The previously unreported moves to cut back staff and spending in Japan follow years of investment in the world’s No 3 gaming market, with not much to show for it. China’s two dominant game publishers sought to escape a stagnating home market by making a series of bets in Japan since 2020, looking to incubate the next great entertainment hits to bring back home.
Shenzhen-based Tencent, the world’s biggest games distributor, has been frustrated by its interactions with Japanese developers, in part because of a mismatch in ambition between the Chinese firm and local partners, the people said. Local creators are adept at smaller-scale, lower-risk projects, whereas Tencent went to Japan in search of tentpole franchises to take global, one of the people said. Since late last year, Tencent has been setting higher goals and expectations when offering money to studios, according to the people.
“We may be approaching a point where Tencent and NetEase begin to scrutinise their returns more closely,” Bernstein analyst Robin Zhu said. “Globally, the video gaming industry has retrenched post-Covid, and many large publishers have reduced headcount or scaled back investments. Anecdotally, the Japanese developers’ desire to tightly control what can be done with their IP has sometimes been a source of friction.”
Both Tencent and NetEase continue to work closely with Japan’s biggest names, such as Capcom and Bandai Namco, and neither is planning a full-scale retreat from the country, Zhu added. Gaming hits can be notoriously difficult to predict and require a long-term commitment to development, a common issue for the entertainment industry.
Tencent said in an emailed statement that it remains committed to its partner studios and developing its business in Japan. NetEase said it had “nothing to announce” when asked about a potential closure of Ouka, and that it was seeing progress at the many Japanese studios it has invested in.
“In supporting studios outside China, we craft our strategy based on our goal of providing better gaming experiences to local and global players,” a NetEase representative said. The company is “thus always making necessary adjustments to reflect market conditions”.
Still, Ouka encapsulates the way many of their initial plans did not quite pan out.
Hangzhou-based NetEase recruited seasoned creators from Japanese publishers like Capcom, Bandai Namco and Square Enix Holdings in 2020 when it set up the console-focused team. The studio was held up as a key operator in NetEase’s push to develop more high-profile hits, helping infuse them with Japanese creative flair.
Tencent, similarly, saw Japan’s wealth of anime, comics and gaming content – already popular in China – as attractive territory to mine.
Among signs of Tencent’s shifting market strategy, the company’s long-time Japan chief, Juno Shin, has taken on more global responsibilities in recent years. He now also oversees its search for promising investments in Europe. Last week, he was named the head of its international Venture Lab, widening his remit to nurturing early-stage game developers worldwide.
All that coincided with a revival in the Chinese market after years of stagnation, spurred by incessant regulatory scrutiny.
Crafted by a tiny Hangzhou studio set up by former Tencent staff, Wukong has stoked confidence to look for hits domestically and, together with external headwinds, made overseas spending less attractive, according to one of the people.
To be sure, both Chinese firms have enjoyed success with their international investments elsewhere.
NetEase has a minority stake in Marvel Snap maker Second Dinner. Tencent’s early-day investments were highlighted by landmark acquisitions of Riot Games and Supercell. It has since shifted to more widespread and smaller stakes in the makers of many well known games, from Elden Ring to Path of Exile 2 to Baldur’s Gate 3. It also has a 5 per cent share in Wukong maker Game Science.
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