As the first Chinese-born social media app to become mainstream in the West, TikTok once served as a model for Chinese tech companies that wanted to go global. But as TikTok CEO Shou Zi Chew prepares to appear before Congress on Thursday, the app is in danger of becoming a cautionary tale.
U.S. officials have been raising concerns about TikTok’s data security and Chinese ties since former president Donald Trump’s attempt at a ban in 2020. But tensions escalated this month with the Senate’s introduction of the Restricting the Emergence of Security Threats that Risk Information and Communications Technology (RESTRICT) Act. The bill would grant broad powers to the president in regulating or even banning technologies seen as a threat to national security. In the short term, the proposed law would pave the way for a TikTok ban. In the long term, it would make it far easier to block Chinese tech companies from operating in the U.S., with unpredictable consequences for any companies hoping to replicate TikTok’s success.
But if the picture is bleak, it hasn’t yet scared Chinese companies away from the American market. Entrepreneurs and investors in China told Rest of World they’re still hopeful that they can bring their products to the U.S. — the only consumer market in the world larger than China. At the same time, to avoid the scrutiny given to TikTok, many companies are distancing themselves from their Chinese roots by setting up headquarters in California or New York, hiring American staff, and storing user data on non-Chinese servers.
“The landmines that Huawei and TikTok stepped onto are the biggest lessons for ‘going-abroad’ entrepreneurs,” a China-based manager of a venture capital fund told Rest of World, requesting anonymity to discuss sensitive issues. “Following the lessons, companies are now keeping a low profile about their Chinese origins, and packaging themselves as international firms.”
In Washington, TikTok is working hard to stay on the U.S. government’s good side. The company has already proposed to mitigate national security concerns with data privacy safeguards and source-code reviews, but its multimillion lobbying efforts have so far not been successful. More than half the states have banned the app on government-issued devices.
Chew’s prepared remarks show how careful the company has been in addressing its Chinese origins. “I am well aware that the fact that [TikTok’s parent company] ByteDance has Chinese founders prompted concerns that our platform could be used as or become a tool of China or the Chinese Communist Party,” Chew says in his published comments. “I steadfastly believe that all concerns that have been raised have solutions.”
The implications for other Chinese technology companies trying to tap into the U.S. market are hard to escape. The text of the RESTRICT Act designates six countries as foreign adversaries: China, Russia, Venezuela, Cuba, North Korea, and Iran. Of the six, only China is a significant tech exporter.
There’s reason to think ByteDance won’t be the last Chinese company to come under scrutiny. The bill also names “unmanned vehicles, including drones” as a priority for enforcement, drawing on Trump’s 2021 executive order targeting drones made in China. China’s DJI, which was blacklisted by the Department of Defense in October, could well face new restrictions as a result.
When reached for comment, DJI emphasized the broad public-sector uses of their drones, including in infrastructure maintenance and search-and-rescue operations. “A rash, uninformed decision that limits access to our technology because of concerns about country of origin will literally cost people their lives,” a DJI spokesperson told Rest of World. “We cannot know whether we will see greater scrutiny if the bill passes. However, we have nothing to hide.”
Most ominously, the bill gives broad leeway to the president and the secretary of commerce in deciding which products pose a threat and how to respond, which leaves foreign companies with few clear paths for compliance. “It’s very broadly written,” Caitlin Chin, a fellow at the Center for Strategic and International Studies, told Rest of World. “I do think if this bill passes, it will make it much harder for companies to operate in both regions.”
The best option for many Chinese companies is simply to downplay their ties to China, and hope they can stay under the radar. Though they are known to have close access to manufacturing supply chains and relatively cheap tech labor, the Chinese brand comes with stereotypes about poor quality and data security concerns. Chris Pereira, founder of North American Ecosystem Institute, a consultancy that helps Chinese companies expand in North America, told Rest of World clients were often concerned their Chinese identity would bring unfair treatment by the U.S. government and media. “If you are a Chinese company, you are often guilty before proven innocent,” he said.
Some companies have set up headquarters outside of China. Fast fashion platform Shein, which is reportedly planning a U.S. IPO this year, effectively made a Singapore firm its holding company, while e-commerce giant PDD Holdings headquartered its international shopping app Temu in Boston. Some others have picked foreign-sounding names. A Chinese e-bike motor supplier called Okawa has its sales team in the Netherlands. Heisenberg and HonyMow are lawn-mowing robot companies headquartered in Shenzhen.
A marketing specialist at a Chinese consumer appliance startup, which targets the U.S. market, said that while most of its staff is based in Shenzhen, the company is officially headquartered in California, and promotes products through American influencer agencies and TikTok influencers. Still, some skeptical consumers had called to ask if the products were made in China, he told Rest of World, requesting anonymity because he was not authorized to speak to the media. “We do not go out of our way to say we are a Chinese brand,” the person said. “But we also don’t hide that we are from China.”
Tech companies founded in China often keep their development teams at home, and hire marketing and public relations workers in the U.S. to better engage with their customers. Jie Chen, a managing partner at venture capital firm Celtic House Asia Partners, told Rest of World China-linked companies could also mitigate political risk by bringing in international workers and investors. “They try to become more Americanized, in terms of operation, transparency, and ownership structure,” Chen said.
Consultants for Chinese companies say keeping user data outside of China also helps assuage security concerns. The founder of a software development startup, who requested anonymity to discuss sensitive issues, told Rest of World his company separated user data in China — stored on Alibaba Cloud — from user data in other countries, stored on Amazon Web Services.
The company is registered in California, even though it first launched services in China. “We are an American company,” the founder said. “From day one, we wanted to create a global product.”
The future of TikTok itself remains unclear. With a growing list of co-sponsors and an endorsement from the White House, the RESTRICT Act is likely to pass, but it will probably be months before it becomes law. Once it does, the White House may simply use the threat of a ban to negotiate a sale, or more restrictive security measures. Despite public pressure, there’s still little indication of how the new powers will be used by President Biden or future presidents.
Joyce Zhang Gray, the co-founder of Alariss Global, a consultancy that advises companies on how to expand into the U.S., told Rest of World American politicians have been trying to act tough on China, but most Chinese businesses are too small to get noticed. For startups, creating a viable product is still a much more urgent task than managing government relations, Gray said. “[They think that if] we’re lucky enough to become so influential that the government starts to notice us, that would be great.”