Tencent guides the way for Chinese firms heading West

Earlier this month, Tencent acquired a 10 per cent stake in internet-investment company Digital Sky Technologies (DST) for US$300 million in a move that allowed Tencent to “benefit from the fast-growing internet market in Russia, as well as to leverage our technical and operational know-how to strengthen the leadership position of DST and explore new business opportunities in the Russian-speaking internet markets,” as president of Tencent, Martin Lau, said at the time.

Lau was suggesting that the move hinged on Tencent’s intention to influence the rapid growth of the Russian digital landscape, which has little in common with China’s.

But in truth, Tencent’s investment in DST may have less to do with Tencent’s interests in Russia than DST’s interest out of it.

DST claims “that our companies comprise well over 70 per cent of all page views in the Russian-speaking internet”, but its past investment in firms including Facebook, Zynga and Groupon, as well as its acquisition of AOL’s ICQ IM service, has cultivated its reputation as a global investor.

“For Tencent, it’s a real coup to work with DST because it’s built a global investment platform that would have taken Tencent a really long time to replicate in China,” says Bill Bishop, who runs market blog DigiCha.

Tencent has repeatedly voiced its intentions to expand beyond China’s borders, even hunting for an advertising agency in 2008 that insiders said would help position the brand for international expansion.

However, the same hurdles that all Chinese companies face when contemplating expansion also applied to Tencent, says Napoleon Biggs, vice-president and head of digital integration for Asia-Pacific at Fleishman-Hillard, even if it is the third largest internet company in the world.

Alibaba has also tried the traditional routes of expanding Westward. In 2008, it launched a large-scale $30 million international campaign in 20 key markets in North America, Europe, Asia-Pacific and the Middle East to bolster its e-commerce websites’ global presence.

The barrage included online, TV, print, radio, outdoor elements and live events. Months later, analysts say they don’t know what came of that push.

Biggs says that, in some Western markets, “people are very suspicious of China”, so indirectly entering a market though DST-like partnerships could be the best way to learn more. In China and elsewhere, successful firms must understand the niche they need to fill.

“For Tencent, its main communications product faces a lot of competition from other global IM players if pursues the West, and the same with social gaming,” adds Biggs.

But in DST, Tencent can examine a range of different digital businesses and determine its path from there.

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This article was originally published in the 6 May 2010 issue of Media.