makes a product manager great in China? And always talking about product.
Lulu: Yeah. Well, Tencent is a product manager driven company. I can tell you Alibaba was not always like that, or they’re still not like that. It’s all about, for Allen, it’s about what makes sense in the product. I think WeChat is the typical example where he doesn’t… WeChat is very… it stands out compared with all the other products that you have on the market where they’re always spamming you with advertisements, with all kinds of noise. And for WeChat, it’s just a clean product. And even with all the functions, despite being a super app, it’s always clean. They really function like a utility app where your text messages are always prioritized, and all that extra stuff is neatly designed into the background where it fits user intuition. For Allen, he has this whole set of principles, his 10 commandments that he talks about.
And those are what goes into the philosophy of his design. Surprisingly, he is a person who is not very articulate. People who’ve worked with him have flat out told me it’s frustrating, absolutely frustrating to work with him because he cannot communicate his thoughts in a coherent fashion. Maybe he’s gotten better these days. He has an obsession, but he is not the best at articulating what the ideal is that he wants. I listened to him give a speech once at… WeChat has this annual conference. And I remember sitting there in the audience, and this lady who is an investor sitting next to me, just turns her head and says, “I cannot believe this person is Allen Zhang. How did he create WeChat?” Because she was just so not impressed by the way he talked, but it was also that same speech where he talked for four hours straight.
Kaiser: Yeah, four hours.
Lulu: Four hours. It was supposed to be…
Kaiser: Legendary speech.
Lulu: It was supposed to be 20 minutes.
Kaiser: 20 minutes.
Lulu: And it turned out to a four-hour speech. But he managed to hold the attention of everyone in the audience. It was the content that really, really captured the people’s attention and not his style of communication.
Kaiser (36:32):
Yeah, sounds like it. So, Tencent has been involved in some epic struggles over its lifetime from its early war in messaging with its QQ going up against Microsoft’s Messenger, which was, I think people don’t remember how popular Microsoft’s… what was it even called? I can’t remember, Windows Messenger, before that, it was called?
Lulu: MSN.
Kaiser: MSN. Right, MSN. It was super popular with white-collar types back in the early 2000s.
Lulu: It was super popular with kids even.
Kaiser: Oh really?
Lulu: That’s how we communicated with our high school and university crushes back then. Or we would stalk them and see when they logged on, it would generate this beeping sound. And that’s how you stalk people who are logged on at 2:00 AM.
Kaiser: You go into great detail about that and how QQ eventually prevailed there. But there were also a bunch of other really interesting ones like the 三Q (sān) battle between Zhou Hongyi’s Qihoo and Tencent’s QQ. And I’ll let readers of your book enjoy that story because it’s really fun. I mean, Zhou Hongyi is another super colorful character. I mean, he’s sort of the 曹操 (cáocāo) of the Chinese internet.
Lulu: Absolutely.
Kaiser: I’m not sure anyone understands that reference. Yeah, he’s a villain. He’s cunning and kind of evil.
Lulu: But also always portrays himself as the underdog, which is a great branding strategy.
Kaiser: Yeah. It’s such crap. Yeah. But then they don’t win all of their fights, at least not initially. One story that you tell with a really kind of long arc begins with the war of the 10,000 Groupon Clones, where Tencent actually partnered up with the original Chicago-based Groupon itself but ended up winning, like years later, when it pulls off this great coup with Meituan. Can you talk a little bit about that story? Because it’s quite central to the book.
Lulu: Yeah. Groupon, when they entered China, they partnered with Tencent. And this was during the days when companies, Groupon, would… and everyone was subsidizing people to go purchase stuff online and then they were not winning. And in those days, there was a company called Meituan that kind of emerged, and it was founded by Wang Xing, who had two very successful companies that both got shut down because they were politically sensitive. One was…
Kaiser: Well, first there was Xiaonei, right?
Lulu: Well, right. Xiaonei didn’t get shut down. Well, yeah.
Kaiser: No, they got acquired.
Lulu: They got acquired.
Kaiser: He sold it way too cheap. He sold it way, way cheap.
Lulu: That was a success story. Then he started Fanfou, and Fanfou was the Chinese equivalent of Twitter. And that got shut down, that service.
Kaiser: Yeah, I remember exactly when that happened. That was right after the Urumqi riots that happened in 2009.
Lulu: Yes. That’s when they got a spike in users.
Kaiser: Yeah.
Lulu: Yeah. So, Wang Xing then moved on to, he said, “I’m going to go and move into something that’s super apolitical, that’s completely neutral,” which is when he went into Groupon. A huge part of success came from the fact that he poached a key lieutenant from Alibaba, and this person was part of the… In Alibaba, they have this 中共铁军 (zhōnggòng tiějūn), which is like a play on the Communist Party central supply. It’s translates to the central supply system army, but that’s the army that goes and sells their service to merchants. But it’s also like a play to Communist Party Iron Army.
Kaiser: Because it’s 中共铁军. Yeah.
Lulu: 中共铁军.
Kaiser: Just to be clear, I mean, so these Groupon type companies required you to have lots of people with boots on the ground running around, knocking on merchants’ doors, and making these individual deals. It was an extremely labor intensive play.
Lulu: Yeah. It was extremely labor intensive, which is why Groupon was hiring so aggressively, and everyone was burning so much money. And it’s very funny, I think like, in terms of management lessons, there’s two things that I learned from this, from the process of reporting this. One is, at the time, now it seems really, really intuitive, which is that more listings lead to more transactions, but at the time, people didn’t know that. So, they were all trying to brand this thing as consumer sense, which is what is the consumer going to buy? What is the consumer loving next week, next month, next year? And you’d have people at these companies controlling the front page, controlling the listicles, right? 阿甘 (Ā gān) who is the person that once brings along or poaches, says like that-
Kaiser: 阿甘, by the way, is what Forrest Gump is called.
Lulu: Yes. Yeah. So, he says “more listings lead to more transactions.” And that was like an epiphany for them. The other thing was, in terms of how he managed his teams, he would ask the… because there’s many teams, units competing internally, and he would ask the successful team to come in the next morning. The successful teams, one of the lessons that they brought in was that if you come in the morning and do the morning meetings, and share your lessons learned from how do you do on the ground promotions that leads to a better team building and team understanding of how to promote the work. And a lot of the star teams or people who are doing well originally refused to take part in that because nobody wants to get up at 6:00 AM in the morning.
And so he said, “Fine, do whatever you want to do, but if you underperform then you have to follow this rule once you drop off the grade.” Eventually, the teams that were having these sharing sessions in the morning and having the morning meetings actually outperformed the other ones. And it’s little things like that, that helped them win the fight. There are many, many little things like that helped differentiate them in the longer battle compared with people who had a lot more money than them. Okay, this is Groupon, they moved to food… At some point, they made the leap into food delivery services, and they were competing with 饿了么 (Èleme) at the time.
Kaiser: Right. 饿了么was an Alibaba investment.
Lulu: Yeah. And then there was also Baidu Waimai, I remember, it was so messy.
Kaiser: I do.
Lulu: It was so messy. There were so many competitors. Everyone was competing with everyone. But I think on the broader scale, you had the Alibaba camp, and then there was Tencent who invested in DianPing. And Wang Xing was on Alibaba’s side, but somehow, and I talk about this in the book, Tencent and Wang Xing staged a coup, and Wang Xing flipped to Tencent’s camp and deserted Alibaba, and that’s what shifted the whole landscape in terms of food delivery services.
Kaiser: It really did.
Lulu: Yeah. It was a very important business because it was high frequency and also essential to mobile app, mobile internet usage, payment systems. In a sense, it really helped Tencent win the… partially helped them win the mobile payments war as well.
Kaiser: Wang Xing is another one of these interesting characters because he; again, he is just like, he’s deeply weird. I mean he’s like another one of these not very obviously charismatic guys. I mean he’s probably on the spectrum.
Lulu: Logical. He values logic.
Kaiser: Yeah, super…
Lulu: In fact, that’s one of the criticisms against him that he values logic and thinks logic… he’s kind of like a Spock, I guess.
Kaiser: Yeah. He’s Mr. Spock, for sure. For sure. Wow. That’s the thing. I mean, one of the things about this book is it is just full of these colorful characters for sure. So, we all know Tencent now because of WeChat, but that is still, like we said earlier on, by no means their most profitable product. In fact, it was… I think it’s still loss making. Let’s talk about Tencent’s might in online games and its partnerships with the major global game studios like Riot, Activision, Blizzard, and Epic, which makes Fortnite, which is like one of the most popular games in in the world. How did that happen? How did they get into become such a powerhouse in games?
Lulu: Well, originally Tencent… Well, Pony was the one who wanted to get into games, and all his co-founders were against it because that’s not core to their original strategy.
Kaiser: Right.
Lulu: Obviously, in the end, he managed to convince people to give him a try. And they, after a few initial trial and errors, I think Mark Yuan, who’s the lieutenant, he brought in, adopted the right strategy. And their preliminary success, or during the desktop era was this whole strategy of importing great IP titles that did well overseas and importing them for Chinese internet users. After Tencent made the leap to mobile internet, their breakout hit was Honor of Kings. And that game was such a huge hit because it attracted so many female users and people who are just not your typical gamer community. People would be playing this game and using it as an icebreaker for business, like doing business. So, that’s the power of this game. It went beyond its typical reach.
Kaiser: You describe a scene where you and your friends play that game like 20 minutes a session or whatever.
Lulu: After dinner.
Kaiser: Exactly. Right after you had dinner out in a restaurant, you sit in a restaurant, and four of you or whatever, six of you play.
Lulu: Absolutely. And we’re all these middle-aged people in our 30s who are losers to the typical gamers who have nothing to do with gaming, but we were truly addicted to the game at the time.
Kaiser: A lot of these came originally from like Korean models, and where that model was already very familiar, where the kind of free to play and then pay for item, the freemium model was already quite entrenched. But this was not a common model outside of Asia at the time.
Lulu: Yeah. So, Asia pioneered the freemium model. Tencent took full advantage or really brought that model to a whole new level. One of the typical success stories is Riot Games with League of Legends. And this game, I think to a certain extent, became such a huge hit is because players don’t have to pay upfront, and it creates a longer lifespan because gamers can buy… They can buy in items. Like, if you’re really invested in the game, then you start decorating your characters, you pay for gemstones to up your power, and it creates a longer life shelf. So, you don’t have to keep creating one hit wonders that only have a life shelf of a few weeks to a few months. A lot of the gaming titles that they imported have been there in China for years. And that’s one of the, I think, like the freemium model right now is a much more widely adopted model globally as well.
Kaiser: Right. And they’re lucky that these did have a long shelf life because at one point, and I’m not sure of the exact date, suddenly there was this massive crackdown on the industry. But when did they suspend the issuance of new game licenses for online game companies in China?
Lulu: I think that was 2018. And it’s relevant to what’s happening right now. Because now that I think about it, what was happening on the regulatory level at the time was that, you remember we had SARFT and the state council control divisions where they would oversee publishing. And I think at the time what was happening was really that there was a power grab at the very high level where the party division was taking more control over these sectors. So, after the party inserted more control over publishing, they moved onto the internet sector and the story that we reported last week, and the journal actually reported first, and then we also reported the same thing, is that what’s going to be happening out of the plenum coming this week is that people are expecting that the same thing is going to happen with the financial sector where the Communist Party is going to insert or take more control by reviving this division called the Central Financial Work Commission.
If there’s overlapping functions for the securities watchdog or the banking watchdog, some of those powers might be folded into the party division. For outsiders, it doesn’t make sense because the Party controls everything. But another way to think about it is that Xi is inserting his own men into key sectors of the economy and finances like one of the last sectors that he’s going to make a power play on.
Kaiser: So, it was before the CBRC and the CSRC still had some autonomy from direct political control. They were very powerful regulatory agencies, but they had still a little bit of political independence. Whereas now, these party commissions will take precedence on important matters and financial regulation.
Lulu: I wouldn’t put it that way because the Party does control everything. I think it’s more about personnel issues. So, you had these technocrats who grew under different patrons, who rise through the ranks and were overseeing these divisions. Now Xi wants to replace his own people into these key functions of government. For years, China always making sure that there was a division, where at least on the idea that the government and the party were functioning as two different entities was a thing. I don’t think that’s being emphasized, or maybe going forward, that’s not a thing anymore.
Kaiser: Yeah, yeah, yeah. That’s what it’s looking like to me. Let’s talk more broadly about what befell the internet sector beginning… I guess there was an early harbinger of it with this suspension of issuance of new game licenses. But really, I think most of the world woke up to this in November of 2020 when Ant Financial’s IPO was pulled. So, what is your understanding of what Beijing was trying to accomplish broadly? I mean, because what followed on there, of course, was what Didi, after they went ahead with their IPO in the United States, suddenly they found themselves in really big, deep regulatory hot water, supposedly, over concerns about data security where they were all allowing too much sensitive data to be out of their hands as a U.S.-listed company.
And then, of course, the entire afterschool tutoring sector just gets completely clobbered. What’s your understanding of the big picture thinking that was coming from the party during this period? Because there’s a lot of controversy over what it really was.
Lulu: Yeah. I don’t think we’ll ever get to the full picture of what happened. I have my theories of where the thinking came from. One, you had these different strings of trends that were happening. One is that, after these internet companies shifted to the mobile internet age, the amount of data that they harvested became so significant. And a few months ago, actually the government issued this paper for the first time where they acknowledge the status of data as a means of production. And so, if data is a means of production and the Communist [Party] has to control key means of production in society to ensure its status as a communist state, then, of course, they have to control this, right? So, that’s one thinking. The other thing is the elevation of Xi’s thinking of common prosperity where there is a huge gap in wealth in China.
And I think common prosperity has clicked with a wide population in China, but it’s not necessarily conducive to profits and to a lot of these companies, because for years, they were generating revenues and 70%, 80% profit. And these companies that were so lucrative and profitable became easy targets for that. That’s where the, I think education crackdown came into play because education before, I would say the 2000s, it was a public service, and then commercialization of education was not a thing. And in the past few years, with the uprising of startups and capital investment…
Kaiser: TAL and New Oriental.
Lulu: Yeah, and Yuan Fudao, you name it. It really became a commercial product and it generated so much anxiety among parents, I think from both an emotional level for many of these bureaucrats whose kids were going through this rat race to an overall thinking of: Xi wants to generate population growth, so he needs to lessen parents’ anxiety about education. All of that fed into the crackdown. And also, a lot of it was ensuring that education, which is core to ensuring that the right train, or the right way, of thinking, the right schools of thought for the future generation are still controlled, the narrative is controlled by the Party. And you have “Western capital” infiltrating a lot of these companies that play a huge role. They wanted to make sure that this was still under control, this sector. That also fed into this.
Kaiser: Yeah. Your book talks an awful lot about the anxieties that they have now about the capitalization of all these industries.
Lulu: 资本无序扩张 (Zīběn wú xù kuòzhāng). That’s the term.
Kaiser: Disorderly-
Lulu: Disorderly expansion of capital.
Kaiser: The disorderly expansion of capital. Let’s go back to Tencent specifically. If there’s a story in the history of Tencent, a story in its rise that you would pick out, that you find to be the most interesting or surprising to your readers or to people who you’ve talked to about the book, what would that story be?
Lulu: I find the characters, the personalities behind what creates these companies the most interesting. And it’s very easy to just say, “Oh, Tencent, Alibaba, these companies became so big because of the firewall,” which is true to a certain extent, but the competition that they experienced, and the fact that Western capital played such a huge role in the growth of these companies, the fact that the biggest pension funds and endowment funds in the U.S. actually are invested and closely tied with these internet giants in China, that whole capital trail was not obvious to people living on both sides of the Pacific, I think. So, what happened for China internet in the past decade, the past two decades, was a very special period in human history where you did have 1.3 billion leapfrogging into the mobile internet age. And you had all the right elements of capital, talent, regulatory environment to create this era, which has gone down, known as, [the] golden era for China internet.
Kaiser: Yeah. God, I was really lucky to have been in the middle of that. I feel like that.
Lulu: You saw the best years.
Kaiser: I did. I really do feel like I saw the best years. So, Lulu, if Tencent has an Achilles heel, what would it be? What’s their big weakness?
Lulu: Well, their big weakness right now is that they’re so powerful.
Kaiser: Yeah. Their size itself. Their success is…
Lulu: Their success is a dangerous thing to themselves.
Kaiser: Because they are now just so integral to life that the Party cannot but get its hands more and more into what their business is, right?
Lulu: Yeah.
Kaiser: Yeah, I would have to agree. I mean, if anything, are going to be victims of their unsuccess. Fascinating. Thank you so much for taking the time to talk about the book. It’s called Influence Empire: Inside the Story of Tencent and China’s Tech Ambition. I couldn’t recommend it more highly. it’s really well written and fun, and it is like a history of the golden age. So, congrats on that.
Lulu: Thank you.
Kaiser: Before we move on to recommendations, I want to offer a quick reminder that if you like the work that we do with the Sinica Podcast, the best thing that you can do is become an Access subscriber. We are running a promotion right now for just a buck for your first month. You can become an Access subscriber. You get the podcast early on Mondays instead of having to wait until Thursday through our secret RSS feed that we will send you if you become an access subscriber. And of course, you get our daily newsletters, which are just fantastic. So, definitely do that and you’ll be helping us out. You’ll have my eternal gratitude. All right. Let’s move on to recommendations now. Lulu, what do you have for us?
Lulu: I wanted to recommend something that’s more evergreen, and it’s a book that I’ve read so many times. I read it just to enjoy the lines. I think it’ll go down as one of those classical books that you can read over and over again, and it’s called Gay Talese Reader. It’s a collection of profiles that he did for magazines, including The New Yorker. The reason why it’s awesome, I think is because we talk about profiles and Gay Talese has this point about hating the recorder, where he refuses to sit down and have an interview one-on-one with the people that he writes about. He’s always observing him in action and looking at, putting them into what they’re really like and real life.
I think that’s a lost… it’s a lost craft, or as journalists, we don’t do that enough. Yeah, I would recommend it. I learned so much about writing and reporting as a journalist from that book — really gave me… yeah.
Kaiser: Oh, fascinating. He was in Beijing, I think it was like in the year 2000, I’m going to say. And it was really funny because he was living in the China World Hotel. I remember he was going to come to this party where me and a bunch of my friends were. And I said something like, “Hey, he’s going to be here. Let’s not be like all sycophantic and obsequious, okay? Let everyone act normal when he gets here.” And of course, like he gets there, and then I can’t remember what the exact line I said, but what I said, I asked him a question that was prefaced with, “As a prominent American man of letters…” And then everyone just sort of rolled their eyes and groaned at me. But yeah, he’s terrific. I love his work. It’s amazing.
His fantastic book about The New York Times, of course, a classic. My recommendation is something completely opposite from that, and super, super silly. It’s the series Cunk on Earth. It stars Diane Morgan. It’s on Netflix. Diane Morgan plays his character named Philomena Cunk, and who is like this profoundly stupid host of a kind of documentary, historical documentary. So, it’s kind of like Ali G. or Sasha Baron Cohen. So, she’s interviewing these unsuspecting academics who think they’re going to be talking seriously about ancient Greece or ancient Rome, but she asks them these just completely insane, often very vulgar questions in this flawless deadpan. Her deadpan is just amazing that she can say such 无厘头 (Wúlítóu), just like nonsensical stuff to them. You definitely have to be in the right mood to enjoy this because it’s just so dumb.
Seriously, I have like a leftover… I still have a little bit of a cough from this cold I had a couple of weeks ago, and I was having bronchial spasms from laughing so hard. I thought I was going to die, so be careful. Don’t do it if you have bronchitis, but it’s fun — Cunk on Earth.
Lulu: Yeah. That’s so great you recommended it. I saw this on Netflix so many times and just was not interested, but now that you recommended it, I think, yeah.
Kaiser: Yeah. You got to be in the right mood. If you just feel like there’s something completely stupid and silly and funny to get your mind off the world, it’s quite enjoyable. All right, Lulu, it was so great to reconnect and so great to talk to you about the book.
Lulu: Absolutely. Oh, so nice to talk to you. And so huge congratulations to your success. When you said that you were going to do a podcast when you go back to the U.S., I wasn’t sure that you were serious.
Kaiser: No, that’s what I was doing. Yeah, no, I’m really glad that it’s worked out like this because I enjoy this so much, just for this very reason because I get to talk to people about their fascinating work. And your book is just fantastic, so please, everyone, grab a copy. It’s called Influence Empire: The Inside Story of Tencent and China’s Tech Ambition. Congrats once again, and great to talk to you.
The Sinica Podcast is powered by The China Project. It is a proud part of the Seneca Network. Our show is produced and edited by me, Kaiser Kuo. We would be delighted if you would drop us an email at sinica@thechinaproject.com or just give us a rating and a review on Apple Podcasts as this really does help people discover the show. Meanwhile, follow us on Twitter or on Facebook at @thechinaproj, and be sure to check out all the shows in the Sinica Network. Thanks for listening, and we’ll see you next week. Take care.
