Commentary on Political Economy

Sunday, 9 August 2020


TikTok’s Fate Is a Bad Sign for China’s Rise

The government’s actions could deny Chinese companies the benefits of competing globally. 

The Trump administration is forcing a sale of TikTok to a U.S. buyer.
The Trump administration is forcing a sale of TikTok to a U.S. buyer. Photographer: Hollie Adams/Bloomberg

It’s starting to look like the biggest obstacle to China’s rise as a global technology superpower may well be its own government. As long as countries around the world mistrust China’s Communist regime, they will worry about Beijing using mainland companies to gather data on users, shape media content and interfere with critical infrastructure. If those companies in turn aren’t allowed to expand globally, China could find itself stuck in an increasingly uncompetitive bubble.

That’s what’s so dangerous about the travails of Chinese apps TikTok and WeChat, as well as companies such as telecom giant Huawei Technologies Co. On Thursday, President Donald Trump issued executive orders giving anyone subject to U.S. jurisdiction 45 days to stop dealing with TikTok’s Beijing-based parent, ByteDance Ltd, as well as internet giant Tencent Holdings Ltd. in transactions related to its WeChat app. (Microsoft is aiming to buy TikTok’s U.S. operations before the deadline.) This follows an outright ban on TikTok and WeChat in India.

Meanwhile, last month the U.K. became the latest country to bar Huawei from its 5G telecommunications networks. And the Trump administration seems intent on going further yet. Last week, U.S. Secretary of State Mike Pompeo announced an initiative that suggests the administration’s end goal is to scrub Chinese tech from U.S. communications networks entirely.

At home, China has poured billions into supporting favored sectors from chips to electric cars in an effort to promote self-sufficiency and build the country into a technology powerhouse. One school of thought argues that more Western pressure will only accelerate China’s technological progress, as Beijing doubles down on these state-led programs and fires up nationalist fervor among tech entrepreneurs.  

But that ignores how much China will lose if its companies can no longer access global markets. Other emerging economies that graduated to rich-world status all benefited immensely from having their companies compete abroad. South Korea would not be the wealthy nation it is today if Samsung Electronics hadn’t grown into a global leader in smartphones and chips. Part of the reason is simple scale: The capital required to compete in semiconductors, for instance, is so massive that investing in the industry is much more viable when a company can tap into global demand.

Even more importantly, the imperative to export exposed Samsung and other Korean companies to the rigors of global competition from an early stage. Samsung, initially a low-cost producer of cut-rate electronics gear, made its leap into high-quality digital products under pressure from cost-cutting Japanese competitors. The more advanced Korean companies became, the more progress the entire economy made. Compare the sharp rise in Korea’s GDP per capita to the more sluggish arc in Malaysia, an economy that has not managed to become as innovative.

The need for a global presence is as important in the digital age as in the industrial. Reaching an international audience provides apps with opportunities to amass users, advertising and, most critically, data — the lifeblood of new tech. Clearly, investors think so. Shares of Tencent plunged Friday after the executive order was released.

Granted, China’s domestic market is so huge that it can sustain large-scale tech businesses that smaller economies can’t. ByteDance will probably survive quite nicely on the 400 million users of TikTok’s Chinese sister app, Douyin. Nor will all countries be offended enough by China’s authoritarian political system to ban its technology. Fifty-three United Nations members supported the controversial national security law Beijing recently imposed on Hong Kong.

Yet, as research firm Capital Economics noted in a recent report, those 53 nations together account for a feeble 4% of world gross domestic product. One reason the U.S. has retained its dominance even as its share of global economic activity has shrunk is because the world is still running American apps on gadgets powered by U.S. operating systems and chips. If Chinese companies are locked out of major foreign markets, China could get stuck as a second-class technological power, unable to set standards for the rest of the world.

Worse still, China could fall into its own version of the Galapagos Syndrome, often associated with Japan’s famously insular mobile phone industry, whose products were so localized they couldn’t survive anywhere else. China might well become its own technological island, in which Chinese use chips, operating systems and smartphones that most of the world’s consumers don’t. These industries could become so embedded in the local market and disconnected from outside trends that they simply become uncompetitive.

Already, given the Great Firewall and Beijing’s strict censorship rules, China has its own version of the internet, with popular services at home having almost no influence abroad. The government’s goal of achieving self-sufficiency in technology will only add more pressure on Chinese companies to buy local, even over more cutting-edge foreign products.

Without foreign markets, companies would also face more burdensome research and development costs. Truly global enterprises can amortize R&D costs over a worldwide business. Bottled up at home, Chinese firms would have to absorb similar expenses without the international payoff. Or they might not be able to afford the costs of innovation to catch up or keep up with foreign rivals.

China might then fall further and further behind the U.S. and Europe, subsisting at an overall lower level of technology. That’s hardly the glorious future Chinese leaders are promising. They should remember that, in this new digital age, a state striving to maximize its power could easily erode it instead.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

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