Name: Eastworld Spotlight: Post-election could be the ‘most dangerous time’ for the U.S.-China relation
Uploaded: 2020-09-17
Duration: 11 min 52 s
Description: Gavekal Research’s Dan Wang talks about TikTok sale saga and Chinese tech company global aspiration.

[MUSIC] CLAY: Dan Wang is a technology analyst for Gavekal Research. He's based in Beijing, and joining us from Shanghai today. Dan, let's talk about TikTok again. This of course is the wildly popular short video app that has really become China's first real global breakout success as an internet product. President Trump, last month, said that he intended to ban TikTok from the United States on privacy and national security grounds, unless it could be sold to American investors. So just last weekend, it looked like the winning bidder for that was going to be a coalition of investors led by Microsoft and Walmart. And then all of a sudden this weekend, we got the surprise announcement that instead, the parent company TikTok, Beijing based ByteDance, doesn't really plan to sell the company at all. Instead, it's going to give a minority stake of some sort to Oracle, the enterprise software company that's led by one of Trump's biggest contributors, Larry Ellison. And that Oracle will host TikTok's data and vouch for the privacy and protection of its users in the United States. What's going on with all this? DAN WANG: It has been a lot of these extraordinary actions, just following through the legal trauma. First of all, the executive order signed by President Trump basically demanding a shutdown of ByteDance, or at least the inability to work with US persons, which includes not just natural persons, but also all US legal entities like companies, and then seeing ByteDance react to that without a court challenge in Los Angeles federal court, and then seeing, basically, the Chinese government asserting a role for itself by rolling out some of its own export restrictions on video recommendation algorithms. Basically, there's been a lot of twists and turns here, and I think we haven't really seen, basically, the last step. CLAY: So one complication is to figure out whether a partnership as opposed to a sale would be satisfactory to the Trump administration? DAN WANG: Yeah, that's right. And so basically, if it is sort of a partnership, maybe a company like Oracle can guarantee that basically, all of the user data is remaining on US soil. And if maybe there are some people who have concerns that the video recommendation algorithms, which are mostly a black box, isn't used in the various ways, then perhaps that might delay the national security fears from the Trump administration. CLAY: What's your thought on how big a genuine security threat TikTok is? I mean, it's a dance video app. DAN WANG: Yeah. Well, that's sort of always been my view as well, Clay. So basically, this seems mostly to be youths under, 20 lips singing and dancing. Now, I think the best arguments that there is some national security issue here is that it is collecting a lot of data on Americans. And in general, the US government is not happy if foreign actors can access any of that. And second of all, the argument, which I think has been most prominent by Ben Thompson of Stratechery is that the video algorithms are a black box. So if the Chinese government ever ordered ByteDance to really push things in some ideological direction or political direction, it's very difficult for people to detect that very broadly. Now, I still see that as a fairly theoretical concern that does not demand these really extraordinary legal actions from the US government, which constitutes an executive order threatening ByteDance, the parent company. Now, assertions of problems from CPS, the investment, [INAUDIBLE] investment authority, and then also claims from President Trump that any deal has to pay a nice dividend to the US treasury. All of these are extraordinary steps for something I think has mostly been a hypothetical and theoretical concern at this point. CLAY: What implications does what's happened to TikTok have for other Chinese tech companies who-- particularly internet companies who have global aspirations? DAN WANG: Well, certainly it seems to be limiting. The Trump administration seems to be succeeding in limiting the expansion of Chinese companies. And this is not just TikTok, it is also a broad host of apps that were banned by the Indian government in India last month over deadly border skirmish. And then also in Western Europe as well. We can examine the case of both Huawei and TikTok together. Now, Huawei, I consider to be China's most important hardware company. It's certainly the hard leader in actually generating exports. And ByteDance I think is the undisputed leader in software. There is not a great deal of exports from companies like Tencent or Alibaba. For value, that figure is zero. 0% of its revenues are derived overseas. But TikTok is really ByteDance's and China's major breakout app. What's happening to both of these companies? Well, after the designation to the entity last year in May 2019, Huawei phones overseas do not have access to global mobile services, which means losing access to a whole host of apps that include Google Maps, Google Play Store, and also a lot of apps that require Google integration to work, like Snapchat and Tinder. We can see that in Western Europe, its sales year over year over the second quarter has halved. So it's fallen by around 50%. In Latin America, it's fallen by around a third year over year. And so we can see that basically all these handset sales are not succeeding. And it also seems like European governments and also governments all over are turning against Huawei's IT business as well under considerable US pressure. So on the one hand, the hardware company is getting squeezed, and on the other hand, it seems like at least TikTok might not necessarily remain in ByteDance's hands. So basically, both of these companies may lose a lot of their overseas exposure. So this is going to be making it more difficult for Chinese companies to stay on the cutting edge of technological trends, and also have the revenue to really invest more in R&D for the future. CLAY: Beijing has been very critical of Trump's action to force the sale of TikTok. And Zhang Yiming himself has been vilified in the Chinese press for even considering selling out to American owners. Is there a way in which a trusted partner arrangement, as the Oracle deal has been described, could be palatable to both the government and to the Chinese public for ByteDance? DAN WANG: Well, I think it is very difficult to reconcile this. The Chinese public would rather not TikTok but be sold to any foreign firms, and the US government is demanding a sale. So to reconcile that could be pretty challenging. But I think the ByteDance strategy here is to hew a little bit more closely to the actual concerns of CPS, and to try to mitigate as many of their issues as it can. And that means probably finding the best deal for itself. And I'm hoping that the outrage domestically can not bedevil it for a very long time. CLAY: In the event that we do get a Biden administration, do you expect that these kinds of complex will persist, or are they likely to go away? DAN WANG: I think they probably will not go away. So Clay, I spend a lot of time in DC. In a normal year I'm in Washington DC around once a quarter just to chat with folks about what other China actions might be coming down the line. And as far as I can tell, at least the Democrats and the Republicans in Congress are very much united on basically holding time to account. Now, I think the other thing to note here is that Congress has proposed an extraordinary number of bills with China in the-- basically, in the text to again hold China to account. And so I think, at least in Congress, there is a very much United sense that China is now a strategic adversary as designated by the US Department of Commerce in its national security strategy. And so basically, there has to be a lot more action. Now, I think what is less likely to be the case is for this continuous treach or designations to continue at the pace that it has. What we know from the book written by the Wall Street Journal, journalists update this and think the way is that President Trump designated all way to the entity less-- mostly in a fit of pique after the trade talks collapsed in May 2019; not just some nudging from National Security Advisor, John Bolton. And there was very little deliberation on actually imposing this blacklist of China's most important technology company. Very little consultation with industry that saw a lot of good stuff our way. I think the Biden administration will not be so rash and impulsive in making these designations, but these designations will continue to happen if they decide, basically, China is a bad actor in any sort of particular way. CLAY: You see more actions in the immediate horizon; either from the US side or from the Chinese side. DAN WANG: Well, in a few days, Huawei will no longer receive semiconductors. This is from a rule in May. In around the week, Department of Commerce will force sanctions and restrictions on WeChat and Tencent. But it is possible that SMIC, S-M-I-C China's leading semiconductor maker ends up also being designated to the entity list. And as part of the Hong Kong Autonomy Act, Congress is going to determine-- actually, Congress is ordering treasury to determine if any foreign banks are working with sanctioned Chinese or Hong Kong officials and to be the target of secondary sanctions. So there's already a lot of regulatory deadlines that are coming up. Now, there could still be more. I think the-- what folks are most concerned about is if President Trump loses the election in early November. He still has two more months to push through whatever sort of agenda he wants to do. And so the most dangerous time might be for President Trump to push through with help of the [INAUDIBLE] is in the White House to push through a lot more actions on China, because this is sort of their chance. CLAY: Fascinating, fascinating. Dan, that's all really quite insightful. DAN WANG: Good. And putting, generally, your thoughts on these things. Thanks very much, Clay. This is a lot of fun. 

Eastworld Spotlight: Post-election could be the ‘most dangerous time’ for the U.S.-China relation

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Post-election can be dangerous for U.S.-China relation

Gavekal Research’s Dan Wang talks about TikTok sale saga and Chinese tech company global aspiration.