Say It Ain’t So, Prez
An extortionist fire sale of TikTok to a US company would be un-American
In the latest twist of the US-China spat, President Trump has his sights on TikTok, the short-form video sharing platform and ByteDance subsidiary. On July 31, President Tump threatened to ban TikTok because it was a threat to US national security. On August 6, he made good on his threat when he signed an Executive Order to that effect. President Trump tightened the screws with an August 14 Executive Order requiring ByteDance to divest its assets in the US and destroy any TikTok data on its US users within 90 days.
Both ByteDance and TikTok are Cayman Islands-registered companies owned in a murky web of cross-holdings by its Chinese founder Zhang Yiming, but with significant ownership by US investors. The list of investors in ByteDance is a Who’s Who of US venture capitalists and investment bankers, including Sequoia Capital, Goldman Sachs, Morgan Stanley, and Kohlberg Kravis Roberts. Barely 7 years after its founding in 2012, ByteDance had $20 billion in annual revenue, in 2019, and TitkTok (launched by ByteDance in 2017), reached 165 million installs in the US by 2020. It is thus no surprise that TikTok is the latest victim of US government’s war on Chinese companies, especially Huawei.
Although President Trump insists that TikTok poses a threat to US national security, the CIA has not found any tangible evidence of this threat. Nevertheless, he is insisting that TikTok should divest its US assets, thus forcing a fire sale of a Chinese company to US interests. To make matters worse, he has taken this extortionist stance that ByteDance should pay the US government “key money” from its sale of TikTok.
Against this backdrop, some US investors in ByteDance offered $50 billion for majority-ownership of TikTok. Shortly after, came reports that Microsoft was in talks to buy TikTok assets in the US and possibly those in other countries. Microsoft, of course, has gobbled up many companies, is trusted by consumers and the US government alike, and has $136 billion in cash.
Microsoft is not the only suitor for TikTok as Twitter has had talks with ByteDance, and many have called Netflix, the giant of Internet streaming as, after Microsoft, the best fit for TikTok. Oracle also is interested in buying TikTok. Oracle’s founder, Larry Ellison is a strong Trump supporter, is working with investors, including General Atlantic and Sequoia Capital, and the company’s CEO served on Trump’s Transition Team. So its not surprising that President Trump supports Oracle’s bid to buy TikTok.
US corporate giants are falling over each other trying to snare TikTok because it is a treasure trove of user data and user-generated videos. TikTok also has a 15 million lines of computer code that drive its world-class artificial intelligence (AI)-based algorithms that hook people to its platform.
The party line has always been that China engages, inter alia, in theft and forced transfer of intellectual property (IP) from the US; not the other way round. The world has also been told that China steals US IP to beat US companies in the global market. For this reason, it seems rather odd, to put it mildly, that the US government is forcing a Chinese company to be bought, along with its IP, by a US company.
No wonder the Chinese are pretty upset and hurling insults and criticisms at the US and — oddly enough — ByteDance and its founder. A Chinese foreign ministry official remarked that the potential ban of TikTok by the US government contravened the “principles of openness, transparency, and non-discrimination” of the World Trade Organization. One State-owned Chinese media outlet said a forced sale of TikTok would be akin to forcibly taking the child out of the arms of ByteDance and amount to a “barbaric act of a rogue government.”
Just as Americans are apprehensive about companies like ByteDance which are incorporated under the Variable Interest Entity (VIE) laws that allow participation of non-Chinese in government-restricted sectors in China, Chinese can also see the TikTok saga as proof that US companies can use VIEs as Trojan horses to forcibly take over Chinese companies and IP. In that case, China might repeal or make VIE laws more restrictive, further upsetting the over $600 billion US-China trade gravy train, and jeopardizing the $1.3 trillion in US investments in VIE-based Chinese stocks. Indeed, TikTok’s sale might be thwarted by Byte Dance’s poison pill which is that it will “strictly” abide by Chinese export law, which was revised last week and for the first time in 12 years to restrict the sale of technologies that power TikTok.
A forced sale of TikTok to a US company would contravene American values of honest friendship and generous reciprocity, and could have a lasting, probably negative, impact on US-China relations. President Trump might yet again end up shooting himself in the foot, and harming the long term interests of the US because the rest of the world, too, is watching.
