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As Clock Ticks On TikTok Saga, Ripple Effects For US Tech?

August 04, 2020 at 10:05PM

The saber-rattling between China and the U.S. is heating up — with boardroom as battleground, and with some of the biggest U.S. companies as potential casualties.

It’s a ripple effect, perhaps, of the ongoing controversies surrounding TikTok, and by extension, the interdependence of the two countries when it comes to consumer spending. In addition, the as-yet-unfinished drama over who owns TikTok is shining a spotlight on unresolved issues tied to data sharing and privacy.

In the end, we may see a rising tide of backlash — one where the Chinese shun U.S. firms finding already shaky ground and rocky economic environments.

The story thus far: Microsoft has a deadline, at Sept. 15, to strike an acquisition of TikTok’s U.S. operations, effectively cleaving it from parent company ByteDance. That comes a bit after President Donald Trump said he was mulling an outright “ban” on TikTok (or, more specifically, its video-sharing app).

At the same time the 45-day acquisition period is in place, the Committee on Foreign Investment in the United States (CFIUS), which investigates investments (and M&A) tied to foreign firms against the backdrop of national security, has launched an investigation into TikTok. Concerns have swirled around data — and how that data is collected, stored and accessed.

Shots Across The (National Security) Bow 

As reported late last year in Reuters,  U.S. Senate Minority Leader Chuck Schumer and Senator Tom Cotton called for an investigation into whether the app might pose national security risks. In a letter, the lawmakers said that while ByteDance has said it stores U.S. user data in the U.S. (where the app has had more than 110 million downloads), it “still is required to adhere to the laws of China,” and as such may be compelled to be used by Chinese intelligence and security services to conduct espionage against the U.S. and its allies.

It’s only the latest installment of a long-running joust between China and the U.S. over data — particularly, sensitive and valuable data including (but certainly not limited to) intellectual property.

As noted in this space at the beginning of the year (pre-pandemic, of course, so it feels like a lifetime ago), the first phase of a much heralded U.S.-China trade deal noted: “The United States emphasizes trade secret protection. China regards trade secret protection as a core element of optimizing the business environment. The Parties agree to ensure effective protection for trade secrets and confidential business information and effective enforcement against the misappropriation of such information.” The agreement stated that each country “be able to operate openly and freely in the jurisdiction of the other Party without any force or pressure from the other Party to transfer their technology to persons of the other Party.”

The CFIUS’s Scrutiny 

That rather general verbiage is a nod (at least) to some of the issues that, for example, led the CFIUS to scuttle Ant Financial’s bid to buy MoneyGram for $1.2 billion a few years ago. And, of course, earlier this year, Chinese telecom firm Huawei was charged, along with two of its U.S.-based subsidiaries, of racketeering and conspiracy to steal trade secrets from half a dozen U.S. tech firms, including Cisco, Motorola and others — allegedly gaining insight into hardware and software innovations.

This time around, if (and it’s an if), U.S. investigations claim that TikTok represents a security threat, putting ByteDance on the same list (the “entity” list) that Huawei is on, would mean, as Fortune reports, that Google and Apple effectively would drop the app from their online stores.

Chinese state-run media has likened news of a potential TikTok sale to “open robbery” and branded the U.S. as a “rogue country.” China Daily, as cited by CNBC, has said there are “plenty of options” to respond to what it said is a “planned smash and grab” by the U.S.

Grass-Roots Backlash? 

Among those options, we note: a grass-roots (or publicly-waged) campaign to spur consumer-led backlash against the U.S. firms that could be rocked if consumers keep wallets and purses closed. Apple comes to mind here, of course, as China is roughly 15 percent of its sales. Microsoft (though it gets low-single-digit sales from China), would certainly be a target. Card companies, of course, have been trying to enter the market to capture at least some portion of an estimated $27 trillion payments market.

Mastercard earlier this year got the green light to set up a bank card clearing business, and Amex got similar approval at the beginning of the year — but it’s been no cakewalk, considering that China began changing its business rules as far back as 2015 so that licenses could be granted to foreign bank-card clearing providers, if they went about establishing units or acquiring a local company. Companies including Walt Disney, which of course has a Disneyland park via Shanghai Disneyland, and quick-service restaurants (QSRs) owned and operated by, say, Yum! Brands, would feel the pinch of reduced foot traffic.

Incidentally, looking longer-term as various economies reopen more fully, Business Times reports that as much as $111 billion in annual spending — where Chinese consumers have made two-thirds of purchases overseas, as estimated by Bain — has been trapped.

The ultimate fate of TikTok (the U.S. operations, anyway) remains to be seen. But the reverberations of the continued U.S.-China confrontations will likely be widespread.

As Clock Ticks On TikTok Saga, Ripple Effects For US Tech? …

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