Amid slowing growth and regulatory uncertainty at home, China’s gaming companies are increasingly eyeing overseas markets. Many of them have had impressive growth figures in international markets for some time, but the situation at home is driving them to view foreign gamers in a new light. Established players such as Tencent and NetEase – both of which are in the top five gaming firms in the world – are giving international growth new emphasis, while rising upstarts such as HoYoverse (formerly known as miHoYo), FunPlus, and 37 Interactive Entertainment are seeing surging interest in their titles outside of China.
The diversity in terms of the size of Chinese gaming firms finding success abroad shows that there’s something of a relatively level playing field outside of a domestic market that is dominated by a handful of majors – even small indie game makers are able to strike it big when they look beyond their own backyard. Yet there’s no cheat code for doing well internationally and Chinese game firms face new modes of competition and significant cultural challenges when they venture outside of China.
Powering up internationally
To reflect the increasing scale of its global gaming growth, Tencent started to disclose revenues from domestic games and overseas games as new sub-segments in the third quarter of 2021.
In a challenging 2021, Tencent’s overseas games saw an impressive 31% yearly growth, while the domestic gaming sector grew by only 6%. Tencent made RMB 25 to 30 billion ($3.79 to $4.55 billion) in overseas games in the first three quarters of 2021, accounting for about 20% of its gaming revenue. Overall, the company saw its slowest revenue and profit growth in five years, 16.2% and 11%, respectively, underlining the international gaming division’s eye-catching performance.
NetEase first revealed its overseas gaming performance in the third quarter of 2018, saying incomes from overseas markets accounted for 10% of the total net profit in its gaming business that year. The latest figures show that overseas gaming revenue accounted for 11% to 15% of NetEase’s gaming revenues in the first three quarters of 2021. However, the company didn’t reveal a detailed breakdown of overseas gaming revenue in its 2021 annual report.
Although the growth in NetEase’s overseas gaming revenue has been steady rather than spectacular in the last three years, the company has set a goal of expanding earnings outside of China to 50% of its gaming income, with a focus on markets in Japan and North America, according to Chinese media outlet Jiemian. NetEase also dramatically increased its research and development expense ratio in the past two years, hoping to win with better gaming developing skills. The report added that the ratio doubled from 8% in 2017 to 16% in the first three quarters of 2021.
Chinese gaming companies taking it to the next level overseas
In March of this year, of the top 10 highest-grossing mobile games globally, four came from Chinese gaming companies, according to Sensor Tower: Tencent’s Honor of Kings and PUBG Mobile, HoYoverse’s Genshin Impact, and Alibaba’s Three Kingdom TacTics. Lilith’s Rise of Kingdoms also made it into the top-grossing list on the App Store. Among the Chinese titles, HoYoverse’s Genshin Impact was the most profitable. Tencent’s PUBG Mobile was second, with Lilith’s Rise of Kingdoms ranked third.
Genshin Impact is a sprawling multiplayer online role-playing game (MMORPG). Launched in 2020, it hit 115 million downloads in its first 18 months, according to Data.ai, a US insight firm focusing on app stores. According to Data.ai, Genshin Impact’s success was so big it helped put a positive spin on figures for the whole category, pushing MMORPG revenue to grow 17% year-on-year in 2021, despite other titles in the same category showing a slow and even negative increase in revenue.
Tencent’s PUBG Mobile, in many ways, has followed the success of its PC version. The title has found popularity with a new game mode called battle royale, whereby players fight to be the last one standing amid a mass competition with hundreds of other players. Its primary competitor is Call of Duty Mobile, also developed by Tencent and published by Activision, which ranks seventh on Sensor Tower’s list.
Challenging times at home
Chinese gaming companies are having a tough time getting new games approved and making money in the domestic market due to tightening regulations around young players’ gaming habits and strict limits on new game licenses.
Late last August, Chinese regulators asked all companies to limit minors’ access to games (in Chinese), with the aim of protecting them from gaming addiction. As a result, those under the age of 18 can only play games one hour a day on Fridays, weekends, and holidays, according to the rules, with no gaming time allowed on weekdays.
Tencent said in its 2021 annual financial report that the new regulations hit the company’s domestic games revenue due to “less spending by minors” and the company allocating developer resources “to implement new measures.”
Around the same time, China also stopped issuing licenses to new games. The regulator only resumed issuing licenses in April, eight months later. This wasn’t the first time the regulator withheld its licensing power. In 2018, the issuing of licenses was halted from March to December. Game publishers in China need a license from the National Radio and Television Administration (NRTA), the state’s regulator for news, print, and publications, to be listed in app stores or to be downloadable on their websites within the country.
The extended freeze has forced many Chinese gaming companies to downsize. Since last year, major Chinese gaming companies such as NetEase, Lilith, IGG, and Perfect World have had to cut off projects and lay off staff.
What’s next for Chinese gaming companies going overseas?
Amid such problems, many are forecasting another grim year at home for Chinese gaming companies in 2022. DataEye, a Shenzhen-based industry insights firm, wrote in their 2021 annual report that they foresee another slow year ahead. “The domestic market won’t see major growth. 5% growth is optimistic; no growth is also likely,” said the report. Instead, they noted, “The main growth in the industry will most likely come from the overseas market.”
It’s easy to see the allure of international sales given the picture back home. Yet, despite some major success stories so far, achieving sustained growth internationally comes with its own set of difficulties for Chinese game developers. There have been some surprise hits, such as indie outfit Coconut Island’s crossover success Chinese Parents, but for large-scale, longer-term growth, a sophisticated understanding of international markets is required.
“Localization in overseas markets goes way beyond just translating the content in local languages. The key is in cultural localization,” Wang Yangbin, CEO of DataEye, wrote in the firm’s report. “These are problems all top Chinese firms — Tencent, NetEase, and Alibaba — and second-tier companies have to solve quickly.”
How quickly they do so may well determine how soon and to what extent international markets can provide the kind of salvation that many Chinese gaming companies appear to be looking for by heading overseas.