China’s new export rules mean quick sale of TikTok video app ‘unlikely’

BEIJING, Sep 2, 2020, SCMP. Beijing’s updated export control list offers it plenty of leeway to determine a possible sale of TikTok’s overseas operations, adding a powerful new player in the fight for control of the popular video-sharing app, according to sources from the Chinese government and the company’s owner ByteDance, South China Morning Post reported.

A quick deal to sell TikTok in the United States is now unlikely, as the new regulations give Beijing the power to review and veto the export of technologies, increasing the odds it will cease operations in the US like it was forced to do in India, said a ByteDance official, who was briefed on discussions about the impact of the new rules.

ByteDance has said it will “strictly comply” with the new rules around tech exports released by the Ministry of Commerce and Ministry of Science and Technology at the weekend. It is the first time the controls, which cover TikTok’s algorithm, have been updated for more than a decade.

“ByteDance will have to go through the approval process in China as the TikTok deal in the United States involves transferring of such technologies,” said the company source, who declined to be identified.

The Chinese government will have an important say in the deal … by blocking or delaying the process, which means a quick deal is very unlikely to take place.

“The Chinese government will have an important say in the deal … by blocking or delaying the process, which means a quick deal is very unlikely to take place.”

ByteDance could continue talks with potential buyers of TikTok and technically skip the government approval by excluding sensitive technology transfers in any deal, said a government source.

“In other words, ByteDance can sell all of TikTok but the algorithms,” said the source, who is involved in regulating ByteDance but not directly involved in technology export control.

Under the new rules, any sale that involves sensitive technology such as the push of personalised information based on data analysis requires ByteDance to file an application to a provincial level commerce ministry authority – for example, the Beijing Municipal Commerce Bureau – and the authority has up to 30 working days to approve the deal.

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If the outline of the deal submitted by ByteDance is approved, the firm could start “substantive negotiations” with potential importers of the restricted technologies.

ByteDance would then have to submit any contract for review to the commerce ministry authority, which would make a final decision on the deal within 15 working days. If approved, a technology export license certificate would be issued.

The approval process could be shorter as local governments have been working to streamline procedures. It would take 19 working days to obtain an export license certificate in Beijing after documents were filed, authorities said.

ByteDance has not announced whether it has filed any application.

In any case, this would make it nearly impossible for ByteDance to reach a deal on TikTok that included technology transfer before the September 15 deadline set by US President Donald Trump.

Trump said on Tuesday that if TikTok’s US operations were not sold by mid-September, “we close it up in this country”.

If ByteDance decides to strip out sensitive technology from a potential deal, it would start a burdensome process of defining what would be excluded and how the exclusions would affect the value of a deal.

Michael Priem, the chief executive of Minneapolis-based tech agency Modern Impact, said the most valuable part of TikTok for potential buyers is “the installed base of the fastest social growth platform” and maybe “their artificial intelligence”.

In addition, even if Beijing were to ban the transfer of ByteDance’s technologies to the US, a new owner of TikTok could find alternative suppliers since “there are some best practises that have proven to be some standard protocols”, Priem said. “I don’t want to say they’re completely commoditised, but they’re not something that only TikTok and ByteDance would understand or have.”

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The Chinese government has not announced it would demand ByteDance immediately file an application for a potential deal, although the Xinhua News Agency quoted a government adviser as saying the company should “seriously and carefully” consider suspending talks with potential bidders as a result of China’s update of the technology export control list.

The intervention of the Chinese government came after the Trump administration issued an executive order on August 14 demanding that ByteDance divest its US TikTok business or face a shutdown.

In addition to Beijing, other stakeholders jostling to decide the fate of TikTok in the US include the Trump administration, which is trying to cut the links between the app and its China roots; the ByteDance management team led by Zhang Yiming that is trying to keep TikTok in operation and maintain some control; a group of TikTok investors who are scrambling to avoid a total US ban; and number of bidders from Microsoft-Walmart and Oracle.

The Chinese government had been relatively silent on the TikTok issue until this past weekend, although China’s foreign ministry has repeatedly voiced complaints about the Trump administration’s targeting of Chinese firms.

However, ByteDance, and its founder Zhang, have been accused at home of being too accommodating of the US attempt to “steal” TikTok, which has more than 100 million American users.

The ByteDance source said Beijing’s intervention dovetails with a decision by management to fight for the app. In late August, TikTok filed a lawsuit against Trump’s order to ban the app.

“For investors, the worst scenario would be a total ban of TikTok in the US,” the source said. “For ByteDance, the loss of the TikTok’s US market would be bearable because its key market is in China. And for the Chinese government, the worst case is if Washington were able to easily seize a Chinese asset.”
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Zhou Xin co-leads the political economy team at the Post. Robert Delaney is the Post’s North America bureau chief.