How bad could it get? America’s ugly election

An anthropologist examines the world of work

Having business in China was not a pre-

condition for the handouts; many compa-

nies, especially small and medium-sized

ones that made up the bulk of applicants,

had little or none. An executive at Novel

Crystal Technology, a producer of materials

for semiconductors, says his firm applied

for the subsidy to reduce overconcentra-

tion—in the American market. The sums

on offer are far too small to spur all-out de-

coupling, says Onishi Yasuo, a former offi-

cial at the Japan External Trade Organisa-

tion, an independent government agency. 

Most Japanese firms with lots of expo-

sure to China are in “wait and see” mode,

says Mr Ke. America may have a new gov-

ernment soon. The scope and enforcement

of American sanctions is vague. Even if

tensions keep rising, Japan Inc is unlikely

to behave as a monolith. Makers of niche

products for export may decamp from Chi-

na. Firms with a large Chinese business,

such as carmakers, will be loth to leave. 

In the long run the risk for corporate Ja-

pan is less geopolitics than competition.

China already transformed once, from a

land of cheap labour into a booming con-

sumer market; more than 70% of what Jap-

anese companies’ affiliates produce in Chi-

na is sold there. Now a second shift is under

way, from consumer market to rival in so-

phisticated technology. 

The latest annual survey of 74 technol-

ogy products and services by 

Nikkei

, a Japa-

nese business newspaper, found that last

year Chinese companies overtook Japan in

market share for liquid-crystal displays in-

stalled in smartphones and insulators for

lithium-ion batteries used in electric vehi-

cles. As an adviser to a large Japanese bank

observes, that is what really makes Japa-

nese firms nervous. 

7

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The Economist

September 5th 2020 

Business

57

I

nvestors in bytedance

have got used to

being caught between superpowers.

They were still taken aback on August 28th,

when an update to China’s export-licens-

ing regime blocked the sale of the hot Chi-

nese technology firm’s prize asset—the

American arm of TikTok, a short-video

app—to American firms and investors.

A Chinese riposte to President Donald

Trump’s campaign against TikTok was in-

evitable. He contends it could give China’s

Communist Party means to spy on Ameri-

cans and conduct disinformation cam-

paigns. TikTok’s assurances that it does not

censor content unflattering to Beijing or-

send personal data to China have fallen on

deaf ears. Last month Mr Trump issued two

executive orders aimed at TikTok, the most

recent of which will ban it in the United

States if it is not in American ownership by

November 12th.

Microsoft and Oracle, two software

giants, put in rival bids of around

$25bn-30bn for TikTok’s operations in four

markets—America, Canada, New Zealand

and Australia. Oracle enlisted some Ameri-

can venture-capital backers of ByteDance,

including Sequoia Capital and General At-

lantic. It would be more hands-off than Mi-

crosoft and could let ByteDance or its foun-

der, Zhang Yiming, reinvest in TikTok later

on. A strategic sale to Microsoft would be

more definitive. But Mr Zhang favoured it,

according to people close to ByteDance. He

once worked at Microsoft and is said to ad-

mire its chief executive, Satya Nadella.

Microsoft also beefed up its bid by teaming

up with Walmart, a retail colossus.

Then came the Beijing bombshell. Chi-

na’s commerce ministry added certain

types of artificial intelligence, as well as

personalised information-push technol-

ogy and data analysis, to a list of products

critical to national security. These can no

longer be sold abroad without official per-

mission. They are also what makes TikTok

tick. ByteDance quickly said it would obey

the new rules.

There was always ambiguity as to

whether the app’s American suitors would

get its algorithm. They might have bought

only the brand, its users, ad-buying plat-

form and less advanced software. But Byte-

Dance’s recommendation engine is a big

part of TikTok’s appeal. It has been honed

for years with data from millions of users

around the world and displays an uncanny

ability to divine peoples’ viewing tastes.

So Microsoft and Oracle structured their

bids to keep access to ByteDance’s code. Ac-

cording to a shareholder, both are offering

ByteDance $5bn-10bn upfront, then anoth-

er $5bn or so a year for a few years depend-

ing on TikTok’s revenues and performance.

In exchange, ByteDance would provide

technological enhancements and updates

every six months or so.

“ByteDance is over a barrel, so it has to

earn the price,” says the shareholder. Try-

ing to write a brand-new TikTok algorithm

in America is out of the question, says an-

other investor. It would be as difficult as

starting a new company, he says. The

Trump administration appeared to accept

that TikTok would keep technology ties

with ByteDance, so long as data security

was ensured by an American owner and the

link did not last for ever.

Now Microsoft and Oracle await Byte-

Dance’s decision. They may withdraw their

bids or amend them, to take account of the

fresh uncertainty over what they would be

getting. Once ByteDance signals its inten-

tions and any revised bids are in, it could

take 30 days to get China’s go-ahead. Byte-

Dance could then request an extension to

Mr Trump’s November deadline, perhaps

hoping that he loses to Joe Biden in elec-

tions on November 3rd.    

The risk of TikTok being blocked in

America remains substantial. The Chinese

government may refuse to grant an export

licence and buyers could walk away. This

would deprive ByteDance of billions. But

that may be a price China is willing to pay to

prevent America from setting a bad prece-

dent by forcing the sale of a Chinese tech-

nology to American interests.

As for Mr Zhang, taking a stand against

Mr Trump would earn him kudos, and pos-

sible rewards, at home. State approval is

not something the independent-minded

entrepreneur has sought. He may yet have

little choice but to accept it.

7