China Saving Face on TikTok
Today: TikTok can’t sell its algorithm, what that says about China, my likes/dislikes, the new ‘Postscript’ section.
The Agenda 👇
Beijing finally reacted to Trump’s TikTok ban
Bessemer’s selection of investment memos
Remote work has a bright future
Reliance/Jio Platforms (cont’d)
Tesla is not a blue chip (yet)
GOP Senator censoring French movies
Dominic Cummings alive and kicking
On picking topics for European Straits
The first articles about China potentially barring the TikTok algorithm from being sold to a US acquirer were published about 10 days ago. My prediction at the time was that the TikTok issue would lead to diplomatic negotiations rather than traditional M&A deal making. But I was wrong. It appears the sale of TikTok will indeed be forbidden by the Chinese authorities. Still, it doesn’t seem there will be any bilateral talks on the matter. Instead, this is what happened:
First, the Chinese ministry issued a revised list of prohibited and restricted tech export items, calling it a “routine adjustment.”
Then, per The New York Times, “the country’s official Xinhua news agency published commentary by a professor who said the new rule would mean that [TikTok’s] parent, the Chinese internet giant ByteDance, might need a license to sell its technology to an American suitor”.
Then ByteDance, TikTok’s parent company, issued a press release stating they would “strictly comply with” the new regulations.
To my knowledge, at no point has any high-level official voiced China’s position on the particular issue of the TikTok ban in the US. Instead, they just framed the context to make their position clear. And if anyone missed it, Xi Jinping just spoke about “Five things he pledged never to allow the US to do”—all without ever mentioning TikTok of course.
Quite simply, for China, acceding would mean losing face. Reading all that, any person familiar with Chinese culture and society sees that TikTok could never be sold to a US company, precisely because Trump ordered it! And that’s the one thing that can’t happen in Chinese culture, as explained by Sean Upton-McLaughlin in his excellent China Culture Corner:
To the Chinese, there is a natural order in society as well as business, and if one is unwilling or unable to show the proper amount of face to those that feel they deserve it, then one will likely be judged to not have good character. This has the potential to wreck business deals and sour relationships, so with regard to the issue of Face, most Chinese [people] tread with care.
Even worse, it would mean reliving the old times of the unequal treaty. The whole of China’s foreign and economic development policies over the past seven decades has been about taking revenge on the West for having humiliated China back in the 19th century. And, in a way, it’s well deserved. If you don’t know why, watch this excellent video primer by Vice UK on “How Britain Got China Hooked on Opium”:
Still, the latest twist took more than one person by surprise. A few days ago, Yuan Yang of TheFinancial Times was writing about the Chinese government not caring that much about TikTok. Supposedly Huawei was a big deal for Beijing, but not TikTok. Well, that didn’t account for the importance of saving face. In the end, Beijing did everything in its power to slow things down.
But, wait, isn’t TikTok ceasing operations in the US a problem that would require swift action and resolution on the part of the Chinese government? Again, no—that doesn’t resemble the Chinese approach to me. From a Chinese perspective, negotiating with Trump to try and solve the TikTok problem would only lead to more problems in the future. On that front, a clear explanation is provided by Henry Kissinger (I’ve quoted him many times on that using this video interview):
Americans think a stable world is normal. And so, when the world isn’t stable, then it’s a problem. And if there’s a problem, you solve it, and then you go on to something else.
Chinese leaders think that resolution of a problem is an admission ticket to another problem. So almost every Chinese leader that I’ve ever met has wanted to think, in a conceptual way, of policy as a process rather than as a program.
Then there’s the idea that because China is barring the sale of the algorithm, banning TikTok was the right thing to do—because the whole thing suggests the algorithm is indeed a national security threat for the US (this idea was expressed by Ben Thompson here). I’m skeptical. For me it’s clear that the refusal to be humiliated is a greater motivation here. In addition, as explained by Fortune’s Clay Chandler, it’s a way for Beijing to remedy TikTok’s founder's unusual independence when it comes to the CCP.
So where do we go now? It’s perfectly possible that the parties settle on another kind of deal (like having a US company take a controlling minority stake in TikTok and ensuring the data storage).
Indeed,The Wall Street Journal has an article about the current discussions between ByteDance and the Trump administration, with this incredible conclusion that Trump might relent because TikTok serves a big chunk of conservative users, and that ByteDance might be using this information to flatter him. (We’re really in banana republic territory.)
In making its case for an alternative to a sale, ByteDance is trying to illustrate to the Trump administration that shutting down the app also carries risks—including by arguing that a sizable percentage of its users skew politically conservative, some of the people said.
And this, by the way, is all in the context of China maybe wanting Trump to win a second term. Have a look at this excellent article by James Crabtree about other Asian countries applauding Trump’s tough stance on China. Europe, too, is breaking away from China (even though it can’t wait for Trump to disappear from the global stage). But China, interestingly, might also be favorably disposed to Trump winning a second term. This hypothesis was recently discussed by ChinaTalk’s Jordan Schneider:
CCP regime stability trumps all else. What supports that pursuit is primarily strong economic growth, but the CCP’s grip on power gets a boost from the rally round the flag effect that comes when America is seen to be directly opposing China. Second, Xi sees benefit to China in America losing its ideological luster and weakening its alliances.
As for me, I’m just sad that the most successful experiment in building a global tech giant outside of the US is likely to be cut short. What it means, as I said to Sébastien Ricci of the AFP, is that future generations of Chinese entrepreneurs will be less interested in global expansion and discovering related good practices, and we Europeans will lack their examples to follow.
About that, make sure to read Eugene Wei’s excellent TikTok and the Sorting Hat if you haven’t already.
More readings:
My take on All About the TikTok Ban (August 10)
Sara Fischer on Inside TikTok's killer algorithm (Axios, September 10)
😀 Just two days after I sent my Memo About Writing Investment Memos, Bessemer Ventures released an archive of a dozen landmark investment memos, including LinkedIn, Twilio, Shopify, and Twitch. Definitely worth a read!
🙂 Deel, a company co-founded by French-Israeli entrepreneur Alex Bouaziz, just raised a Series B only months after raising its Series A from a16z. It reveals the critical legal and tax issues employers have to deal with in the world of remote work. Here’s my recent podcast interview with Bouaziz (in 🇫🇷).
😏 And now, on to retail 🇮🇳 After welcoming prominent investors into the cap table of telco behemoth Jio Platforms, India’s Reliance Industries is now replicating the move for its retail arm. This time there have been reports of a $1B investment by Silver Lake, and a potential $20B investment by Amazon!
😐 Tesla missed being included in the S&P index, despite becoming the most valuable car company on Earth. Many observers are wondering why. Here are potential explanations by Bloomberg’s Chris Bryant, Fortune’s Anne Sraders, and The Wall Street Journal’s Charley Grant.
😒 Another sign of the Great Fragmentation: Now a conservative US Senator (Josh Hawley) is asking Netflix to censor a French movie (“Cuties”), “a controversial coming-of-age film from France”—which depicts “the pressure young girls face on social media and from society more generally growing up”.
😖 Dominic Cummings has rearticulated his idea that Brexit is about unshackling the UK and making it possible for Britain to support its local champions. Meanwhile, the UK is fine with the SoftBank owned-Arm Holdings being sold to US semiconductor giant Nvidia. (Also: this about startups in the UK.)
On picking topics
When I announced the switch to 5 editions a week, I made it clear that one of the motives was wanting to cover more topics with shorter essays. At the same time, I was starting to use Notion to build the European Straits archive. And so I simply added another (private) folder in Notion to manage daily tasks, including planning editions of European Straits. I use the ‘Kanban View’ (or ‘Board View’) so as to distribute topics in three buckets: ‘Ideas’, ‘Drafts’, and ‘Published’.
‘Ideas’ obviously contains all the essay ideas that come to me while reading articles and books, or while talking with other people. Each idea could become a potential essay. Sometimes it’s something very precise that I’ve been working on for a long time; in other cases it’s very vague. There are currently 40 ideas in that bucket. Each item is a page in Notion, so I can add notes and links as they come, forming the base for drafting an essay.
‘Drafts’ contains scheduled editions of European Straits. I move an item from ‘Ideas’ to ‘Drafts’ by rolling a die (this random approach to organizing my work has been my practice from my days spent as a teenager on role-playing games). Sometimes I move the item back to ‘Ideas’ if the topic proves too difficult to work out over a short period of time, or if I need to make room for something that came up in the news (such as China’s export list 😜).
Then an item is moved to ‘Published’ once it’s actually published on Substack. (I write on Google Docs rather than Notion because it makes it easier to share drafts.)
Questions? Remarks? Feedback? Interested in a reading list on a given topic? Just reply to this email!
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From Normandy, France 🇫🇷
Nicolas
