How Backlash Against Chinese Companies Threatens America’s Economic Superiority
Eric Yuan, the 50-year-old founder and CEO of Zoom grasped the situation he found himself in rather well, when, overnight, he issued a public apology and announced a U-turn of the company’s strategy from feature development to security, after a series of investigative reports, tweets and blog posts exposed Zoom’s security lapses.
After its triumphant IPO in 2019, Zoom had become the darling of Wall Street. (NASDAQ: ZM, not to be confused with OTCMKTS: ZOOM, a Chinese wireless communications company; investors often mix up the two companies and invest in the wrong stock.)
Unlike other prominent startups filing for IPO last year (Lyft, Pinterest, Uber), Zoom actually made a profit. With its low-key, frugal CEO, Zoom was reporting numbers that made Aaron Levie, CEO of Box (and also Zoom’s customer), tweet that it could start a second business selling its “beautiful” financial numbers “as a coffee table book.”
Zoom could easily have a second revenue stream by selling laminated copies of their S-1 as a coffee table book based on how beautiful the numbers are.
— Aaron Levie (@levie) March 25, 2019
In a span of weeks, Zoom’s users have grown from 10 million to hundreds of millions thanks to the coronavirus lockdown. But rather than a blessing, the spiraling growth has put the company at the center of the data privacy debate. Yuan has done everything right to stem the looming PR crisis—acknowledge the mistake, take blame and overcorrect—realizing that his company could unleash the same sort of public outrage that TikTok had to endure a few months prior.
App Acquisitions and Security Risks
TikTok came to be when Chinese company ByteDance acquired and rebranded the American app Musical.ly in November 2017. By the following year, the looping short-form video app had become an instant hit in the U.S.—right before the trouble began.
First, U.S. lawmakers noticed that TikTok could potentially be a security risk to the United States; Later, U.S. regulators pushed things further when they began investigating if ByteDance should reverse its 2017 acquisition of Musical.ly.
This came after a blowup over Chinese ownership of Grindr, a popular gay hookup app. It was reported that the app obtained sensitive data, from real-time locations to nude photos and videos of users, including U.S. government and military workers. In the end, regulators ordered Kunlun Tech, Grindr’s Chinese owners, to sell the app.
TikTok was prone to attract similar negative attention. In fact, more of it, given that its popularity was growing most rapidly among young Americans. The Chinese version of TikTok has already been used for propaganda by the Communist Party, as reported by The Washington Post and other respectable media outlets. Could the app be misused in a similar way to manipulate Americans? Far-fetched, but who knows…after all, “TikTok’s purse is still in China,” as a former ByteDance manager told the Post.
Zoom’s purse is, of course, firmly in the U.S. (see above—a Wall Street darling), but its intellect is in China. Yuan was born and educated in China, where most of the company’s R&D department is employed (page 24 of Zoom’s S-1). Yuan’s apologetic behavior was in response to a threat he recognized—the shifting sentiment against Chinese enterprise.
Dicey Chinese Stocks
Carson Block’s research firm Muddy Waters has done well identifying, and then shorting, a number of Chinese stocks listed in the U.S.—each time different, but all sharing a common thread: They were prone to manipulation, lack of transparency and overvalued false prospects of growth. Most recently, the firm’s bet against Luckin Coffee, the self-proclaimed Starbucks rival in China, proved correct, when the company admitted it overstated revenue on April 2, leading to an 80 percent drop in stock price.
Another famous short seller, James Chanos, was highly critical of Chinese stocks, and the East Asian country in general, during a recent interview with Bloomberg, while explaining the dangers of VIE structures—a mechanism used by Chinese companies (most notably Alibaba) to raise capital in the U.S. by listing shares of an intermediary SPV set up offshore. “China, I think, is very happy to have that structure and to set up access for Western capital to go into China through this VIE structure,” Chanos explained. “And it’s really a problem.”
These criticisms bring to mind the 2017 finance documentary The China Hustle and add to the debate that ensued last year about forced delisting of some Chinese companies from the U.S. stock market, which, some suspected was another chess move in President Donald Trump’s U.S.-China trade war.
The debate easily gained momentum because it did have some merit. Aside from the cases of outright fraud documented in the The China Hustle, it is often true that investors in U.S. stocks of Chinese companies have no recourse to the ownership, no voting power, little visibility and a lot of uncertainty over what’s happening inside those companies.
When asked by Chinese regulators, Alibaba removed its highly valuable online payment platform AliPay from its main holding structure—but didn’t let its foreign investors know until after the decision was made. (While the move caused much controversy, those foreign investors didn’t have a say, anyway, because they actually just held shares in a Cayman SPV.)
Trump’s Finger Pointing
The issue here is that what began as anti-fraud sentiment is now slipping into anti-China rhetoric. Trump’s blaming of China, his Chinese virus tweet and additional finger pointing have been political missteps—even by his standards; he has not only weakened his negotiating stance but also instituted hate.
By calling COVID-19 a Chinese virus, Trump is using the oldest trick in the book. Giving diseases names that instigate prejudice toward races, nations and religions is a recurring theme in human history. Susan Sontag, author of Illness as Metaphor and AIDS and Its Metaphors, wrote that syphilis “was the ‘French Pox’ to the English, morbus Germanicus to the Parisians, the Naples sickness to the Florentines, the Chinese disease to the Japanese.”
China’s Threat to Wall Street
For now, Trump’s fear-mongering is not likely to transform into acts of violence or open racism. But, it may weaken Americanism.
One of the reasons why Chinese companies have sought to list in the U.S., instead of going across the border to Hong Kong, was that the listing requirements were softer. The other reason was, of course, prestige. As Dan McClory of Boustead Securities told CNBC, “It is the aspiration of every Chinese entrepreneur to list on the Nasdaq and NYSE.” Many smaller Chinese companies have, in fact, kept most of their U.S. shares in Chinese hands.
For a good half of the 20th century, the U.S. was the center of capitalism, an economic superpower built on a celebration of greed and a love for entrepreneurship. From newsboy to millionaire, the American Dream has been, and still is, an ethos that most other countries aspire to replicate.
But that American honor may be gone. Even before the pandemic, Trump’s sucker-punching of China and Chinese entrepreneurs looked bad. In the post-virus world, China may no longer look up to Wall Street or Silicon Valley, something which could weaken Trump’s influence for the rest of his time in office and, more worryingly, threaten America’s economic superiority in the long-run.
George Salapa is a cofounder of bardicredit GmbH, a Swiss advisory. Before that, he was in consulting (PwC), banking (Sberbank) and technology (Braintribe). His writing has been featured in VentureBeat, CCN, Forbes and other magazines.