China Throws a Wrench Into Trump’s Plan to Force TikTok Sale
ByteDance Ltd.’s TikTok app is displayed in the App Store on a smartphone in an arranged photograph. (Photographer: Andrew Harrer/Bloomberg)

China Throws a Wrench Into Trump’s Plan to Force TikTok Sale

Zhang Yiming’s plan to sell the U.S. operations of his short-video app TikTok to avoid a shutdown was thrown into jeopardy after China asserted authority over a deal already under scrutiny by the Trump administration.

Beijing on Friday added uncertainty to already thorny negotiations over the sale of ByteDance Ltd.’s prized asset, claiming the ability to block a sale to foreign suitors Microsoft Corp. or Oracle Corp. with tighter restrictions on artificial intelligence exports. The commerce ministry added speech and text recognition and personalized recommendations to a list of products that require approval before they’re sold abroad.

These new areas cover the very technologies ByteDance employed to make TikTok a viral teen sensation from America to India. The company is now required to seek the government’s sign-off on any deal, though it doesn’t mean an outright ban, according to a person familiar with the matter. TikTok is dissecting the new regulations and thinks they will make securing a deal more difficult, a second person familiar with the matter said.

Shares of Oracle and Microsoft were each down more than 1% in early trading Monday. Walmart Inc., which has said it will partner with Microsoft on a bid, was down about 2%.

For China, the move helps gain leverage to prevent what state-run media called the “theft” of technology while underscoring to the U.S. it has intellectual property worth protecting. It also increases the likelihood a deal could get held up and Trump will then move ahead with a TikTok ban ahead of November’s election, depriving millions of teenagers of any updates to the app though they may still be able to use the current version.

“AI is a foundational technology and is one of the key sectors that China aims to lead, competing with the U.S.,” said Rebecca Fannin, founder of Silicon Dragon Ventures. “This pushback by Beijing could be seen as part of the growing U.S.-China tensions and tech cold war.”

China Throws a Wrench Into Trump’s Plan to Force TikTok Sale

China’s opaque regulations introduce more unknowns into an already delicate process involving multiple corporations, agencies and federal court, all converging days before Donald Trump’s executive order banning TikTok takes effect ahead of November elections. It could take up to 30 days for ByteDance to get the greenlight to export AI, said Zhaokang Jiang, a trade attorney and managing partner of GSC Potomac.

The involvement of Beijing, which has denounced Trump administration bans on TikTok and Tencent Holdings Ltd.’s WeChat, muddies the waters as American corporations and investors vie to hammer out a deal by the Trump administration’s deadline. Microsoft and Oracle have submitted rival bids to acquire TikTok’s U.S. business, while Centricus Asset Management Ltd. and Triller Inc. made a last-minute pitch on Friday to buy TikTok’s operations in several countries for $20 billion, according to a person familiar with the matter.

“We’ve been seeing U.S. restrictions on China on a daily basis. We can’t expect China to have no response at all,” said Wang Huiyao, an adviser to China’s cabinet and founder of the Center for China and Globalization.

China’s Foreign Ministry criticized the American government’s moves again on Monday.

“We are opposed to the U.S. abusing the national security concept and state power to suppress specific businesses of other countries,” Chinese Foreign Ministry spokesman Zhao Lijian told a daily briefing in Beijing. “The U.S.’s attempt to take economic bullying and political manipulation against non-American companies, whether it is politically coerced transaction or government enforced transaction, is no different from plundering.”

Beijing’s new curbs on technology mirrors American sanctions against the sale of U.S. software or circuitry to a plethora of Chinese firms. Apart from giving it a say in any imminent deal, the seemingly innocuous changes provide another bargaining chip in the U.S.-China tech cold war.

“Beijing’s responses to Washington over the past five months have largely been designed to appear retaliatory, but are in fact carefully calibrated to place Beijing on equal footing with the U.S. while not escalating tensions — yet,” said Kendra Schaefer, head of digital research at consultancy Trivium in Beijing. “This move is no exception: it may give Beijing more equal footing so that decisions can’t be made by the U.S. unilaterally, but doesn’t necessarily indicate Beijing will move to nix the deal.”

ByteDance has become one of several Chinese companies at the heart of Washington-Beijing tensions. Trump accuses the company’s app of being a threat to national security, echoing charges against telecom giant Huawei Technologies Co. The White House has now ordered Zhang’s company to sell the app’s operations in the U.S. and several other countries, with a valuation estimated at $20 billion to $50 billion.

It’s unclear how the bidding process will now play out. Zhang has said the company, whose TikTok is also banned in India, is working rapidly to resolve its geopolitical headaches. But Beijing’s insertion into the process raises the chances that it may just decide to veto or at least delay a deal, with unknown ramifications.

Those outcomes may appeal to Zhang, the 37-year-old founder who built ByteDance into the most valuable startup in the world with a $140 billion valuation, according to CB Insights. He had long resisted giving up control of TikTok because he thinks the service is evolving into one of a handful of major online advertising businesses, alongside Facebook Inc. and Google.

His instincts may be to fight: He has scrapped with authorities in Beijing over politically sensitive content and with Chinese publishers over allegations of copyright infringement.

TikTok has asked a federal judge to block the Trump administration from enacting a ban on the fast-growing social media network, bringing a geopolitical fight over technology and trade into a U.S. courtroom.

Even before the latest regulations, Microsoft or any other American owner faced the difficult task of hiving off TikTok U.S. from ByteDance’s much larger Chinese business.

ByteDance runs TikTok in various regions, often employing code from Musical.ly, the progenitor to the app that ByteDance acquired in 2017. With ByteDance engineers in China still working on TikTok, it’s unclear how Microsoft could split the code and the underlying technology to ensure it’s free from Chinese interference -- or determine the value of a standalone operation that may not have access to ByteDance’s technical wizardry.

The rule revised Friday would cover cross-border transfers of restricted technologies even within the same company, while the impact and consequences of failing to make appropriate applications would be very different if an international business is spun off, said Cui Fan, a trade expert who’s a professor at Beijing’s University of International Business and Economics.

“We are studying the new regulations that were released Friday. As with any cross-border transaction, we will follow the applicable laws, which in this case include those of the U.S. and China,” ByteDance General Counsel Erich Andersen said in a statement.

©2020 Bloomberg L.P.

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