Derek Scissors on China’s Future in Semiconductors, Sino-US Decoupling and How ByteDance Differs from Huawei

AJ: First off, what was your reaction to Senator Hawley’s proposal to ban TikTok on government devices?

DS: I think that's appropriate. I don't have a great sense, a I don't think anyone else does, what the risk is now. But it's an evolving risk. Let's say, right now, someone said, for Pete's sake, a bunch of government workers, you need to TikTok? What is your problem? What happens if the Chinese either have or gain, and the second part is the crucial part, the ability to focus down on individual workers and and into individual people using TikTok. So it's not about big data. This is what the US government is doing. Suddenly everyone of the Commerce Department is talking about Huawei. We're gaining a couple days with it. It's about actually being identified specific individuals in sensitive positions or going to be in sensitive positions. So things done in government don't happen that quickly. It's not like you say we should take care of Tik Tok on government devices and it'll happen tomorrow.

I think he's probably right as a long term threat. Chinese Intelligence will try to gather Information. They've been calling me and many other people around for a long time. Maybe they can't do it now. I don't see any reason why government device needs Tik Tok in a big curbing of American freedom or anything like that. And that the current risk may be low, but I think the future risk could be quite considerable.

AJ: In emerging markets where Chinese companies and American companies are competing, in places like Southeast Asia, India and Latin America. Do you think data privacy concerns could hinder Chinese tech companies in international competition?

DS: Not in most places. We care about that. Europeans care about that. Australians care about it. A few countries care about it. In most of the emerging markets, they don't care. If you can provide a new kind of service at a low price, they are not worrying about data privacy yet. This is like, sorry to stress this, but it's the parallel to like climate change and building coal plants. We may care about climate change. I think the Chinese shouldn't be building coal plants, but when some places have no electricity, you want the coal plant, right? The Chinese are providing a valuable service. Not a little luxury, but it's a service that really can help people in their everyday lives.

They're not worried about privacy at that point. And to be honest, they shouldn't. Like if you're a normal person in an emerging market, who cares? China is not gonna hurt you, you're not a target of them. You're not the US government worker. So, there are a handful of countries where this matters. It certainly does in the European Union and the US. In Europe, we are not even on the same page on this, but privacy matters in both cases. I think in emerging markets, it's not going to matter. And it's going to be about quality of service, which maybe the US has an edge on, but of course the Chinese have become very competitive on it, right?

AJ: So kinda follow up on that, do you think that the lack of concern about data privacy could give the Chinese a competitive advantage? i.e. better products, stronger recommendation algorithms due to more/different inputs?

DS: I don't know why when people talk about big data, they say China has lots of consumers. That's actually very vague and not a helpful way of looking at things. You need differentiated data to understand the new market. In other words, let's say the only market the Chinese had is China, and they're trying to use that to get into the Brazilian market. It’s not gonna help them. Because it's a completely different market, the size of market is highly distorted. It's certainly a step in the right direction. And Chinese companies are very well aware of this need to gather information on other markets. That's why you see Alibaba's commercially aggressive behavior in southeast Asia.

Now the question is when are we going to get to the point that in undeveloped markets and less developed markets where we don't have, maybe the people online are richer and you want to sell to a mass market, but the mass market isn't online yet. Is it really that useful? In other words, I think if you're looking at a trend where the Chinese are gathering more data in emerging markets and American firms, I think that's definitely competitive disadvantage in the longer term. I don't think that's happening yet. I don't think you could go to Egypt and gather personal consumer data and like to have a huge competitive advantage in Egypt yet. It's not a well developed market. That's the flip side. In the country, they don't really care about privacy. What they care about is new innovative stuff. This is China. You know, 10 years ago, anything new had a big advantage. That's the same thing in Egypt. Your technology, the innovation, your price competitiveness is what's gonna determine your results in emerging markets for at least the next 5 to 10 years. It's not like gathering Information on consumer behavior, because those markets aren't integrated enough.

AJ: In your testimony you wrote about semiconductor exports in 2019. What kind of trend do you see in terms of decoupling and what’s the timeframe for potential fallout?

DS: I don't think we've got very much yet. We talked about a lot, but the president just wants to export more to China. On the technology side, we've talked, talked, talked, and then nothing. We haven't done anything to Huawei. So all the talks of decoupling are mostly on the financial side. There's not a delay, there's no US action. And I don't think we're going to get any action until 2021. However, whoever the president is, whoever is in charge of Congress, that's the time to launch new initiative.

President Trump’s big initiative was trying to get a phase one deal with China. He could say we're gonna get more exports and that may happen. But that's what he was going for. He wasn't going for decoupling. Congress is currently pressing for a detailed plans, but none of those build the path. So coronavirus can encourage movement supply chains out of China. We'll see where they're going to go.

The purpose of the tariffs wasn't to decouple, but it was for the Chinese to accept more US goods. So we don't have a goal of decoupling or partial decoupling with that goal. We're not gonna actually get decoupling.

AJ: How do you view Chinese aspirations for technological self sufficiency in key components like semiconductors, for example?

DS: I don't think they will generally work. They're going to have areas of success. But as I said, the Chinese really like control over what they consider to be strategic sectors. So they will try to localize. But local control isn't compatible with innovation. Of course, they can move up the semiconductor supply chain to some extent. But really what drives innovation is competition, and they don't want to allow competition. They don't want for large Chinese private firms to go at each other. They want those firms to be responsible to the Party and they want their actions to be coordinated.

And to me that isn't going to work. People talk about how much money they're spending, but they will not be able to catch up because they don't like competition. Now, there are some people who think that money is more important than competition. And so if you just spend enough money, you get whatever you want. I'm not in that camp. I think competition through open markets is crucial for innovation, and it's something that Chinese don't like. So they're going to be less animated for that reason.

AJ: Are there any significant points from the hearing that caught your attention, that you feel should be focused on?

DS: I wanted to say we need to coerce bad actors, not just defend against them. There's still this thing, especially in the science community, saying that President Trump is unilateralist and that they fight against the multilateralists. And I understand the reaction to President Trump, but their reaction is still wrong. We have to decide here what we're going to do, which we have not done. And I brought that point up. We haven't made a decision. How much do we want to decouple? Do we want to try to make globalization work, and force the Chinese to be a good partner. Or do we want to separate from them? Because they won't be better partners? We haven't taken the plunge on what our own policies are yet.

We need to figure out our own positions first. And then we can see whether unilateral or multilateral approach works better.

AJ: If ByteDance considered relocating their headquarters to a place outside the Chinese mainland, like Singapore, for example. Do you think that would do anything to ease US concerns about user data privacy?

DS: I don't think so. Ultimately this comes down to ByteDance's decision makers being coerced by the party, right? The physical location of your headquarters is not that interesting. I look at senator Hawley’s general approach to this. He's saying American firms, American technology firms, are to cooperate with the Chinese because they make a lot of money in China, and they feel like they're obliged to cooperate with the Chinese to protect the flow of income. Just where you locate your headquarters obviously isn’t important.

Now if they set up up a joint venture where they could still profit financially and get some of the data, like if they sold 51% of their US business to an American firm, and they're still a 49% partner and so on. That might work. Something that will protect the people making decisions about US data from the party. And we had an example on the hearing where the American executives didn't want to cooperate with orders from the Huawei parent company. And so they just send Chinese to do it, which senator brought up.

AJ: Is there anything that TikTok could have said today to make a difference?

DS: Tik Tok is completely different from Huawei. I’ve been dealing with Huawei for 25 years. They're dishonest, they're opaque. Bytedance is not acting that way. That's a step forward. If Bytedance will come forward and say, this is our proposed mitigation. You have these problems. We want to be here in the American market in a big way. This is our proposal for mitigation.

Huawei always say I don't know what you're talking about. We're not a threat. We're totally private, you can see in our shareholding structure. And we didn't supply stuff to Iran. But of course , they supplied stuff to Iran. Bytedance should be there telling the truth and offering an olive branch to the Congress, and it might not work, but even if it doesn't work, Bytedance looks totally different than other Chinese companies by doing that.

They have this idea that they can't win in these hearings. But you're not trying to win. You're trying to build a case that you're a different kind of company and you will cooperate with Congress and the administration. Up to a point that you're not gonna do anything they want, you have corporate interests. That's a very different approach than Huawei or Chinese state-owned enterprises.

So I think if they had come with a proposal in mind that says we understand your concerns. Here's our offer. If they showed up at the hearing and made a real offer and fell short, but it was real, that would put them on a different path.