Aug 14, 2020 08:16 PM

Opinion: Why Selling TikTok Is ByteDance’s Only Option

Game theory offers a lesson to the besieged company.
Game theory offers a lesson to the besieged company.

Zhu Ning is a professor of finance and deputy dean at the Shanghai Advanced Institute of Finance at Shanghai Jiao Tong University. He is also a fellow at Yale University and a columnist for Caixin Media.

U.S. President Donald Trump issued an executive order last week banning American residents and companies from doing any business with TikTok’s parent ByteDance Ltd. in 45 days, arousing heated discussions in China on how ByteDance would respond to the order.

Apart from the widespread criticism over the U.S. scuttling Internet freedom and globalization with a double standard, some people in China also criticized ByteDance for not being tough enough to stand up to Washington’s pressure and Trump’s order. Some even blame the company’s strategy of going global for attracting Trump’s heavy-handed move.

But first of all, we must wake up to the fact that the ability of almost any business is weak and limited compared with that of the state machine.

The primary duty of any enterprise or entrepreneur should be to provide products and services, grow the business, bring returns to shareholders, create jobs for the community and meanwhile drive the country’s economy. To impose excessive political or moral requirements on them, however, may not only affect their normal operations and financial considerations, but even jeopardize the health and growth of their business.

The globalization strategy of Chinese companies has drawn a number of criticisms domestically for some time. Those criticisms undermine the companies’ globalization and the sustainable high-quality development of China’s economy, as well as the competitiveness of those companies and their investment returns to Chinese households. Worse still, they may also politicize normal businesses, creating greater difficulties and risks in the future for Chinese companies operating overseas.

More importantly, the Covid-19 pandemic this year has further stepped up the de-globalization process as countries around the world are becoming more hostile to foreign companies and goods. If China joins in with the criticism of globalization at this time, it will not only stymie the internationalization of Chinese companies and economy, but also impede China from displaying its technological progress to the world.

Indeed, any company going global will inevitably encounter risks and challenges it never faced domestically. Some nonbusiness factors such as national security could mean the larger, more influential and cutting-edge a company is, the greater difficulty it will face expanding globally.

In light of the radical changes in the China-U.S. relationship, how to make the best possible decision with insufficient information is probably the most important question for ByteDance. Game theory offers a lesson to the besieged company.

Simply put, the basic idea of game theory is to consider the decision-making process in a dynamic and interactive context. Just as a chess player has to think about the possible coming steps of his or her opponent, business decision-making and government policymaking must also ponder the responses of the parties involved as well as what new opportunities and challenges these responses will bring to their decisions. In a sense, game theory is a bit like what we call “empathy” in our daily life, in which we try to understand others as accurately as possible and to adjust what we say and do accordingly.

According to game theory, when evaluating the multiple choices it may have, ByteDance needs to consider not only its own goals and the immediate consequences of its decisions, but also the goals of its opponent, the message its actions may send to the U.S. government and Washington’s possible policy responses in future.

Looking at Trump’s moves over the past year, the possible goal of many of his policies is to gain political capital for the presidential elections in November by cracking down on China and Chinese companies. Restricting TikTok’s operations in the U.S. or requiring the company to sell them may not be Trump’s ultimate goal, but merely an intermediate step of his often-used “maximum pressure” strategy.

Trump’s ultimate aim is more likely to ban TikTok’s global operations and thus prevent ByteDance from becoming a globally influential company, or at least increase his reelection odds by hitting the Chinese company. The protests and negotiations from the Chinese side will just provide an excuse for Trump to start a new round of sanctions.

The goal of ByteDance, by contrast, is probably to build a Chinese company with global reach. The U.S. business is certainly an important part of TikTok’s global landscape. But if the company fights back with drastic measures such as waging a public opinion war in America as some have suggested, it may help Trump earn more political capital in his campaign and boost his reelection bid in November. Moreover, it could also trigger harsher sanctions from the Trump administration, jeopardizing TikTok’s business around the globe.

ByteDance probably has three main choices on the table now.

The first is to accept Trump’s executive order and to withdraw completely from the U.S. market. The second is to operate normally while challenging the presidential order. The last choice is to seek opportunities to divest its U.S. operations at a reasonable price.

The first option is clearly fully in line with Trump’s order and thus the U.S. shouldn’t impose additional sanctions. But the cost is that ByteDance will not only forgo an important overseas market and profit opportunity, but also fail to receive any return or compensation for its past financial investments and business operations there. Therefore, the first option is not attractive from a finance, strategy or brand image perspective.

The second option, which ByteDance mentioned in a statement (link in Chinese) Friday, is to resort to legal action and thus secure its legal rights and get fair treatment. This proposal is reasonable and consistent with the principal of American judicial independence. But will it be strong enough to reverse the attitude of the Committee on Foreign Investment in the U.S. (CFIUS) and Trump’s order? Perhaps we must first discuss the status and role of CFIUS and the legal status of presidential executive orders.

CFIUS, chaired by the U.S. Secretary of the Treasury, is an interagency committee of the U.S. federal government that reviews foreign investments in U.S. companies or operations, especially in sensitive sectors. The establishment of CFIUS in 1975 and the expansion of its power in 1988 were both related to the massive investments and acquisitions made by Japanese companies at the peak of their asset bubble in the U.S. One classic case was the attempted takeover of American chip company Fairchild by Japanese company Fujitsu.

But over the past decade, most cases received or followed by CFIUS have been about Chinese firms. The trend is certainly related to investments from China and Japan in the U.S. themselves, but it probably also reflects America’s serious concerns and fears over the strategic implications of those foreign investments.

Since part of TikTok’s American business comes from Inc., which Beijing-based ByteDance purchased in 2017, it involves a Chinese corporate investment in the U.S. and is therefore subject to CFIUS approval. ByteDance did not notify the committee of the acquisition at that time because was then a company founded, headquartered and operating mainly in the Chinese city of Shanghai. Its controlling shareholder was also Chinese and the company was not in a sensitive industry of “national security” concern for CFIUS.

But CFIUS can still review transactions that are not voluntarily submitted to it. Based on Trump’s statements and the recent U.S.-China saga, it is very likely that CFIUS will veto the acquisition.

Hardly any company has successfully fought a presidential or CFIUS decision under the Exon–Florio Amendment of 1988, which expanded the power of CFIUS and made the president’s decision to suspend or prohibit a foreign transaction “not subject to judicial review.” In other words, even if ByteDance appeals, the odds of changing a CFIUS decision will still be slim to none.

As a result, the second option, though seemingly much tougher, is very likely to have the same outcome as the first. Even worse, ByteDance’s protest could trigger increased restrictions and sanctions from Washington, affecting its valuations and earnings when it divests its U.S. business later.

Perhaps that is why ByteDance has been actively discussing and pursuing the third option — selling its U.S. operations at a reasonable price — over the last few weeks. Trump’s latest presidential orders on TikTok and WeChat have also confirmed ByteDance’s previous judgments on how Washington might react — making it pretty clear that the third option was always probably ByteDance’s only choice.

Is it possible for ByteDance to overturn a U.S. presidential executive order through the U.S. justice system? The answer is also negative. Such an order issued by the president of the United States is a means for him to exercise executive power. Its legal basis lies in Article Two of the U.S. Constitution, which grants the president wide executive discretion.

U.S. presidential executive orders are usually directives for administration officials to enforce laws or allocate resources. Those orders nearly have the force of law unless the U.S. Congress says they violate the constitution or the law. Trump has issued a total of 179 executive orders since he took office, far fewer than the 3,522 orders signed by President Franklin D. Roosevelt.

The U.S. Congress has the power to overturn an executive order by passing legislation that invalidates it or by refusing to provide funding necessary to carry out certain policy measures contained in the order if it is unconstitutional or unlawful. But that has only happened a few times in history. Given that Trump’s Republican Party now controls the U.S. Senate, the chance that Congress will overturn his order on TikTok is very slim.

Meanwhile, Trump’s executive order on WeChat and U.S. Secretary of State Mike Pompeo’s announcement of a “Clean Network” program last week both show that Washington is still putting pressure on Chinese tech companies. What ByteDance faces today may just be the beginning. Perhaps it is an assessment of the current political climate and Washington’s possible future policies that is pushing the company to make its decision to divest its U.S. business as quickly as possible.

Just as some Americans want ByteDance to keep operating TikTok in their country, some Chinese also hope the company could fight Washington more aggressively. But regardless of the opinions of individuals, the mission of businesses and entrepreneurs remains to make a profit by providing goods and services. Ignoring the basic principles of economics and trying to use public opinion to drive government policies or business decisions could unexpectedly sadden friends and gladden enemies. As the saying goes: “A person often meets his destiny on the road he took to avoid it.”

Translated by intern reporter Ingrid Luan.

The views and opinions expressed in this blog section are those of the authors and do not necessarily reflect the editorial positions of Caixin Media.

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