Tencent’s Martin Lau Explains China’s Tech Sector Crackdown

·4-min read

Martin Lau, president and executive director of China’s tech and entertainment industry leader Tencent, on Wednesday explained the positive outcome from the maelstrom of new regulation that the Chinese government is currently imposing on the internet.

In less than a year, regulators from multiple departments and ministries have besieged the country’s leading private sector companies. Some have been very publicly been cut down to size with fines, another saw its IPO canceled, others have endured pressure and criticism from state media. Many across tech and entertainment have been told that their current business practices are detrimental to society and that they will be reformed.

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Earlier Wednesday, Tencent was one of 40 companies told that its app was misusing private data. The app in question was Weixin (aka WeChat), installed on over a billion phones in China and the linchpin of Tencent’s entire games, music, video, social media and micro finance ecosystem.

Government apparatchiks have drawn red lines around mergers and acquisitions, determined how firms compete with each other, and introduced national security concerns into how they handle data. Communist Party officials have been parachuted onto the board of directors of at least two social media firms.

As a result of the changes — and fears of what may happen next — investors have fled, and hundreds of billions of dollars of corporate value has been wiped out.

Lau, a Stanford University and McKinsey consulting alumnus, spoke on a conference call after Tencent announced its financial results for the first six months of the year. Asked by an investment analyst which recent regulatory initiative had been the most surprising, Lau started small and cited the government’s out-of-the blue decision to effectively ban private coaching.

“[The ruling on] after-school tutoring is affecting a pretty big advertising group. We saw part of the impact in the quarter and will see the full impact over the current quarter. Over time we will be able to place inventory with other advertisers,” he said.

Then, realizing that he was going to be peppered with further questions on the same subject throughout the call, Lau went for a more macro-economic portrayal. His analysis was carefully mixed with a touch of special pleading and a large slice of humble pie.

“Regulation of the internet is a global phenomenon. It is not just in China. It is also happening in the U.S. and Europe. China is a bit ahead in terms of the more structural regulation framework. This should be expected because (past) regulation has been quite loose over an industry like the internet, considering its size and importance.

“The regulators are very focused on identifying and rectifying industry failures. And also establishing regulations that emphasize compliance and social responsibility as well as improper behavior. We should expect that in the future more regulations will be coming.

“From our understanding, the government actually wants to foster a long-term sustainable development of the internet industry. The government does recognize the importance on the economic side and the social side of the internet industry and also the contribution of the industry to (China’s) global competitiveness. It does want to foster a long-term healthier environment.

“Our attitude during this wave of regulation: we want to embrace this environment fully. And we want to establish ourselves as fully compliant.

“We feel that this is actually going to be good for us and for the entire industry in the long run.

“And on a relative basis we felt quite well positioned to embrace the regulatory environment because we have been fully-compliant with all regulations. That has always been our operating philosophy. Our strategy has always been about trying to create value for users. We have always been quite self-restrained in terms of monetization. We have run our platforms to support individual enterprises and along the way have always emphasized social responsibility. We want to use our tech for good.

“Given all these factors, there will be short-term uncertainties. And there will be a lot of regulations coming. But we are pretty certain that we can be compliant and over the long run these will actually position the industry for healthy growth – and we will be the beneficiary of that.”

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