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As mentioned in the article we have dedicated to China’s gaming sector, the authorities tend to have a bit of a love-hate relationship with gaming in general, from encouraging domestic companies and being pleased with the impressive revenue as well as YOY growth rate of the space to manifesting concern with respect to the potential effects of gaming on children on the one hand (with certain restrictions being imposed for minors) as well as the potential “cultural deterioration” brought about by them on the other (with censorship by the Communist Party of China representing a factor that inhibits growth, even if not a strong enough force to disrupt the sector altogether).
Time and time again, the authorities find themselves in this predicament, with industries they are not necessarily thrilled about generating so much revenue and being on such an impressive upward path that they have no choice but to find some kind of a compromise solution rather than miss out on extremely useful economic activity.
The exact same principle is valid when it comes to a sub-category of gaming: esports or in other words, those who turn gaming into a career. As of February 2019, the authorities essentially had no choice but to formalize the reality that this career exists, with “esports professionals” as well as “esports operators” becoming official job titles.
To take things even further, majors pertaining to esports have even been added to various national colleges and, again, this is primarily a function of supply and demand or in our case, impressive demand for esports-related opportunities in the context of sub-optimal supply. To understand just how much demand, let’s just say that China is poised to become the world’s number two esports force (after the United States, with them surpassing South Korea), with compound growth rates expected to be in the 21% zone up until 2023.
It remains to be seen how the COVID-19 situation will impact these developments, with there being compelling cases in favor of both outcomes: on the one hand, the fact that the COVID-19 calamity made it clear to a significant section of the population that there can be tremendous value associated with working from home (with esports enabling individuals to do just that) but on the other hand, the fact that deflationary forces may very well affect the esports space as well.
We simply do not know at this point.
What we do know is that for 2019, we are looking at $210 million in terms of esports revenue over in China (approximately 862 million yuan), a little over half the United States value of $409 million (approximately 1.6 billion yuan). While not an Earth-shattering amount nominally speaking, it represents an impressive feat in light of the growth rates involved as well as the fact that esports-related career choices are poised to grow exponentially.
As always, China is doing its part when it comes to arguably its favorite approach: infrastructure investments. As such, almost $300 million were invested back in late 2017 so as to create a so-called esports town in Hangzhou, with the same city manifesting interest in spending over $2 billion over the next two years so as to build a grand total of 14 facilities (it is worth noting that the 2022 Asian Games will be hosted by Hangzhou). Other extremely active Chinese cities on the esports front include Chongqing, Xian, Haikou, Sanya and Shanghai.
At the end of the day, there is a fair bit of tax revenue potential involved, with for example Hangzhou alone predicting that once its goals have been reached, $140 million in tax revenue are on the table. However, as mentioned rather obsessively, the authorities are playing a remarkably pragmatic game when it comes to esports in particular and gaming in general.
This reality tends to inhibit private sector investments which would have otherwise most likely been at ultra-high levels. For example, an entrepreneur who invests in the esports space needs to come to terms with the fact that he or she can be only one legislative turn of events away from ruin. For example, China (in)famously banned console games for a period of 15 years, from the year 2000 up until 2015. Needless to say, those who invested heavily in industries that would have been on the receiving end of a potential console boom ended up bitterly disappointed but it is equally true that as gamers transitioned to PC and mobile games en masse, other opportunities emerged.
Think of it as “doing business in China 101” or in other words, understanding that if you expect generation-defining opportunities and predictability, you will be quite disappointed when it comes to the latter. Time and time again, entrepreneurs as well as investors who do not understand the oftentimes frustratingly unpredictable legislative landscape in China and up losing money as well as interest in pursuing other opportunities in China. They pack their proverbial bags, leave with a bitter taste in their mouth and write off this jurisdiction completely.
The ChinaFund.com team strongly advises against such an approach.
Instead, we would strongly recommend a modus operandi with reserved optimism in the spotlight, as we like to call it. Reserved optimism which revolves around understanding that opportunities abound in China but that this is most definitely not a jurisdiction for those who expect complete predictability and are not willing to do their own due diligence.
Should you or your organization be in need of assistance when it comes to the latter, our team of experts has over 13 years of “ground level” (brick and mortar dimension included) experience which it will happily put at the disposal of interested parties. Unlike other consultants who see nothing but dollar signs when looking at Western clients, “pragmatism” and “brutal honesty” are the operative terms as far as our approach is concerned. For more information about what we can do for our clients, visit the Consulting section of our website and to get in touch right away, use the Contact section of ChinaFund.com.