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China’s tightened grip on TikTok’s algorithm could seriously cripple a U.S. sale

China’s new law on A.I. tech may have sent TikTok’s prospective buyers back to the drawing board. Reuters reports that negotiations to acquire TikTok’s U.S. operations have hit a critical snag as bidders scramble to figure out ways to comply with China’s updated export rules.

Earlier this week, Beijing released an amendment to its tech export laws to cover “recommendation of personalized information services based on data” — essentially the cornerstone of TikTok’s viral success. Any foreign business which seeks to acquire products with such A.I.-based recommendation engines must now first secure the local government’s stamp of approval, the new rules state.

In a statement at the time, Erich Andersen, the general counsel of Bytedance, TikTok’s parent company, said the company is “studying the new regulations” and it will “follow the applicable laws.” “As with any cross-border transaction, we will follow the applicable laws, which in this case include those of the U.S. and China,” he added.

Reuters says prospective buyers are exploring a total of four routes to restructure the deal and none of them seem promising. The most obvious and convenient option is to simply acquire TikTok without the algorithm but that may be a risk companies such as Microsoft or Oracle, two of the reported front-runners, might not be willing to take. TikTok’s algorithm is its key ingredient and leaving it out of the deal could render the acquisition practically worthless for interested buyers.

On the opposite end of this spectrum is the scenario where bidders consider seeking approval from China. But as political tensions between the U.S. and China continue to escalate, that’s unlikely to happen — especially given that TikTok needs to reach a resolution before the proposed November 12th deadline to avoid a ban.

We’ve reached out to Bytedance, Microsoft, and Oracle for a comment and we’ll update the story when we hear back.

Another option is to work out a transition period of up to a year with the Committee on Foreign Investment in the United States (CFIUS). Reuters didn’t comment on how this plan could potentially unfold but it’s possible the time frame might enable the new owner to replicate the algorithm and eventually let go of Bytedance’s engine.

Lastly, Bytedance could be asked to license the algorithm to whichever American giant ends up acquiring TikTok’s U.S. business. However, again, this would step over regulatory lines in a way that the U.S. may not be comfortable with. The Trump administration has made it clear TikTok will have to give up all of its Chinese ties in order to continue functioning in the U.S.

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