US Game Software Group Unity Seen Selling China Unit

US video games designer Unity Software is in talks to sell its China unit and is seeking strategic investors for a business valued at more than $1 billion, sources say.

News of the talks, which come amid strained US-China relations and concern about storage of data by foreign companies, saw Unity shares rise by more than 5% on Tuesday.

The company, based in San Francisco, is reportedly keen to help its China unit to grow, according to four sources said, who declined to be identified as they were not authorised to speak publicly on the matter.

There is also growing interest in expanding game-making software to new technologies such as the so-called metaverse, an immersive three-dimensional internet, they said.

Unity entered China in 2012 and its eponymous software, known as a game engine, powers many of the country’s most popular games such as “Honor of Kings” from gaming leader Tencent Holdings and miHoYo’s “Genshin Impact”.

Rivals include Tencent-backed Epic Games, the US developer of the increasingly popular Unreal Engine 5.

Unity’s spin-off plan is being driven by a desire to see its software used more extensively in China in areas as varied as smart city modelling to industrial design, as well as in the metaverse, two of the people said.

Potential investors Unity has been speaking to have made big bets on the metaverse, they said.

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‘More Local Autonomy’

With China tightening data handling regulation, Unity believes a spin-off would aid this expansion as it would give the unit more local ownership and autonomy over how it operates in the country, which could also increase its attraction to local government and state-owned partners, the people said.

The spin-off would be one of China’s bigger technology deals this year as investment activity has slowed due to weak economic growth, Covid outbreaks and regulatory tightening.

Unity China chief executive Zhang Junbo has been working on the plan for at least a year, two of the people said. Progress was slowed by Unity’s share price sinking 80% since its November 2021 high amid weakness in US tech stocks, and by a product missing performance expectations, they said.

Zhang disclosed Unity’s China expansion ambition last month to local tech media outlet 36Kr without mentioning a spin-off, saying Unity was exploring ways to make its technology “safe and controllable” within China – a reference to the government’s mandate for important technology to be controlled domestically.

He also said Unity would likely hire over a thousand engineers in coming years while expanding offices in Beijing and Guangzhou in addition to its main office in Shanghai.

Two of the people said Unity’s Shanghai-based employees have been asked to sign contracts with the new entity, and that talks about an operating budget separate to its parent’s are ongoing.

A local joint venture (JV) could help Unity “gain a footing with sensitive industries such as governments and manufacturing that are seeking to modernise their operations with digital twins and real-time 3D enabled technologies,” Matthew Kanterman, director of research at Ball Metaverse Research Partners, said.

While forming a China JV carries risk – a notable example being a dispute between British chipmaker Arm and its Chinese unit – Kanterman said such joint ventures have worked well for many Western tech firms, such as HP Inc and Nokia Oyj.

“Having the right local partners can help Unity succeed where others struggle,” Kanterman said.