For the past few months, the US and China’s spat has made frontline news every once in a while. When it came to corporate entities that were suffering the blow, you usually heard of Huawei and Huawei and Huawei.
I know our emphasis on Huawei sounds unreal but let’s think about it. In this year alone, US has imposed visa restrictions on some Huawei’s employees, led a largely successful effort to convince US allies to remove Huawei from their 5G networks, accused Huawei of enabling human rights abuses and cyber espionage, and has gladly begun to cut Huawei’s link with US companies by requiring US government contractors to prove that they have no financial ties with Huawei. So, you see, Huawei has had its fair share of US bashing this year.
But since July, the White House has slowly ramped up its efforts to curtail Chinese mobile apps and cloud computing services too. This week, these efforts built to the US threatening to limit cloud computing groups like Alibaba that operate in America. This threat against US cloud computing services has meant that whilst most Chinese cloud computing services in the US have usually been used by Chinese customers, more US businesses have grown more unwilling to consider using services from Chinese companies such as Alibaba and the like.
The US curtailing decoupling efforts against Chinese tech companies have also built up to the US ordering American companies to stop dealing with ByteDance (the Chinese owner of TikTok) and WeChat by September 15. For Tencent (the owners of WeChat) the order has wiped $47bn from the company’s value mainly because of market fears that the US may ban all transactions with Tencent. Definitely, these market fears are not unreasonable given that Trump seems to be coming for everybody and has got till November before the US Presidential election. Additionally, such a ban will effectively deliver a serious blow to Tencent’s US gaming business and may force it to sell its stake in US companies like Tesla, Epic Games and Spotify.
Leaving the uncertainty about the impact of US decoupling efforts on Tencent, for ByteDance we know that things are much more certain following news that Microsoft is negotiating to acquire TikTok’s global business. While this news came with initial opposition from Donald Trump against the deal, Trump has (in his classic way) reversed his opposition and perturbed a lot of observers by with an unheard-of demand that the US Treasury gets a “very large percentage” of the purchase price because the US is making the deal possible. It is interesting to see how this unheard-of mechanism will work as Microsoft have shown no qualms about making such a payment by responding with a blog post that “providing proper economic benefits to the United States, including the United States Treasury”. Surprising eh? But perhaps what is more surprising is why Microsoft is the front runner to acquire TikTok. I mean, Microsoft’s business-focused brand image is not exactly what TikTok is about. TikTok which is likely to cost Microsoft $34bn more than LinkedIn $26bn purchase price is more about memes, singing and dancing is not a natural extension of Microsoft’s legacy focus on corporate clients. It does not even fall in the category. But given, as FT explains, that Microsoft is sitting on $136bn in cash and we are in an era of near-negative interests rates, the opportunity cost of TikTok’s purchase is negligible and Microsoft’s close relationship with both China and US perhaps makes it the best-placed buyer.
While we wait to see the full extent of US new focus on Chinese mobile apps, other tech companies associated with China are aware that they are slowly being asked to choose sides. For one, it is hard to straddle both US and Chinese markets as a US tech company when the market is at the centre of tit for tat conflict and both sides are increasingly becoming increasingly incompatible. While the TikTok option of a Microsoft purchase is not available for all companies, for prominent companies it is clear that the new strategy may be for them to begin to separate the US and Chinese operations. But let’s see how this develops and most importantly how far China will retaliate in this saga.
In the meantime, the role of a lawyer will be helping their clients manage the risks that develop from this great tech decoupling. Most importantly, there will be a lot of consideration from multinational companies both in the tech space and outside of the tech space of how they successfully develop and manage a two-track Sino-American corporate strategy, diversify supply chains were needed, and divest their Chinese/American operations in the future if needed. This is except if you are Microsoft or ByteDance’s lawyers and you are trying to draft the host of agreements and ancillary documents that are needed to proceed with TikTok’s sale before the 15th of September deadline.
For Tom, Dick and Harry, their role will probably be to observe and wonder why we cannot all be friends. They will also wonder about how big tech companies have become arms of the state in disputes.