Governments are Cracking Down on TikTok and WeChat. Here’s What Smart Managers Can Learn From That.

Aug 10, 2020 - 5 minutes read time

Businesspeople have long despised politics. But “politics” is now shaping strategy. It affects boardrooms as much as assembly lines. The Trump administration is turning up the heat on TikTok and WeChat. An executive order will stop US companies from doing business with them. In 90 days, the Apple App Store won’t be able to feature the two Chinese apps. The administration has also recommended removing all Chinese companies from US stock exchanges unless they give US regulators full access to their accounts.

Thanks to the tight deadline, Microsoft is likely to snap up a crown jewel at a discount. TikTok remains the fourth most popular app in the world. Zhang Yiming, the chief executive of ByteDance, which owns TikTok, told employees he has no choice but to abide by US laws.

Trump also said the US Treasury should get “a very substantial portion” of the sale price. That’s “because we’re making it possible for this deal to happen.” The mechanics of this are unclear. But Microsoft said it “appreciates the US government’s and President Trump’s personal involvement.”

The Trumpeting of a National Purpose

The US government hasn’t intervened in business so forcefully since World War II. It’s one thing to demand that businesses be socially responsible toward local communities. But now it seems acceptable for the government to crack down on foreign companies and to profit from doing so. What the White House creating is a new norm around the world.

Governments everywhere now feel compelled to intervene in a company’s operations. Concerns include “privacy protection,” “national security,” “local jobs” or the “local economy.” India has already banned TikTok, WeChat and another Chinese tech company, Baidu. The UK is removing Huawei from its telecoms network. Japanese clothing retailer Uniqlo is closing stores in South Korea amid an ongoing trade dispute. Apple faces a Siri patent fight that may block iPhone sales in China.

Absent from these situations are intergovernmental organizations. The crackdown on TikTok and WeChat is driven by Trump’s executive order. The World Trade Organization (WTO) has mishandled trade negotiations for too long. It can’t meaningfully mediate between countries anywhere. This means the burden of doing business falls back on executives.

A Game of Chicken

Before the WTO, tariffs were everywhere. In 1963, for example, then US President Lyndon Johnson imposed a 25% tariff on light trucks imported to the US. This was payback for European tariffs on American chicken. Johnson signed the “chicken tax,” as the tariff on became known, just before the 1964 election. Members of the United Auto Workers union from Detroit were threatening to call a strike, and the tax gave them what they wanted. Sales of Volkswagen trucks and vans in the US plummeted.

Without the WTO to prevent this kind of dispute, companies had to come up with their own solutions. Mercedes was one that managed to avoid much of the pain. For years, the German automotive manufacturer disassembled its vehicle parts and shipped the pieces to South Carolina. There, American workers put them back together in a small kit assembly building. These vehicles were “locally made,” so they escaped the import tariff. The extra costs of this method were nothing compared to Mercedes’ profits.

How Managers Can Respond

Today’s economic and political dispute between the US and China make the “chicken tax” battle seem minor. The value of US imports at stake in the countries’ next negotiation is US$200 billion (£153 billion). Because of the trade hostilities, US-listed firms have lost some US$1.7 trillion of their value over the past two years.

One immediate consequence is that US companies are moving manufacturing activities out of China. Instead, they’re choosing places like Thailand and Vietnam and Bangladesh. The most successful executives recognize the need to align business practices with politics and switch to new operating models quickly.

Zoom, for instance, has stopped selling new and upgraded products directly to customers in mainland China. Instead, it’s shifting to a “partner-only model” in the country, outsourcing commercial activities to Bizconf Communications, Suiri Zhumu Video Conference and Systec Umeet. It’s the sort of partnership model that Microsoft also has in China for cloud-computing service Azure.

In the financial sector, stored data has become the most sensitive issue. In Europe, German and French officials are talking about creating a continental cloud service for banks. This service would be run by local tech companies. This move is part of Europe’s strategy for “ensuring technological sovereignty and reducing its dependence” on US providers. Countries no longer think it’s safe to just buy from Amazon, Microsoft, or Google.

All these things are extra burdens that executives who are already too busy have to think about. As I argue here, it’s now even more urgent to automate everyday decisions with AI. When everything is done manually, is it any wonder that many leaders are stuck clearing their email inboxes at midnight? With no time to think and no time to plan, no one can be ready for the future.

For TikTok, There is No Time

If TikTok disappears after September, it’s not because the company didn’t try. Long before Trump took notice, founder Zhang Yiming tapped Disney’s head of streaming. Kevin Mayer, to run the platform. If perception is reality, having an American CEO as the face of the company’s global operation is a no-brainer. But in this case, it’s more than window dressing. TikTok has been storing user data in servers located in the US and Singapore. That lets it boldly claim all its data centers are located outside China, and none of its data is subject to Chinese law.

To shore up this commitment, TikTok is opening a $500m data center in Ireland. At the same time, it’s talking with Microsoft about a potential buyout and with Twitter about a merger. It’s showing a lot of spunk for a company in danger of being crushed by a government. When the dust has settled, TikTok will at least be remembered as a heroic corporate player. It’s just one caught on the wrong side of history.

 

Stay healthy, 

Howard Yu signature

 

 

 

 

P.S. How do you think the internet will look in five years? Have geopolitics affected your industry? What role can a smaller economy play during rising tensions between China and the US? Let me know your thoughts in the comments below. Join the discussion.


Comments


2 comments

Z
Zachary C. Aug 14, 2020 at 3:01pm

Great interview Howard, thanks for sharing.

N
Nicholas Aug 14, 2020 at 1:48pm

Crisp and clear!

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