August 23, 2020: Crypto, TikTok, JEDI, Zoom, Pinduoduo, Gitee

This issue covers the period between August 17 - 23, 2020 with six news stories – three from English language sources, three from Chinese language sources. Disclaimer: all translated article titles are done by me, not official translations from the media outlets.

Before you go on, please check out my latest deep dive post: "Where Can the Chinese Internet Go?"

“Crypto Assets Worth $50 Billion USD Exited China in 2019” (English Source: Blockchain News)

My Thoughts: This finding was first unearthed by the blockchain research firm, Chainalysis, and has gained coverage in some mainstream business media as well, like CNBC and Bloomberg. I chose to highlight Blockchain News instead, because trade publications tend to include more useful technical information which mainstream media gloss over. The cryptocurrency of choice was apparently Tether, a stablecoin that is pegged to the US dollar, making it a good option if you goal is ultimately to get USD. Since this asset outflow is understood to be a form of “capital flight” out of China, where there’s a well-known annual transfer limit of $50,000 USD, choosing Tether for its pegging with USD makes sense. Tether has also been used in cross-border transactions between Chinese and Latin American merchants, many of whom prefer to use cryptocurrencies instead of the dollar. Tether, being a pretty new stablecoin, has had its fair share of controversies, which has become part and parcel in the blockchain space. This news should be contextualized with China central bank’s own digital initiatives, specifically: piloting the Digital RMB in Beijing and Hong Kong, and issuing rules to standardize blockchain applications for the entire financial sector back in July.

“TikTok to challenge U.S. order banning transactions with the video app” (English Source: Reuters)

My Thoughts: By the time you read this weekly issue, TikTok may have filed their lawsuit against the Trump administration already. It’s important to note that this lawsuit is only against the executive order issued on August 6, not the new CFIUS order issued last week which we discussed. It also has little impact on the pending acquisition being negotiated with Microsoft or Oracle. The crux of TikTok’s legal argument against the EO is that the order’s “reliance on the International Emergency Economic Powers Act deprives it of due process.” As I have argued in quite a few past deep dive posts (see “A Framework to (Dis)trust and Verify TikTok” and “Can ByteDance Build Trust?”), whatever we do to TikTok (or WeChat, or any other product or company), we must do so with evidence and Due Process. Otherwise, America is no longer American. It’s ironic to say the least that a Chinese company is arguing for Due Process against an American president who could care less about it.

“Microsoft plans cloud contract push with foreign governments after $10 billion JEDI win” (English Source: CNBC)

My Thoughts: The title of this article is misleading, because AWS filed a complaint regarding the JEDI contract decision a few months ago, which is still pending, so I want to call that out first. (For a deep dive on the implications of AWS’s complaint, see a previous post “AWS vs Azure: Return of the JEDI?”). Even with, and perhaps due to, the pending status of JEDI, Microsoft is leveraging its status as the “presumptive” winner of the largest cloud contract in the Defense Department’s history to go after cloud deals (often dubbed “digital transformation” in the industry) of other governments. This article does not specify which governments Microsoft is pursuing, but we can deduce that at least some of the Five Eyes are on the target list, just from the contours of its potential TikTok acquisition, which includes operations in the US, Canada, Australia, and New Zealand. All cloud vendors are still in a linear, land grabbing mode, but Microsoft with Azure seems to be playing multi-dimensional chess.

“Zoom’s big retreat from China” (Chinese Source: InfoQ)

My thoughts: Zoom’s effective exit from the Chinese market will be official starting next week, where the company will only sell its product indirectly via three partners. As I highlighted from a couple of weeks ago, this decision is very much a response to the increasing scrutiny on TikTok and Zoom’s own prior security troubles related to its engineering presence in China. What’s unclear is how many and how quickly Zoom will reduce its R&D headcount in China, while it hires engineers in Pittsburgh and Arizona. Zoom has enjoyed significant engineering arbitrage in China, where junior developer salaries are roughly one-third that of Silicon Valley. (The gap is much smaller though for senior-level talent.) Even within China, Zoom’s engineering hubs are built in cheaper cities like Hefei and Suzhou. This well-researched article also shared Zoom’s plan to expand into the Indian market, with new data centers in Mumbai and Hyderabad and engineering hub in Bangalore, where much engineering arbitrage is happening as well (see what Uber is doing there). This expansion will face both scrutiny from the Indian government (if it thinks Zoom is more Chinese than American like many in America believe), and stiff competition from local giant, Reliance, who already released a Zoom clone called Jio Meet (see visual comparison below). While it’s en vogue to not cooperate in geopolitics these days, cloning to success is still universal.

“Pinduoduo’s Apple and Dyson don't ‘smell good’ anymore?” (Chinese Source: 36Kr)

My thoughts: After releasing its Q2 2020 earnings report last week, Pinduoduo’s stock dropped 10+%. Still it is up more than 120% year to date. This 36Kr article does a good job of analyzing the report in the context of PDD’s overall business model and growth trajectory, which can be confusing for a Western audience. It wraps e-commerce, entertainment, social-buying, local community, and a consumer-to-manufacturing (so-called C2M) distribution model all into one app. In addition, PDD also started the “10 billion subsidy” discount program exactly a year ago to drive user growth and engagement. The program works exactly like it sounds: 5-50% direct subsidy from PDD on top of already cheap prices from merchants on its platform, for everything from top-line consumer electronics like Apple’s Air Pods and Dyson vacuums, to lipsticks and daily necessities. Both Alibaba and JD.com have since copied the program. I will do a deep dive on Pinduoduo in the future. Until then, I recommend you read this excellent white paper on PDD and “interactive e-commerce” by Elliott Zaagman and Matthew Brennan:

“Ministry of Industry and Information Technology pproves Gitee, domestic open source ecosystem building enters the fast lane” (Chinese Source: Open Source Society or KaiYuanShe)

My thoughts: This official endorsement by MIIT of Gitee is, in my view, the least covered news that’ll have the most impact on the future of technology and US-China relations. By 1. Fully endorsing open source technology on a national and strategic level; and 2. Anointing a Chinese domestic champion to drive open source growth in Gitee, this decision signals a further move towards bifurcation in arguably one of the only threads that’s keep cross-border collaboration alive: open source. In my “Open Source in China” three-part series, I briefly mentioned Gitee -- China’s homegrown Git-based developer collaboration alternative to the Microsoft-owned GitHub. GitHub is where the vast majority of open source technology and development live today. Will Chinese tech companies and developers have to choose between GitHub and Gitee one day? That outcome will have more significant consequences to the global technology landscape than the newest Trump’s EO.

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