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Exclusive: China's ByteDance moves to ringfence its TikTok app amid U.S. probe - sources

[November 27, 2019] By Echo Wang, Alexandra Alper and Yingzhi Yang

NEW YORK/WASHINGTON/BEIJING (Reuters) - ByteDance has stepped up efforts to separate its social media app TikTok from much of its Chinese operations, amid a U.S. national security panel's inquiry into the safety of the personal data it handles, people familiar with the matter said.

The Chinese technology company is seeking to provide assurances to the Committee on Foreign Investment in the United States (CFIUS) that personal data held by TikTok, which is widely popular with U.S. teenagers, is stored securely in the United States and will not be compromised by Chinese authorities, the sources said.

CFIUS, which reviews deals by foreign acquirers for potential national security risks, is looking into ByteDance's $1 billion acquisition of social media app Musical.ly in 2017, which laid the foundations for TikTok's rapid growth, Reuters reported earlier this month.

ByteDance's response represents a key test of corporate China's ability to operate businesses in the United States that handle personal data, as U.S. President Donald Trump's trade war with China fans suspicion between the world's two largest economies.

ByteDance is hoping to avoid the fate of Chinese gaming company Beijing Kunlun Tech Co Ltd <300418.SZ>, which said in May it would agree to a CFIUS request to divest popular gay dating app Grindr following concerns about the security of personal data. It is also exploring exiting its investment in Grindr through an initial public offering.

ByteDance started to separate TikTok operationally before CFIUS approached it in October, because it wanted some of its staff to focus on TikTok, according to the sources.

It completed the separation of TikTok's product and business development, marketing and legal teams from those of its Chinese social media app Douyin in the third quarter of this year, according to the sources, who requested anonymity to discuss the company's internal arrangements.

During the summer, it also hired an external consultant to carry out audits on the integrity of the personal data it stores, the sources added. The company has said U.S. user data is stored entirely in the United States, with a backup in Singapore. It has also said that the Chinese government does not have any jurisdiction over TikTok content.

Following the approach by CFIUS, TikTok is making a new push to set up a team in Mountain View, California, that will oversee data management, according to the sources. This team will determine whether Chinese-based engineers should have access to TikTok's database, and monitor their activity, the sources said.

TikTok is also hiring more U.S. engineers to reduce its reliance on staff in China, according to the sources.

It is not clear how effective these changes will be in appeasing CFIUS. A spokeswoman for the U.S. Treasury Department, which chairs CFIUS, said it does not comment on information relating to specific CFIUS cases.

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The logo of the TikTok app is seen on a mobile phone screen in this picture illustration taken February 21, 2019. Picture taken February 21, 2019. REUTERS/Danish Siddiqui/Illustration

"Shifting a company's operations away from China, geographically and technically, can give CFIUS more comfort that the company is really independent of its Chinese owner and the Chinese government," said Nevena Simidjiyska, a partner at law firm Fox Rothschild LLP who advises companies on CFIUS reviews and is not involved in the TikTok case.

U.S. CONCERNS

TikTok employs about 400 people in the United States, up from 20 people at the time of the Musical.ly acquisition, the sources said. Most of the new employees joined this year, as TikTok built its U.S. operations, the sources added. ByteDance has 50,000 employees around the world.

U.S. lawmakers called last month for a national security probe into TikTok, expressing concern that the Chinese company may be censoring politically sensitive content, and raising questions about how it stores personal data. Last week, U.S. Army Secretary Ryan McCarthy said the U.S. military is undertaking a security assessment of TikTok.

Facebook Inc <FB.O> CEO Mark Zuckerberg, whose social media platform competes with TikTok for younger users, has also criticized the app over censorship concerns.

The CFIUS probe is currently focused on the handling of personal data, rather than censorship, according to two of the sources. ByteDance views the CFIUS investigation as informal, and has not yet been subjected to an official review, one of the sources added.

Some of the personal data that TikTok stores, such as a person's name, age, email address and phone number, is submitted by its users. Other information, related to a person's location, is collected automatically, according to TikTok's website. TikTok also stores user-generated content, such as photographs and videos.

Launched just two years ago, TikTok has been downloaded 1.5 billion times, making it the third most downloaded non-gaming app of the year, after Facebook's WhatsApp and Messenger apps, according to research firm SensorTower.

ByteDance is one of China's fastest growing startups. It owns the country's leading news aggregator, Jinri Toutiao, as well as TikTok, which has attracted celebrities like Ariana Grande and Katy Perry.

ByteDance counts Japanese technology giant SoftBank Group Corp <9434.T>, venture capital firm Sequoia Capital, and private equity firms such as KKR & Co Inc <KKR.N>, General Atlantic and Hillhouse Capital Group as backers.

(Reporting by Echo Wang in New York, Alexandra Alper in Washington and Yingzhi Yang in Beijing; Editing by Greg Roumeliotis and Lisa Shumaker)

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