September 23, 2020

What the US and China's tussle over TikTok means for Europe

China has long had its Great Firewall, but now the US is catching up and it's not good news for Europe.

Nicolas Colin

4 min read

Credit: Unsplash

Welcome to the “Splinternet” — today’s fragmented version of the internet in which we’re not connected with one another at the global level anymore.

China has long erected its infamous Great Firewall, insulating their national network from most foreign interference and laying the infrastructure for the Communist Party to implement widespread surveillance and censorship. Now the US is catching up quickly, as Donald Trump forces ByteDance to divest its subsidiary, TikTok, to the benefit of a consortium of US-based investors (also happening to be Trump friends and financial backers) led by Oracle and Walmart.

This is not good news for US tech firms, not good news for TikTok, and not good news for Europe.

Not so global

The internet has never been as global as we liked to think. Many platforms and applications are in fact operated at the national rather than the global level, whether for legal or marketing reasons. But Trump has taken the whole thing several gigantic steps further. His implementation of what could be called the ‘China model with Western characteristics’ is likely to reverberate for years to come:

The internet has never been as global as we liked to think.
  • First, this will degrade the status of the US as a good place to do business. There are precedents of foreign companies having crossed the US government (BNP Paribas, Alstom, Siemens...). But this is all happening at another level, as it doesn’t have even the whiff of a clear legislative basis. As Azeem Azhar of Exponential View tweeted, “What is to prevent an executive order banning Shopify, Spotify, or Runkeeper on a similar rationale to the WeChat ban?” Meanwhile, new research by Index Ventures reveals that fewer and fewer European tech firms are choosing to relocate their engineering base as they expand to the US, in stark contrast with 10 years ago.
  • Second, European governments and the European Commission are taking notes. What prevents them from getting tougher toward US companies doing business in Europe now that Trump has raised the bar? Expect more European words and actions related to “regulating tech companies”, “breaking them up”, and “imposing digital taxes” in the near future. Just this week, Facebook threatened to interrupt service in Europe if it can’t transfer the personal information it collects on users to its servers in the US. But since that’s exactly what the US is demanding from Chinese companies, why wouldn’t Europe follow suit, especially in the absence of the now struck down Privacy Shield (and considering the authoritarian inflections in Trump’s political practice)?
What prevents European governments from getting tougher toward US companies doing business in Europe now that Trump has raised the bar?
  • Third, it will deprive us of examples of non-US tech companies that manage to expand at a global scale. After what happened to ByteDance, Chinese entrepreneurs are likely to retreat into their (very large) domestic market rather than explore the frontier of cross-cultural expansion, as TikTok once did (see this essay by Eugene Wei). We Europeans will be left with less inspiration when it comes to international expansion that isn’t driven by Silicon Valley.
  • Fourth, it will force European founders to reconsider who they’re dealing with, especially when it comes to raising funds and how it relates to their international expansion. Maybe it will become hazardous to expand on the US market without having solid, politically-connected allies on the ground. Just as Sequoia’s Doug Leone, a Trump supporter and an early backer of ByteDance, helped TikTok through the crisis, maybe any ambitious European startup willing to expand in the US better have someone close to the president on their side if they want to avoid problems with the federal government. (Sounds like a good, stable (and very American) approach to doing capitalism, no?)

Conversely, those with Chinese investors could be confronted with problems when it comes to operating in the US. This last one has already started with the numerous startups that count Tencent as a shareholder. Per Bloomberg, “the Trump administration has asked gaming companies to provide information about their data-security protocols involving Chinese technology giant Tencent Holdings Ltd.” Does that mean the highly-successful Paris-based Voodoo, which just announced a new funding round led by Tencent (joining Goldman Sachs in the cap table), is at risk of being banned from the US market due to Chinese interests being present in their cap table?

We were all getting ready for the Great Fragmentation. But nothing could prepare tech people, indifferent to politics as they are, for the fact that the US itself would become a leading agent in this trend. Maybe it’s a passing phase that will go away with Trump. But maybe it reveals a gradual embrace of the Chinese model (the government erecting barriers and interfering arbitrarily in business life), that will only be mitigated by whatever remains of Western laissez-faire liberalism.

This ‘China model with Western characteristics’ should force everyone, both in the US and Europe, to reconsider what tech entrepreneurship is all about these days: confronting more fragmentation from a regulatory and political perspective, being exposed to geopolitical risks when it comes to taking money from foreign investors, and in general focusing more on one’s domestic market.

Nicolas Colin works for investor The Family. He writes a regular column for Sifted.

Nicolas Colin

Nicolas Colin is cofounder of VC firm The Family. He writes a regular column for Sifted