TOKYO/GUANGZHOU -- Chinese online gaming giant Tencent Holdings is deepening its partnerships with Japanese gaming companies in response to growing U.S.-China technology friction.
Observers at Tokyo Game Show being held through Sunday are waiting to see if Tencent will make further overtures to Japanese gaming companies keen on gaining a foothold in China, which is expected to become the world's biggest market this year.
In June, Tencent invested nearly 5 billion yen ($47.6 million) in Marvelous, a Japanese game developer known for its agricultural role-playing game, Story of Seasons. Tencent is now the biggest investor in Marvelous.
"We will raise funds to develop games for overseas players," said Shuichi Motoda, president of Marvelous, referring to Tencent's capital injection through its investment subsidiary.
In the fiscal year ended March, Tokyo-listed Marvelous suffered a near-50% plunge in group operating profit due to poor sales of smartphone games. It was also hit by costs incurred in trying to improve the image quality of its games.
With Tencent's backing, Marvelous hopes to develop games for the Chinese market to help turn its fortunes around. Dutch research company Newzoo had forecast that China would surpass the U.S. to become the world's biggest gaming market this year, worth some 4.2 trillion yen.
Tencent and Marvelous already have an existing partnership in streaming mobile games in China since 2019. For Chinese companies, tie-ups with Japanese game companies are part of their global strategies to gain access to their content.
Tencent has invested in some 100 game developers since around 2005 and become the world's largest company in terms of gaming revenue. An estimated 40% of those companies are foreign, including Epic Games and Riot Games of the U.S., that have respectively developed the globally popular "Fortnite" and "League of Legends" games.
Tencent also recently invested in France's Voodoo, which offers easy-to-play hyper-casual games and is developing games that incorporate Pocket Monster characters in collaboration with Pokemon.
Guosen Securities of China said Tencent's strategy was to build a "global game industry chain through investment across the world." From its partnerships, Tencent is able to offer games created by overseas developers to Chinese players. It also converts the games so that they become smartphone-compatible to export.
Apart from Marvelous, Tencent has also formed a partnership with Japan's DeNA, which offers games based on the popular Japanese manga series "Slam Dunk" through the Chinese company and other local partners.
DeNA's subsidiary in China entered the mobile game market with just three staff members in 2006 and has since increased its workforce to 350.
Among other Japanese companies, Tokyo-listed Klab also formed an alliance with China's Shengqu Games earlier this year and won distribution rights for its game featuring the Japanese manga "Jojo no Kimyona Boken" in China and other countries.
Yet, among all this deal-making, high-tech friction between Washington and Beijing is becoming a concern for Japanese game companies that are accelerating their strategic shifts to China. The U.S. government last week told Epic and other gaming developers in which Tencent holds stakes, to provide information about how they process consumer data, according to media reports.
Analysts said that different gaming companies collecting data from players of different games all over the world will end up with a valuable trove that bigger entities such as Tencent can harness to their advantage. Such troves of personal data could also be leaked, something that some developers are already worried about.
Gree said it would consider pulling the plug on its Chinese business if actual damage, such as data leakage, occurs. Mixi, which has retreated from the Chinese market twice in the past, said it has no intention of entering again because of concerns about a further deterioration of U.S.-China ties.
But Gu Qianjun, executive officer at DeNA, said the company would continue its focus on developing the Chinese market, although it would adapt to any market changes.
Another analyst agreed with DeNA's strategy. "The Japanese game industry cannot survive without Tencent and others," said Fumio Kurokawa, a media content analyst.