The TikTok effect: U.S. ban could doom the global ambition of Chinese tech

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The Trump administration’s threat to ban the Chinese-owned short video app TikTok unless it is acquired by a U.S. company could spell trouble for other Chinese technology companies with global ambitions.

U.S. Secretary of State Mike Pompeo said on Wednesday that the U.S. wants to ban “untrusted” Chinese-owned apps and impose new restrictions on Chinese cloud providers and handset makers, saying they pose data privacy and national security risks. Pompeo specifically named TikTok, which is owned by Beijing-based tech firm ByteDance Ltd, and WeChat, the popular Tencent Holdings-owned social messaging platform.

Executive orders Trump signed Thursday seemed to make good on Pompeo’s warnings. They take effect in 45 days and ban any U.S. firm or person from transacting with TikTok’s parent ByteDance or WeChat.

Microsoft Corp is currently in talks to buy TikTok, a move that could appease the Trump administration and anger Beijing. Should that happen, analysts say it could lead to more U.S. companies buying and operating Chinese-founded apps or force Chinese tech firms eyeing U.S. expansion to look elsewhere.

“All signs for the U.S.-China relationship are spiraling down, so why would Chinese companies try to push against this huge tidal wave, when they can just focus on other markets where they’ve had pretty good success already?” said Dev Lewis, a fellow at Hong Kong-based think tank Digital Asia Hub.

‘Unprecedented territory’

A U.S. government eager to crack down on China-based companies means Chinese tech firms could have to choose between “los[ing] out on the critical U.S. consumer market” or “sell[ing] to a U.S. entity to alleviate the security concerns,” said Daniel Elman, an analyst at Nucleus Research, a Boston-based information technology research firm

During a Monday press conference, Chinese foreign ministry spokesperson Wang Wenbin declined to comment on the potential sale of TikTok to Microsoft, saying the ministry does not comment “on the specific business activity of the relevant companies.”

Yet a Tuesday editorial in government-owned newspaper China Daily said Beijing would not accept the Microsoft acquisition, which President Donald Trump said he would approve if the U.S. government got a cut of the deal—an unprecedented and possibly illegal assertion of presidential power. The China Daily editorial said Beijing may retaliate if the Microsoft deal goes through, calling it a “planned smash and grab” by the Trump administration. It’s unclear what measures Beijing could take in response.

TikTok is the first homegrown Chinese Chinese app to attract a broad user base in the U.S., where it’s become a cultural phenomenon. The TikTok episode represents “unprecedented territory” for the U.S., Lewis said.

“Since the start of the Internet, the U.S. has never really had to contend with a foreign company in the tech space that’s successful in U.S. consumer data—this is sort of the first case where a foreign app has actually been popular with U.S. consumers,” Lewis said.

In a statement to Fortune, TikTok touted its 100 million U.S. users and said it plans to be in the U.S. “for many years to come.” The app has repeatedly denied charges of content censorship and data sharing with the Chinese government.

Challenges of the U.S. market

Chinese tech firms have long struggled to find success in the U.S. market—but that hasn’t stopped them from trying.

Chinese tech giants Huawei Technologies and Xiaomi Corporation, two of the largest smartphone makers in the world, have so far failed to penetrate the U.S. smartphone market, owing to a mix of tough competition, carrier requirements, and, in Huawei’s case, a spot on a government blacklist over national security concerns.

Xiaomi said in 2018 that it had plans to enter the U.S. market; in January this year, a Xiaomi executive told CNBC the company was still planning a U.S. market debut, even after the U.S.-China trade war upended the U.S. expansion plans of several other Chinese companies.

The U.S. market still appeals to China’s biggest mobile platforms too. China’s ubiquitous digital payment services Alipay and WeChat Pay each have roughly 1 billion users globally. They’ve expanded into the U.S., but they are used mainly by the Chinese diaspora and tourists from China, and only some retailers offer the payment option.

Looking to other markets

The threat of bans or forced sales could quash the long-held U.S. aspirations of such Chinese tech firms and encourage them to consider other markets for growth. But some of the most obvious alternatives to the U.S. share Washington’s skepticism.

India had been a massive growth market for China until its government banned 59 Chinese-owned apps, including TikTok and WeChat, at the end of June. It banned 47 more apps in late July over national security concerns.

Alibaba Group’s web browser UC Browser was India’s second-most popular browser behind Google Chrome with 130 million users, but the Indian government barred it as part of the sweeping ban.

A group of lawmakers in Japan said last week they will submit a proposal to the Japanese government to restrict the use of TikTok and some other Chinese apps over data security concerns.

British member of parliament Neil O’Brien said this week that the U.K. government should conduct a security review on TikTok before the company establishes offices in London, one of the cities TikTok is reportedly considering for its global headquarters.

At least one Australian politician called for a TikTok ban last month, and Canberra launched a national security and data privacy review of the app. However, Australian Prime Minister Scott Morrison said on Tuesday the government did not find evidence to warrant a ban. “But people should know that the line connects right back to China and they should exercise their own judgment about whether they should participate in those things or not,” he said.

In a statement Microsoft issued Sunday about its potential purchase of TikTok, the company said the deal would involve Microsoft “owning and operating TikTok” not only in the U.S., but in Canada, Australia, and New Zealand too.

Southeast Asia, meanwhile, is more welcoming to Chinese firms, Lewis said.

Indonesia, for example, is already a big market for Chinese apps. In 2017, Alibaba’s UC Browser gained a 41% market share there. It’s likely to remain an important site for user growth as the world’s fourth most populous country with a young population and a growing number of Internet users. What’s more, Beijing and Jakarta have strong diplomatic ties, and China is Indonesia’s largest trading parter.

Lewis said that Africa, where U.S. tech doesn’t yet have a dominant foothold, is another region where Chinese tech might expand.

The divvying up of countries along pro-China or pro-U.S. lines appears to be the phenomenon of ‘decoupling’ occurring in real time. However, the process of decoupling—the large-scale severing of the U.S. and China’s entwined supply chains, financial systems, and Internets—could “wax and wane” for years, said Andy Kennedy, an associate professor at the Australian National University’s College of Asia and the Pacific who researches Chinese tech.

“The political impetus behind decoupling is powerful, but so is the economic attraction between the world’s two biggest economies,” Kennedy said.

The ‘Great Firewall’ comparison

Washington has escalated its attacks on Chinese tech in recent weeks, but the battle to police the Internet is hardly one-sided.

Some of the biggest U.S.-based social media players, including Facebook, Twitter, and Google-owned sites and apps, for years have been inaccessible in China due to the government’s ‘Great Firewall,’ the infrastructure that blocks websites and censors content. Beijing has said it will allow U.S. companies to operate in China if they comply with Chinese government Internet controls.

The U.S. crackdown on TikTok has drawn comparisons to Beijing’s Firewall, but at least prominent voice says the two are quite different.

Kai-Fu Lee, a leading artificial intelligence expert who heads the tech investment firm Sinovation Ventures, worked for Google in China between 2005 and 2009. (Until 2009, Google operated a separate, censored version of its search engine in China.) He said in a Chinese-language statement on Tuesday that Google’s experience in China and TikTok’s case in the U.S. are “not comparable.”

When Google decided it didn’t want to comply with China’s rules, “it decided to withdraw” from the mainland, Lee said. With TikTok, Lee said, the U.S. government did not provide information on what the app could do to continue operating in the U.S. as a Chinese-owned company, nor did the U.S. provide evidence for its complaints against the app.

In a Tuesday letter to company staff, ByteDance’s famously low-profile founder and chief executive Zhang Yiming called the proposed sale of TikTok to Microsoft “unreasonable.” But, Zhang said of Washington, “Their real objective is to achieve a comprehensive ban [of TikTok].”

Source: Fortune

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