Caixin
Jul 08, 2020 05:52 PM
TECH TALK

China Becoming a Land of High-Tech ‘Rebels’ and ‘Mutants’

Think back to your elementary school days when there was always that one kid with the weird parent. Maybe it was something small, like the parent dressed strangely. Or maybe it was something bigger, like the parent was an ultra-disciplinarian. The bottom line was the same: nobody wanted to play with that kid, even though they may have been perfectly normal.

That metaphor is quite fitting for the current state of affairs in China’s high-tech realm, where a host of otherwise promising names like ByteDance and Huawei are quickly becoming outcasts in the global schoolyard due to their odd Beijing parent.

Huawei has been getting ostracized for more than a year now by the playground bully, the U.S., which is leaning heavily on other Western countries not to buy the tech giant’s 5G equipment. But Huawei has always been slightly hobbled by the fact that its founder, Ren Zhengfei, is a former member of the People’s Liberation Army. It also doesn’t help that he comes from an older generation that often sees the state as a sort of “elder brother” they would never dare to challenge.

None of that can be said of the much younger ByteDance, however, and its founder Zhang Yiming, 37, who grew up mostly in China’s internet age and well after the “iron rice bowl” era had ended. Yet despite that youth, the crown jewel of Zhang’s empire, the short video app called TikTok, has suddenly become a lightning rod for foreign governments and their fears and uneasiness towards Beijing.

TikTok, which goes by Douyin in China, has been in nearly nonstop headlines these days, as it’s arguably the first made-in-China internet story that’s found widespread success globally. The app currently has hundreds of millions users outside China, including at least 120 million in India and anywhere from 30 million to 80 million in the U.S., which are two of its biggest overseas markets.

Things started getting tough for TikTok last year when U.S. politicians began raising concerns about the company’s ability to protect user data, with the heavy implication that it might hand over such data to central authorities if requested to do so. Last week the problems spread to China’s neighbor India, which banned TikTok along with 58 other Chinese apps in the country after a brief flare up in the two sides’ decades-long border tensions.

Now, the U.S. is making noises like it could follow India’s lead and ban TikTok outright. First U.S. Secretary of State Mike Pompeo hinted that such a move was being considered, and President Donald Trump was quick to confirm that was indeed the case.

Some might say this is all Trump’s doing, since Huawei’s blacklisting by Washington last year and now TikTok’s potential U.S. ban have all occurred under his watch. But I would argue this misses the point. The fact is that the U.S. has blocked its major domestic carriers from buying Chinese networking equipment for nearly a decade. The only difference now is that Trump has become a very vocal global voice for the same kinds of national security concerns that have been expressed all along.

Rebels or mutants?

All that said, I’ll spend the second half of this column discussing whether concerns being expressed by the folks in places like New Delhi and Washington are legitimate. Then I’ll close with a look at how things are likely to play out, which could see China’s big internet names ultimately emerge as either high-tech “rebels” or “mutants.”

We’ll begin with the first point, which centers on the question “Why all the fuss?” There really was no such fuss for the first 30 years of China’s opening-up era, since the only thing the country sent abroad during that time was low-end manufactured goods like clothing and tchotchkes that were extremely low-tech and hardly the stuff of high-drama spy novels.

But then Huawei began to get noticed in the second decade of the 21st century as it muscled out older names like Motorola, Ericsson, Alcatel and Lucent to become a major supplier of top-notch equipment at very competitive prices. That became troublesome for security-minded people in Washington, since such Huawei equipment being deployed at the core of many countries’ telecom networks could theoretically be tinkered with to allow for eavesdropping.

Nobody that I’m aware of has found any evidence of such backdoors to date, at least not that they’ve shown publicly. Cases of Chinese companies giving user information to central government authorities in Beijing have occasionally come to light, but nearly all have involved people and instances in China. What’s more, Western governments also frequently request such information from their domestic companies when they suspect crimes.

Still, the fact that Chinese companies comply with government requests with little hesitation, since they really have no recourse like an independent judiciary, can hardly be reassuring for foreign governments. Personally speaking, I really couldn’t imagine Huawei or ByteDance refusing to carry out a government order. So in that regard, concerns by foreign governments are probably within the realm of reason.

That will leave Chinese companies with two choices. Either they go along and comply with Beijing’s wishes, in which case they will probably be shunned outside China forever and will evolve into “mutants” that can only survive in China’s unique high-tech landscape; or they can take a very public stand about asserting their lack of ties to Beijing and perhaps even go so far as to move their headquarters offshore to stay out of Beijing’s legal grasp. In that case they become “rebels” that are pushing back against their odd parent.

ByteDance is already taking some of the “rebel” steps I mentioned by trying to build firewalls between its China and offshore operations. I could even envision Zhang someday moving his company’s headquarters offshore, for example by creating a holding company in a more neutral territory.

But only the boldest and most progressive companies are likely to take that path, and could easily get their wings clipped for their efforts. At the end of the day, I do expect to see ByteDance take some unusual and perhaps radical steps to try and salvage its early global success.

One or two others like Tencent may follow suit if they start to find their own global success as well. But for the most part, China’s high-tech realm, especially the internet, will probably belong to the home-grown “mutants” for the foreseeable future, since few foreign firms will want to venture inside this unusual market and none of the Chinese names will have what it takes to survive outside.

Doug Young has lived in Greater China for two decades, including a 10-year stint at Reuters, where he led China corporate news coverage. Send your questions or comments to DougYoung@caixin.com

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