SCMP Columnist

China Briefing

by Wang Xiangwei

China Briefing

by Wang Xiangwei

An Oracle-ByteDance deal for TikTok gives Huawei a glimmer of hope

US sanctions and Nvidia’s planned takeover of British chip firm Arm mean the future of China’s 5G champ remains uncertain
But the partnership model envisaged in the TikTok deal offers a potential way forward for Chinese tech firms hoping to expand in the West

Wang Xiangwei

Published: 9:30am, 19 Sep 2020

Why you can trust SCMP

On September 15, both hope and fear were in store for Chinese executives with an interest in the intensifying US-China battle for technological supremacy.

As US sanctions went into effect that day, China’s telecom giant Huawei was cut off from essential supplies of semiconductors, without which it cannot make its smartphones or 5G equipment. Its future remains uncertain as it expects to run out of chips kept in reserve before the end of next year.

Adding to the woes of Huawei and other Chinese tech companies was the announcement last Sunday that Nvidia, a US technology company known for specialised graphics chips for gamers and servers, would pay US$40 billion for the British chip designer Arm. If Arm becomes a US company, it will give the US government further leverage to restrict the access of Huawei and other Chinese companies to mobile computing. Arm’s chips, which are installed in most of the world’s mobile phones, are independent of American chip-making technology.

Nvidia’s acquisition of Arm throws company into tech spat between US and China

But a glimmer of hope came on news reports that TikTok, the wildly popular Chinese-owned video app, would be allowed to continue operating in the United States for now.

On Friday, US authorities said TikTok downloads and updates would be blocked from Sunday, and users would be able to continue using the app until November 12, effectively extending the deadline for a deal.

TikTok, WeChat bans starting Sunday will be limited in scope

Since then, a flurry of activities has heightened expectations that a proposed deal between ByteDance, the owner of TikTok, and Oracle, a US software giant, could help the app avoid the ban or a forced sale previously demanded by US President Donald Trump on national security grounds.

Much of the deal remains unclear as ByteDance and Oracle executives have been scrambling to make compromises to satisfy the demands of US regulators over security and ownership issues before the initial September 20 deadline.

01:46

Oracle reaches deal to become TikTok’s ‘technology partner’, after Microsoft offer is rejected

Still, according to the broad contours of the deal, as reported in the American media, ByteDance would be able to remain the majority shareholder in a new entity incorporating TikTok’s global businesses, with Oracle taking a minority stake and acting as the “trusted technology partner” to ease the concerns over national security. Walmart, the US retail giant, is also expected to take a stake. ByteDance has agreed to move TikTok’s global headquarters to the US, where it would create up to 20,000 new jobs.

To further ease US concerns over ownership, ByteDance planned an initial public offering of TikTok Global on a US stock exchange, CNBC reported on Thursday, citing sources. Trump said on Wednesday he objected to the proposal to let ByteDance retain the majority stake in TikTok.

CNBC reported that the US Treasury Department sent major revisions regarding security issues on the proposed arrangement between TikTok and Oracle on Wednesday night, and ByteDance had fully agreed to those revisions.

A sign for ByteDance’s app TikTok at the International Artificial Products Expo in Hangzhou, China. Photo: Reuters

The deal would enable ByteDance to continue to ride on the success of the app, which has more than 100 million users in the US alone, and keep control of the algorithms and artificial-intelligence technologies that power TikTok. More importantly, it would keep alive ByteDance founder and CEO Zhang Yiming’s dream of building the company into a global digital powerhouse.

It is far better than ByteDance’s previous plan to discuss a sale of TikTok’s US operations to Microsoft, not least because of the concerns over a cheap sale.

If Beijing wants an innovative economy, it must free Chinese minds

There were reports of disagreements among Trump’s top advisers. Treasury Secretary Steven Mnuchin reportedly supported the proposed deal while China hawks, including Secretary of State Mike Pompeo, and a group of Republican senators, including Marco Rubio, have expressed misgivings.

At the time of writing, it remains unclear which way Trump will go but there should be valuable lessons for those Chinese tech executives and officials closely watching the TikTok saga.

00:30

‘There will be no extension of the TikTok deadline,’ says US President Trump

More than anything, the proposed deal could help show the way forward for other Chinese tech companies, including Huawei, on their overseas expansions in the US and other Western countries where they face a similar quandary.

Citing concerns over data protection and spying on behalf of the Chinese government, the Trump administration has cracked down on Chinese hi-tech companies, including Huawei, ZTE and messaging app WeChat.

Last month, Trump ordered ByteDance to sell TikTok’s US business to an American company or face a ban. The TikTok-Oracle partnership can shine a light on how to pass muster with foreign regulators over data-protection concerns by teaming up with dominant software companies which have a proven record of possessing technology to safeguard data.

In the case of TikTok, it has repeatedly insisted it would not hand over users’ data to the Chinese government and has stored the users’ data in servers in the US, with a backup in Singapore. But data security has continued to be a point of contention.

US President Donald Trump had ordered ByteDance to sell TikTok’s US business to an American company or face a ban. Photo: EPA

However, having a partner like Oracle to process and secure the data from perceived Chinese influence has done more to convince the regulators. Apparently, Oracle’s close ties with the Trump administration are a plus. Larry Ellison, the tech giant’s co-founder and executive chairman, has been a vocal supporter of Trump, and Oracle CEO Safra Catz and the company’s top lobbyist, Ken Glueck, were on Trump’s transition team in 2016.

This could even serve as an example for the telecom giant Huawei, the world’s leader in 5G, the next generation of wireless technology.

The US government has seen curtailing Huawei as the epitome in its battle for technological supremacy with China. In addition, it has been putting relentless pressure on its Western allies to ban the Chinese company over allegations that its gear could be used to spy on their citizens.

Huawei has consistently denied claims that it could provide Beijing ways or back doors to spy or disrupt data but it has failed to allay concerns. Australia and Britain have banned Huawei from building the country’s 5G network, and other Western countries are also weighing their options carefully.

03:07

Stop offering ‘untrusted’ Chinese apps like TikTok and WeChat, Washington urges US tech companies

On Thursday, the Canadian newspaper The Globe and Mail reported that Huawei Canada had put together a legal agreement between the company and the federal government that outlined a “no-back door and no spying” pledge as it tried to avoid being banned from Canada’s 5G network.

But Huawei’s arguments would be more likely to persuade foreign governments to choose its gear and services if the company could take reputed foreign telecom companies as technology partners or joint venture partners in the countries where it wanted to build 5G networks.

Moreover, as Huawei searches for ways to survive the US sanctions, Huawei group as a whole – which claims it is a privately held and employee-owned company – could greatly improve transparency and boost chances of acceptance by restructuring as a joint venture entity with prominent foreign businesses.

Another alternative is for the group to seek an initial public offering, which would help clarify its finances, governance and ownership structure. In the past, Huawei founder Ren Zhengfei has repeatedly said the company would not go public and would remain a closely held entity.

Under US pressure, China is planning an economy that can survive a protracted war

At a time when Chinese hi-tech companies face increasing regulatory hurdles over data or transparency concerns in their overseas expansions, the TikTok saga certainly provides plenty of food for thought. ■

Wang Xiangwei is the former editor-in-chief of the South China Morning Post. He is now based in Beijing as editorial adviser to the paper

Post