Share Prices & Company Research

News

22 September 2021

The Carrot and the Stick: Can Tiktok’s parent company Bytedance be the success story of careful compliance with China’s communist party?

Amongst the recent furore over China’s regulatory pressure on some of its largest corporations there is a sense of quiet optimism around one Chinese tech giant, ByteDance.
 
If the name is not instantly recognisable, the group’s social media giant TikTok certainly will be. National lockdowns and more time to spend scrolling through viral videos have expanded TikTok’s user base far beyond the teenage generation, with advanced artificial intelligence techniques providing a revolutionary algorithm to keep users scrolling, consistently recommending video content tailored specifically to the tastes of each individual.
 
The addictive nature of viral content and the broadening appeal to a wide range of demographics saw downloads rocket throughout all age groups during 2020, and by December it was reported the app had been downloaded a staggering 2.6 billion times. By February 2021, it was estimated there were 1.1 billion active users of TikTok every month, with each user spending an average of 52 minutes per day on the app across eight browsing sessions. Perhaps more worryingly for behavioural psychologists, a new study recently revealed that younger people aged four to fifteen spend an average of 80 minutes per day on the platform. This number of eyeballs focusing in on one platform of course brings immensely lucrative advertisement opportunity as tailored adverts are placed strategically between videos, encouraging brands to pay up to US$200,000 to promote a hashtag. Moreover, creators of popular videos are now being rewarded with bumper pay packets through the TikTok creator fund; 20-year-old influencer Addison Rae reportedly took home over US$5m during 2020.
 
In addition to TikTok, the ByteDance group owns two further social media platforms: Douyin which is essentially a Chinese form of TikTok, and TouTiao (Headlines) which provides a tailored aggregated news feed to millions of users across China. However, it was the group’s US operations in TikTok that sparked security concerns with previous American President Donald Trump. After one of the first platforms developed by ByteDance, Neihan Duanzi, was permanently shut down in 2018 for hosting improper content, senior executives announced that the group would give preference to Chinese Communist Party (CCP) members in its hiring and established an internal CCP Committee to serve party members amongst its employees. The group has also reportedly formed strategic partnerships with the Chinese Ministry of Public Security in order to contribute to the ministry’s public relations efforts.
 
As a result of the Trump administration’s intention to ban TikTok during the summer of 2020, ByteDance engaged in talks with potential buyers and agreed to sell its US operations in TikTok to technology giant Oracle. However, as the American Presidency transitioned to Joe Biden, the deal was put on pause to assess whether the threat of the US ‘ban’ on TikTok would remain under a new administration. It has since become clear that the Biden administration has reviewed the situation and does not appear to be in favour of such a ban, thus the deal with Oracle has been abandoned.
 
With the group no longer at risk of break-up, senior executives within ByteDance have reportedly been eyeing up an initial public offering (IPO) on the Hong Kong Stock Exchange. The group appear to be treading very carefully through a tumultuous political climate for Chinese companies, appearing to stay on the right side of China’s Communist Party and its regulators. Following a meeting with officials to discuss cyber security earlier this year, in which executives from China’s ride-hailing app Didi Chuxing were also said to be present, ByteDance delayed IPO plans in order to provide regulators with more detail on how they process information. Didi, on the other hand, went ahead with a US$4bn listing on the New York Stock Exchange in June, only to be banned from China’s app stores a few days later and subject to a fresh investigation into rule violations. Furthermore, founder Zhang Yiming, estimated to have amassed a US$44.5bn fortune from his success in ByteDance, stepped away from his role as Chief Executive in spring. Although claiming his departure from the role was due to his dislike of managing people and his preference for “solitary activities like… daydreaming”, it seems clear the move is a nod of compliance towards a government highly sceptical of ultra-high net worth CEOs, the recent disappearance of former Alibaba chief Jack Ma perhaps firing a clear message.
 
It seems, therefore, that TikTok’s parent group have an obvious intention to work with, not against, Xi Jinping and the CCP. As recently as 5th August, ByteDance reacted to the CCP’s change in policy towards online tutoring websites by announcing a shift in its education division away from school age children in favour of adult-only tuition, closing down its Gogokid platform which allowed foreigners to teach English to China’s children. The group continues to adapt and make sacrifices in order to avoid the ferocious force that is Chinese regulation, a skill that is beginning to set it apart from the other tech giants of China.
 
Coupled with this apparent ability to please regulators, underlying fundamentals are impressive. During 2020, ByteDance doubled total revenue to US$34bn, and was estimated to be worth upwards of US$250bn based on private stock trades. China-based publication 36kr estimates an even greater valuation of over US$400bn. The group continues to develop key revenue streams too, with a new division named BytePlus beginning to sell components of the software behind TikTok’s addictive algorithm to companies outside China, along with elements of its market-leading video effect software and computer vision technology.

The 15th century Ming treasure voyages in China are often used to explain the ‘carrot and stick’ metaphor; the fearsome fleet of the Ming dynasty being the ‘stick’ while lucrative access to Chinese trade the ‘carrot’. Six centuries on, the country’s current government has shown its willingness to strike with the stick of regulation but has yet to dangle the carrot of compensation for companies who look to comply with its political intentions. The smart move for China’s ruling party would therefore be to encourage a successful public floatation of ByteDance, and use that as an example of what smart cooperation with authority can award.

This article was taken from the Ausust 2021 issue of Market Insight. To subscribe to our investment publications, please visit www.redmayne.co.uk/publications.
 
The Carrot and the Stick: Can Tiktok’s parent company Bytedance be the success story of careful compliance with China’s communist party?

More News Stories

Cracking Down
08 October 2021
Mixed Outlook for UK Retail
07 October 2021
SUBSCRIBE TO OUR PUBLICATIONS
We offer complimentary investment publications produced by our in-house Investment Research team. Please click here to view our range.
Continuing our Personal Service: View our Latest COVID-19 Update: 7th October 2021
We use cookies on this site to improve your experience and help us provide you with a better website. An explanation of the cookies we use and their purpose can be found within our Cookie Policy. Your continued use of this site means you consent to the use of cookies.