Overview
Washington, DC – The saga surrounding TikTok, one of the fastest growing social media apps in the United States, continues to cause concern due to a series of unexpected developments. TikTok, owned by Chinese company Bytedance, has been a target of U.S. President Donald Trump who threatened to use executive orders to stop the social media company’s U.S. operation as early as August 1, but instead gave until September 15 to sell the company to U.S. operators. Microsoft was named a potential bidder from the start but rumors of Apple jumping in started on August 4th. The lead agency for such action is the Committee on Foreign Investment in the United States (CFIUS) which overseas all foreign investment in the United States and has the authority to stop or roll-back transactions it deems as harmful to national security. U.S. concerns stem from the collection of private data that critics allege could be used to spy on U.S. citizens which TikTok has denied ever providing to Chinese authorities and maintains user data is safe.
Adding to the issue, Trump suggested that the U.S. could get a cut (i.e. a commission) from whatever transaction occurs as a result. The overlap of public and private interest is concerning to some but should be concerning to many. This brief outlines considerations for future businesses involved in any international venture.
A Dangerous Precedent
If President Trump is successful in forcing a private company to sell to another private firm this would set a precedent for future international business issues. This in turn allows for incredibly subjective interpretation which could be abused to further a political agenda or for personal gain. If the U.S. follows this course, precedent puts every single international firm and investor at risk of being forced to divest it’s U.S. operation, if and when, a U.S. politician feels that investments violates a perceived law or creates a threat.
Expanded use of CFIUS
CFIUS should be a tool to protect international security and not be used to deter international investment. What we are seeing now is the latter. CFIUS uses an opaque and complex review process that incorporates privileged, classified, and non-attributable data to make determinations. Often in government, simply having a political attitude towards a particular industry or country can influence the analysis and recommendation of government and contract analysts. Once a decision is made there is little due-process or recourse for a company to take. This not only creates apprehension for every international investor; it creates uncertainty from U.S. businesses who rely on foreign funds and international partners to operate.
However, companies that address potential security or data issues up front can often work with U.S. regulators to create a solution that eases concerns and allows for a smooth investment. Legal experts who work with CFIUS regulators have described the lead-up as a discussion rather than a draconian ruling. Still, the opaque process can be disconcerting and has led to a significant drop in foreign direct investment.
Want to learn more about CFIUS? See FAO Global’s previous articles on CFIUS and Chinese investment into the United States.
Subjective Terminology on National Security
Another key driver of uncertainty is the expanded use of national security to define new areas of technology. Last year, CFIUS ordered a Chinese company to sell the popular app, Grindr, citing access to personal and potentially damaging information that Chinese authorities could potentially use. Note the use of the word potentially. CFIUS is not addressing issues that have happened but instead appears to be used to prevent issues from happening in the future: an uncertain future that may or may not exist. This means that data privacy, emerging technologies, and future ideas are all subject to regulation.
The concern is that as everything goes digital, global powers will use different technology and data regimes to silo information. This adds costs, forces countries to choose sides, and makes data flow less efficient. This also adds incentive to set-up domestic operations in overseas environments rather than manage a multinational organization from a home base. We are still far from this reality but there are certainly indicators of this already happening. How the TikTok story plays out will shape that narrative.
Potential China Actions Towards U.S. Businesses
One possible scenario would see leadership in Beijing retaliating by using the same tactics to target U.S. companies. Although China needs domestic economic growth for a growing middle class to prosper targeting a single (or series) individual company to make a point is not off the table. While this is not advised it would send a message that likely leads to continued escalation between U.S. and Chinese leadership.
The U.S. business community in China is, from our team’s understanding, by and large supportive of improving relationships. Most major multinational brands have been in China for many years. Many see more than 50% of revenue from the China market alone. If China did start targeting U.S. businesses they would be targeting companies that have been passive observers but would force them to act. This includes pressuring U.S. lawmakers to craft laws or provide political support to U.S. companies in China beyond what is currently in place. Reality is, this scenario would only escalate the problem. Still, there is 45 days and an entire election cycle in the U.S. to play out and we expect to see more surprises in the near future.
What Can TikTok do?
TikTok is in a position. It has to balance the future interests of Bytedance globally with established market share in the U.S.. It has recently appointed former Disney Executive, Kevin Mayer, in hopes of soothing concerns over a Chinese run company. It has also discussed a carve out situation for it’s U.S. operation. So far, it hasn’t resorted to a public relations (PR) blitz like Huawei did last year. Still, for a company that boasts over 100 million users and was downloaded 165 million times in the U.S. alone, TikTok is by far the most well used Chinese application.
In the current political environment, TikTok is likely to continue negotiations to sell while planning alternate options for a spin-off or a potential lawsuit to halt any executive order that may come down. A change of U.S. presidents may create a different environment but January 2021 is a long way away and President Trump’s threatened September 15th deadline likely creates a level of panic to find a solution less risk facing an uphill legal battle through the election cycle – all of which would contribute to President Trump being “tough on China.”
According to Dr. Shirley Yu, “57% of TikTok’s subscribers are domestic Chinese (on Douyin), who contribute 98% of TikTok’s global revenue.” Aside from future growth opportunities in the U.S. TikTok is not in a desperate situation financially and time may be on their side if they decide to call President Trump’s bluff. In the military, you always wanted to slow things down when making a decision (we call it taking a tactical pause). There are certainly ways for TikTok to navigate this geopolitical and market landscape and they should be exploring all of them.
Takeaways for International Businesses
The repercussions of this situation will impact both foreign and domestic companies. Regardless of nationality, investors and firms should understand how the changing nature of national security, data privacy, and competition is impacting public policy and law. How law is used and what arguments are made will also set precedent should this enter the court system. Most importantly, if President Trump wins the reelection on November 4, businesses and investors will need to understand President Trump’s governing tactics, political will, and what he envisions the U.S. to look like through 2024. Should he lose, businesses will need to be prepared with a strategy and understand the politics and political winds in Congress and the democratic party. These shift daily but are critical to corporate or investment strategy.
About the Author
Brandon Hughes, Founder of FAO Global & Chief Global Markets Consultant. Brandon has been in the room for many key moments in history. He helped U.S. diplomats craft talking points for presidential level meetings, led international engagements for the U.S. military, provided detailed briefings to senior international officials in Beijing, and has been leading companies through complex international issues for the last 10 years.
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Brandon & FAO Global’s team of executive consultants will help you craft detailed strategy and navigate complex geopoltical & overseas market issues.FAO Global incorporates more than a decade of preparing organizations for international ventures in the public, private, and non-profit sectors.
