China's Gaming Giants Struggle to Crack the Japanese Market

China's dominant game publishers, Tencent and NetEase, have faced challenges in their efforts to expand into Japan's lucrative video game market. After years of investment and strategic partnerships, the companies have encountered obstacles in adapting to the local creative dynamics and finding the desired level of success.

Ambitious Expansion Meets Domestic Priorities

Tencent's Foray into Japan and the Limits of Partnership

Tencent, the world's largest games distributor, had set its sights on Japan's thriving gaming industry, hoping to incubate the next big entertainment hits and bring them back to China. One of its prominent deals was securing the rights to develop and publish the mobile version of Bandai's Blue Protocol in 2023. However, this week, Tencent's Japanese partner announced that it will end support for the game in 2025, signaling a potential setback.The challenges Tencent has faced in Japan are partly attributed to a mismatch in ambition between the Chinese firm and its local partners. Japanese developers are often adept at smaller-scale, lower-risk projects, while Tencent was seeking to build tentpole franchises with global appeal. As a result, Tencent has been setting higher goals and expectations when offering financial support to Japanese studios, leading to friction and a potential reassessment of its investment strategy.

NetEase's Venture into Console Gaming in Japan

Similarly, NetEase, another major Chinese gaming company, had set up a console-focused team in 2020, recruiting experienced creators from Japanese publishers like Capcom, Bandai Namco, and Square Enix. The studio, known as Ouka, was positioned as a key player in NetEase's push to develop more high-profile hits and infuse them with Japanese creative flair.However, the Ouka studio's initial plans have not fully materialized, highlighting the challenges faced by Chinese companies in adapting to the Japanese gaming market. The project's struggles underscore the complexities involved in bridging the cultural and creative differences between the two markets.

Shifting Strategies and Renewed Focus on Domestic Growth

The difficulties encountered by Tencent and NetEase in Japan have coincided with a revival in the Chinese gaming market, which had previously faced years of stagnation due to regulatory scrutiny. The success of domestic hits like Wukong, developed by a small Hangzhou studio, has instilled confidence in Chinese companies to seek opportunities within their home market.As a result, Tencent and NetEase have become more selective in their overseas investments, scrutinizing the potential returns more closely. Tencent's long-time Japan chief, Juno Shin, has taken on additional global responsibilities, including overseeing the search for promising investments in Europe and leading the company's International Venture Lab, which aims to nurture early-stage game developers worldwide.

Successes and Diversification Elsewhere

Despite the challenges in Japan, both Tencent and NetEase have enjoyed success with their international investments in other regions. NetEase holds a minority stake in Marvel Snap maker Second Dinner, while Tencent's early-day investments include landmark acquisitions of Riot Games and Supercell. More recently, Tencent has shifted to a more widespread and smaller-stakes approach, investing in the makers of popular games such as Elden Ring, Path of Exile 2, and Baldur's Gate 3, as well as a 5% share in Wukong maker Game Science.These diverse investments and a renewed focus on the domestic Chinese market suggest that Tencent and NetEase are adapting their global strategies to navigate the evolving landscape of the video game industry. While the Japanese market remains an important priority, the companies are also exploring opportunities elsewhere and leveraging their strengths to capitalize on the changing dynamics in the global gaming ecosystem.