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Mutually assured destruction

31 August 2020 By Pete Sweeney

Beijing is threatening to kill TikTok to save it. The Ministry of Commerce added 23 new items to export controls on Friday that might complicate owner ByteDance’s efforts to sell it under pressure from the White House. If neither side blinks, TikTok will end up crippled or dead.

President Donald Trump’s move to require TikTok’s U.S. operations be transferred to a non-Chinese owner or face a ban has played poorly in the People’s Republic. Imagine the American reaction if President Xi Jinping were to demand Apple to sell its Chinese unit – and its source code – to a Chinese buyer or be kicked out of the country. ByteDance has already come under heavy criticism from nationalists for surrendering to U.S. pressure by pursuing a sale.

TikTok’s businesses in North America, Australia and New Zealand could be worth $25 billion to $30 billion, Reuters reported on Aug. 24, citing sources familiar with the matter. But those values assumed that the app could keep using ByteDance’s intellectual property, in particular the recommendation-engine which keeps users glued to their screens. Without it, any buyer will have to reverse-engineer TikTok’s secret sauce from scratch. That would likely prompt potential buyers like Microsoft or Oracle to revalue or scratch any bid.

And that is precisely what China is betting on. On Saturday, the official news service Xinhua published an interview with Cui Fan, an academic and adviser to the government, who said the rules will apply to ByteDance and suggested the company would do best to put the sales process on hold. Beijing could go as far as to order founder Zhang Yiming not to sell.

American and Chinese officials might not mind if TikTok is ruined by their diplomatic tug-of-war. The losers will be ByteDance stakeholders, including private equity firms KKR and General Atlantic, and to a lesser extent the millions of American fans of the app.

If Beijing tolerates a forced fire sale of Chinese overseas assets, Washington will have set an example that other governments might try to follow. From China’s perspective, it makes more sense to put TikTok out of its misery than let it become an ugly, and embarrassing, precedent.

 

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