Section 2 - Compliance

Case Study 2.1 Africa’s Tech Challenge A Chinese State-Owned Enterprise’s Corporate Social Responsibility Experiment in Kenya

Yuan Wang

1 Overview

This case study presents innovative work by a Chinese state-owned enterprise (SOE) to use corporate social responsibility (CSR) as a key component of its business strategy in Kenya. AVIC International’s (“AVIC INTL’s”) core business is exporting Chinese machinery and vocational training curricula to enhance the availability of equipment in host countries and to build the capacity of local technical and vocational training institutions. Through active learning with stakeholders in Kenya, AVIC INTL has developed the “Africa Tech Challenge” (ATC) to host training and competitions for candidates from Kenyan technical and vocational institutes. This CSR project, first initiated in 2014, later became a signature CSR project for the company, one which was repeated annually and received Chinese government awards for companies’ overseas brand-building.

The case study shows how CSR can be an effective business strategy for Chinese SOEs operating in African states. Chinese SOEs have started to use CSR projects as a channel for gaining market access, building a positive image both in the host country and in Beijing, and cultivating and deepening ties with host country politicians, industry, civil society, and the (future) labor pool. The study also demonstrates how Chinese SOEs, over the course of overseas operations, have experienced a steep learning curve in host countries with this learning facilitated by SOEs’ interactions with stakeholders in the host country. It discusses how, despite structural asymmetry vis-à-vis China, African actors can actively shape the behavior of Chinese SOEs that are financially powerful and technically strong.

2 Introduction

Why do overseas Chinese SOEs engage in CSR initiatives?¹ How do SOEs effectively integrate CSR as part of their business strategy? These questions are particularly salient for SOEs working in host countries with relatively weak legal and social institutions to regulate corporate behavior. Global engagement by Chinese SOEs exposes them to new sets of local and international norms and practices that are frequently different from those in China. Many SOEs, during years of operations overseas, have experienced a steep learning curve in acquiring practices and norms from host countries, particularly in countries with sociopolitical contexts starkly different from that of China. CSR has become an area where SOEs can experiment with innovative practices that bring their corporate practices closer to the host country’s normative frameworks.

This case study examines AVIC INTL’s innovative approach of using CSR as a key business strategy in Kenya. It illustrates that in conditions of Sino-African power asymmetry, Chinese SOEs in Kenya learn from their interactions with host country stakeholders and adapt their operations. In 2014, AVIC INTL’s Kenya office rejected the standard approach to CSR as advocated by their headquarters in Beijing and instead initiated the ATC that later became a signature CSR project for the company. The ATC was continued annually and received awards from the Chinese government for effective overseas brand-building. What motivates AVIC INTL to allocate large budgets to this CSR project on an annual basis? Why and how did AVIC INTL create such innovative CSR activities in Kenya? And what was the role of Kenyan stakeholders in shaping AVIC INTL’s CSR initiative?

This case study draws empirical insights from the author’s direct participation in the ATC initiation stage as an early member of the China House, a Kenya-based NGO that participated in ATC’s design and implementation, in 2014. Additional empirical evidence was collected through interviews during multiple field trips to Kenya and China in 2017 and 2019 and follow-up telephone interviews in 2021 and 2022. The study also draws on secondary sources such as AVIC INTL’s CSR reports, internal documents, and email communications with stakeholders on the ATC projects.

The study is organized as follows. It starts by introducing the sociopolitical context of Kenya and Sino-Kenyan relations. Chinese companies operating in Kenya confront a starkly different sociopolitical landscape from their familiar context in China. The study then briefly discusses the Chinese government’s encouragement of Chinese companies, particularly SOEs, to use CSR as a way of overseas operational risk mitigation and it continues by describing AVIC INTL, its shareholding structure, its entry into Kenya, and its core business. The main subsection then elaborates on the initiation and development of ATC from an idea to AVIC INTL’s signature annual CSR project covering multiple African countries, and it concludes with a discussion of key points related to institutional learning, African agency, and the identity of Chinese SOEs as for-profit businesses, policy extensions of Beijing’s Belt and Road Initiative (BRI), and learning institutions to diffuse innovative overseas practices to China’s domestic business community.

3 The Case

3.1 Background on Sino-Kenyan Relations

Kenya is a lower-middle-income country. The country’s GDP per capita was US$2,007 in 2021,² and GDP per capita growth has averaged 1.3% over the past five years, above the regional average. In 2020, Kenya surpassed Angola to become the third largest economy in sub-Saharan Africa after Nigeria and South Africa, according to the International Monetary Fund (IMF). From 2015 to 2019, Kenya’s economy achieved broad-based growth averaging 4.7% per year, significantly reducing poverty (which fell to an estimated 34.4% at the US$1.90/day line in 2019).³ Tourism in Kenya is the second largest source of foreign exchange revenue following agriculture. In 2020, the COVID-19 shock hit the economy hard, disrupting international trade and transport, tourism, and urban services activity. IMF evaluation shows that Kenya’s economic rank in sub-Saharan Africa dropped to seventh in 2021. Russia’s invasion of Ukraine in 2022 further exposed Kenya’s economy to commodity price shocks, particularly as Kenya’s economy is vulnerable to the cost of fuel, fertilizer, wheat, and other food imports.⁴

Kenya has one of the more vibrant media landscapes on the African continent, with professional and usually Western-trained journalists serving as watchdogs. The country’s media is highly competitive and diverse, with over 100 FM stations, more than 60 free-to-view TV stations, and numerous newspapers and magazines. Journalists in Kenya, like in many other African countries, have long been trained with Western curricula, which produces a media system that is “an appendage of the Western model” of journalism.⁵ Kenya also has an active civil society organization (CSO) sector, and trade unions are active with approximately 57 unions representing 2.6 million workers in 2018.⁶ Journalists and CSOs critically assess the operations of domestic and foreign businesses and politics.

In Kenya, like many other African countries, Chinese media reporting tends to be less appealing and less popular than news from Western media sources despite Beijing’s emphasis on soft power and discourse power.⁷ In 2009, China’s central government committed US$6 billion to facilitate Chinese media “going out” and competing with Western media conglomerates.⁸ In 2012, CGTN, the main Chinese global media station, opened its Africa headquarters in Nairobi and China Daily launched its Africa edition. Xinhua News Agency and China Radio International have also been active in their outreach to the continent. China even carried out media training programs for African journalists in China, with the hope that the journalists would portray China in a more favorable light upon returning home but with mixed results.⁹ In fact, interviews and surveys with African residents found Chinese media outlets to be unappealing. Local interviewees were largely unaware of CGTN,¹⁰ and a survey of young private sector employees in Nairobi showed that CNN, a US media outlet, was the most watched foreign media channel.¹¹

3.2 Kenya–China Relations

China established diplomatic relations with Kenya only two days after Kenya gained independence from the United Kingdom in December 1963. China was the fourth country to open an embassy in Nairobi. Bilateral relations gained momentum when President Daniel arap Moi came to power in 1978 and Deng Xiaoping in China pushed for “Opening and Reform.” The Sino-Kenyan relationship gained momentum with high-profile visits and agreements to promote trade, investment, and technology exchange, as well as military exchange.

China is Kenya’s largest trading partner and largest source of imports. In 2020, Kenya imported US$5.24 billion’s worth of highly diversified products from China, with textiles, chemicals, metals, electronics, and machinery representing the main sectors. In the same year, Kenya exported just US$123 million’s worth of products to China, predominantly minerals and agricultural products (see Figure 2.1.1). Kenya’s approach of exporting raw materials to China and importing manufactured products from China conforms to China’s bilateral trading pattern with many non-resource-rich African countries.¹²

Figure 2.1.1 Kenya’s export basket, 2020

Source: Developed using the ‘Atlas of the Economic Complexity’ https://atlas.cid.harvard.edu/explore?country=116&product=undefined&year=2020&productClass=HS&target=Partner&partner=43&startYear=undefined.

Kenya is the fourth largest destination of Chinese loans in Africa after Angola, Ethiopia, and Zambia. From 2000 to 2020, China extended US$9.3 billion of loans for transport, power, ICT, and other sectors.¹³ The largest and most expensive project in Kenya supported by Chinese loans is the Standard Gauge Railway Phase I (US$3.6 billion) and Phase 2A (US$1.5 billion). Since 2017, however, concerns over Kenya’s debt sustainability and whether China uses debt to seek control over strategic assets such as railways and the Port of Mombasa have generated extensive debate in Kenya and internationally.

The two countries have starkly different sociopolitical systems. China is home to one of the world’s most restricted media environments with a sophisticated system of censorship.¹⁴ The publication of the law on foreign nongovernmental organizations in 2017 and the 2016 legislation governing philanthropy significantly reduced CSOs’ access to funding from foreign sources and increased supervision and funding from the government. There is only one legal labor union organization, which is controlled by the Chinese government, and which has long been criticized for failing to properly defend workers’ rights.¹⁵ Chinese companies operating abroad in highly different sociopolitical contexts such as in Kenya frequently find themselves stepping into unfamiliar situations such as environmental and community welfare activism, labor unions, and media watchdogs. Kenyan employees of Chinese SOEs may resort to strikes to force the management to negotiate on wage and benefits, issues that Chinese managers are ill-equipped to deal with and which are a source of tension that reveal large cultural and management style differences.¹⁶ The sheer size and visibility of the multibillion-dollar projects that Chinese SOEs work on, with frequent visits from high-profile local politicians as well as Chinese and other international political celebrities, draw these projects into the media spotlight. Used to highly controlled media serving as a mouthpiece of the Chinese government, Chinese SOEs find themselves beleaguered by “biased” criticism in local and international newspapers and other outlets. As a result of these challenges, Chinese companies frequently find it challenging to adapt their operation to the Kenyan situation. One response is the defense mechanism of “keeping a distance with respect” (jing’er yuanzhi).¹⁷

3.3 Doing CSR Overseas

The Chinese government has encouraged CSR domestically and published CSR regulations for overseas projects, yet implementation has been slow because these regulations are largely voluntary in nature and have weak implementation monitoring requirements. To coincide with the global expansion of Chinese companies and the ongoing evolution of the BRI, government agencies at both central and provincial levels issued 121 guidelines and regulations between 2000 and 2016, mostly voluntary, requiring Chinese companies overseas to perform CSR or improve environmental, social and governance (ESG) domestically and overseas.¹⁸

In response to external criticism of Chinese companies’ overseas behavior, Beijing recalibrated the BRI and promoted new regulations to oversee its implementation.¹⁹ For instance, in 2016, the Chinese Ministry of Commerce started to publish annual social and political risk assessments and held training programs for Chinese overseas investors. The Industrial and Commercial Bank of China published the first Belt and Road Green Bond at the Summit in 2019. The Environmental Protection Agency committed to training 1,500 officials in BRI countries and establishing technology exchange and diffusion centers along the Belt and Road.²⁰ However, the majority of these are also nonmandatory, and Beijing’s regulatory bodies cannot exercise effective control and oversight of all BRI activities conducted locally or abroad.²¹

3.4 AVIC INTL and the TVET Project in Africa

China Aviation Industry Corporation (AVIC) is a central SOE specializing in aerospace and defense and headquartered in Beijing. It was founded on 6 November 2008 through the restructuring and consolidation of the China Aviation Industry Corporation Ι (AVIC Ι) and the China Aviation Industry Corporation ΙΙ (AVIC ΙΙ).²² AVIC’s business units cover defense, transport aircraft, helicopters, avionics and systems, general aviation, research and development, flight testing, trade and logistics, assets management, financial services, engineering and construction, automobiles, and more. It is ranked 140th in the Fortune Global 500 list as of 2021,²³ and, as of 2021, has 1,003 subsidiary companies, including 63 second-level subsidiaries, 281 third-level subsidiaries, 340 fourth-level subsidiaries, 261 fifth-level subsidiaries, and 14 seventh-level subsidiaries, with 24 listed companies and 400,000 employees across the globe.²⁴

AVIC International Holding Corporation (“AVIC INTL”) is a global shareholding enterprise affiliated to AVIC. Also headquartered in Beijing, it has six domestic and overseas listed companies and has established branches in sixty countries and regions.²⁵ In 2008, AVIC INTL became an independent subsidiary company engaging in nonmilitary activities, including project planning, project financing management, export of electromechanical products, general contracting, operation, and maintenance of overseas engineering projects. AVIC INTL Project Engineering Company (“AVIC INTL-PEC”) was formally the International Projects Department under AVIC INTL and became a separate company in May 2011, also headquartered in Beijing. The company specializes in four main businesses: (1) people’s livelihood projects, including exporting Chinese mobile hospital equipment, vocational training equipment, container inspection system, buses, and so on; (2) energy engineering, procurement, and contracting, notably the Atlas Power Station Project in Turkey; (3) infrastructure construction, such as the rebuilding and expansion of a Kenyan airport project; and (4) industrial facility construction. The shareholding structure of AVIC INTL-PEC is illustrated in Figure 2.1.2.

Figure 2.1.2 AVIC INTL-PEC shareholding structure

Source: AVIC INTL Project engineering company’s internal document and interview.

AVIC entered Kenya in 1995 to export Chinese military aircraft to Kenya and established AVIC INTL Kenya representative office on 2 June 1995. Subsequently, AVIC INTL-PEC, AVIC INTL Beijing (covering businesses including cement engineering, petrochemical engineering, electromechanical engineering, and import and export of heavy equipment), and AVIC INTL Real Estate (newly established in 2014) were established in Kenya. When bidding for projects in Kenya, AVIC INTL-PEC, together with other subsidiaries, used the name of the parent company AVIC INTL because it had a bigger branding effect, but in reality these subsidiaries operate relatively separately, having offices in different compounds. AVIC INTL-PEC has engaged in three main projects: the National Youth Service (NYS) Phase I and II,²⁶ Technical, Vocational and Entrepreneurship Training (TVET) Phase I and II, and the Karimenu dam water supply project.²⁷

3.5 TVET Phase I

AVIC INTL’s TVET project was developed with the Kenyan Ministry of Education, Science and Technology (MOEST) and involves equipment provision and capacity-building for Kenyan technical and vocational training institutions. In 2008, a MOEST delegation visited China and raised a request to import Chinese machineries and training in support of Kenyan TVET institutions. In 2010, AVIC INTL signed a Memorandum of Understanding with MOEST for US$30 million for Phase I of the TVET project. The following year, the Export-Import Bank of China (Exim Bank) signed an agreement with the Government of Kenya, providing a US$30 million concessional loan in support of this TVET Phase I. The terms of this loan were set at 2% interest rate, twenty-year maturity, and a seven-year grace period. The loan was scheduled for semi-annual repayment between March 2018 and September 2030.

The purpose of the project was to establish ten vocational and technical institutes in Kenya and provide training to 15,000 students.²⁸ The implementation of the first phase of the project mainly focused on two parts: equipment supplies and course training. This includes providing electronic and electrical goods, mechanical processing, rapid prototyping experimental training equipment, diesel generator sets and corresponding spare parts, supporting facilities for ten affiliated colleges and universities, as well as providing college planning, professional settings, and course packages, including compiling textbooks, laboratory planning, teacher training, assessment and evaluation, integration of production and education, and academic exchanges.²⁹

3.6 TVET Phase II

In September 2013, AVIC INTL signed the TVET Phase II contract with MOEST at a cost of US$284 million.³⁰ This figure was later revised to US$167 million via Addendum No. 1 of the contract. The contract value was then further revised to US$159 million via Addendum No. 2 dated 25 May 2016, after the Government of Kenya opted to undertake the civil works itself, while leaving the supply, installation, and commissioning of the equipment as well as human capacity-building to AVIC INTL. According to the contract, AVIC sought to equip a total of 134 educational institutions and provide training across the country. It was stipulated that 1,500 teachers were to be sent to the field and 150,000 students were to be trained by 2020. Exim Bank’s approval for financing was pending for three years. It was not until 2017 that Exim Bank signed an agreement to provide an additional US$158 million of commercial loans for TVET project Phase II.

3.7 Challenges during TVET Phase I Implementation

By 2013, however, the imported equipment from TVET Phase I had not been used to its full capacity. A review of the project by Kenya’s Auditor General revealed that one university and nine technical training institutes had been supplied with electrical/electronic engineering, mechanical engineering, rapid prototyping manufacturing laboratories, and diesel generators, but a physical verification of the equipment in all of the ten institutes revealed that the equipment had not been utilized to full capacity and the generators had not been put to use.³¹ AVIC INTL’s progress report to Exim Bank in June 2013 also recognized the limitation of existing infrastructure and the gap between Kenyan and Chinese higher education.³² AVIC INTL’s then project manager Li explained these two points in detail.³³ First, many remote towns in Kenya cannot provide stable electricity, and unstable electric current risks damaging expensive equipment. Second, teachers in TVET institutions, even after weeks of training in China, were still not sufficiently skilled to operate the machines, let alone teach students. For the training, AVIC INTL partnered with Inner Mongolia Technical College of Mechanics & Electrics to design the curriculum and carry out the training, but the language barrier was a key obstacle. Chinese trainers from the college traveled to Kenya and taught through translators but misinterpretation and the need to use technical jargon resulted in misunderstandings.³⁴ AVIC INTL needed to show that Phase 1 was successful to secure follow-on finance. However, implementation of Phase 1 on the ground was far from successful with some brand-new machines purchased from China laying idle.

3.8 A CSR Innovation: Africa’s Tech Challenge

To secure Exim Bank’s funding approval for Phase II, AVIC INTL needed to show that Phase I was a success. An endorsement letter from the Chinese Economic Councilor in Kenya was a crucial step toward securing Exim Bank funding and Liu, the then deputy CEO of AVIC INTL, took a short trip to Kenya in late January 2014. There was a dinner meeting with Han Chunlin, the then Chinese Economic Councilor to Kenya. When Han asked about the progress of AVIC INTL’s projects in Kenya, Liu reported on the progress of TVET Phase II and reflected on the experience of implementing Phase I, which had been completed by the end of 2013. He said that, in Phase II, AVIC INTL would further commit, and explore possible solutions, to ongoing issues even beyond the contract framework, such as providing raw materials and manufacturing contracts to schools and ensuring that the products could be used in other AVIC INTL projects in Kenya. By then, the company had already signed a contract with MOEST regarding TVET Phase II and were applying to Exim Bank for a loan thus requiring the endorsement letter from the Economic Councilor.

This was also the time when AVIC INTL-PEC headquarters were considering conducting a CSR project in Kenya. The then AVIC INTL’s TVET project manager Li was also at the dinner that evening. Months later, he went on a trip to visit schools in the western provinces of Kenya with Isalambo S. Shikoli Benard, his counterpart from MOEST. On 21 February, on their way to Turkana, Li received an email from AVIC INTL-PEC headquarters in Beijing informing him of the headquarters’ interest in developing a CSR project in cooperation with the China Foundation for Poverty Alleviation (CFPA). CFPA approached AVIC INTL headquarters in Beijing and proposed a CSR project featuring the provision of scholarships to African students to continue their study locally or in China. This was relatively easy to prepare and coordinate; CFPA already had rich experience of this type of corporate philanthropy in China. AVIC INTL headquarters allocated RMB 1 million (approx. US$16,000) for the Kenyan office to implement the project in collaboration with CFPA. AVIC INTL’s Kenyan office was selected because it was the first office to carry out an education-related program.³⁵ In the email, AVIC INTL headquarters indicated their plan to form a research team with the Corporate Culture Department and three managers from CFPA for a nine-day field trip to Kenya in March 2014 to carry out a feasibility study of this CSR project. Li was asked to coordinate with local stakeholders to prepare for this fieldtrip but was far from enthusiastic about CFPA’s proposal. During the seven-hour drive, Li and Benard discussed this scholarship project and Benard was equally unimpressed.

This prolonged driving trip was an ideal place for Li and Benard to brainstorm CSR project ideas. Benard’s team in MOEST had previous experience of hosting the “Robot Contest” and the winner was named “African Tech Idol.” The idea was to use robot assembly as an entry point to promote engineering and provide a forum for young engineers to display their creative works, exchange ideas, and promote engineering. Sponsored by Samsung, the fourth contest was to be held at TVET institutions.³⁶ Drawing on MOEST’s multiyear experience of successfully hosting the Robot Contest in cooperation with Samsung, Li and Benard borrowed this idea and applied it to AVIC INTL’s CSR project to host a technical skills competition using equipment installed by AVIC INTL. When they finally arrived at a village around midnight, Li emailed back to the senior management of AVIC INTL-PEC, copying in Liu, and warned of three difficulties in implementing the scholarship project including the recipient selection criteria, monitoring and evaluation, and most importantly, the corrupt nature of the client ministry:

The scholarship distribution has to rely on Kenyan Ministry of Education, Science and Technology, and the coordination process may induce corruption. Referencing to previous scholarship programs in cooperation with the Ministry, the scholarship tends to end up [more often] in the hands of some connected individuals than the most needed; or the money was simply divided up within the Ministry before they even reach the students.³⁷

In the same email, Li briefly outlined his discussion results with Benard on an alternative “Africa’s Tech Idol” project:

• Name: Africa’s Tech Idol (tentative)

• Potential candidates for the first season: Kenya Vocational and Technical College (about 30)

• Two rounds of competition for the first season:

  1. 1. The preliminary round: machining competitions are held in five regions in Kenya and the top two in each region will be determined.

  2. 2. The final round: ten teams compete in machining at our workshop at Kensington University. We provide the design, and the team can choose their equipment, including ordinary and numerical control equipment.

• The winning team will be rewarded:

  1. 1. Offered a production and processing contract on the spot.

  2. 2. Will be supported by our technicians in the factory.

  3. 3. We process raw material support.

  4. 4. A certain amount of project funding (in the form of sponsorship or angel funding) or equipment sponsorship, or both.³⁸

Sun and Qi (2017) had a subsequent quote from Benard explaining his attitude toward the traditional types of CSR and his enthusiasm toward the skills competition:

They [the AVIC International staff] were saying, “we could build a hospital…” I said, “All that is good, but it is being done by many people. But where you’ll have impetus: you’ve given us huge equipment, but the equipment is just here. We’re not utilizing it. So, if we have a competition to support this equipment, then really, you’ll be helping us as a country to build the confidence of our students that they can make things which can actually go out there.”³⁹

Benard drafted a project proposal for the creation of what eventually became the “Africa Tech Challenge” soon after returning from the Turkana trip.⁴⁰ In MOEST, Benard also sought higher administrative support from the Ministry. On AVIC INTL’s side, Li’s team sent the “Africa Tech Challenge” proposal back to Beijing for approval at the headquarters level. In comparison, the CFPA’s scholarship program gradually lost support from the AVIC INTL leadership.

In addition to MOEST’s experience in hosting skills competitions, Li also drew from the Japan International Cooperation Agency’s (JICA’s) extensive support of the Nakawa Vocational Training Institute in Uganda and also the experiences of Japanese companies in conducting CSR and other philanthropic projects – information shared via Li’s friend who was working in the Japanese Embassy in Uganda at the time.⁴¹ Li’s friend was part of JICA’s Nakawa Institute project and, following his friend, he shadowed meetings with the project stakeholders in Uganda. When Li visited the Nakawa Institute, he was impressed to see that JICA’s malfunctioning vehicles were sent to Nakawa for maintenance. During the two decades of JICA’s cooperation with Nakawa, there was not only education but also a combination of “production and education” (chanjiao jiehe) projects in Nakawa, bringing business benefits to the institution in addition to training students. In his proposal to AVIC INTL headquarters, Li also cited the Toyota Academy and Huawei Training Centre in Kenya as successful examples of vocational training.

Upon initial confirmation from AVIC INTL headquarters of the idea of “Africa Tech Challenge,” Li and Mwangi, a Kenyan manager of AVIC INTL’s TVET project who used to study in China and speaks and writes Chinese fluently, developed the idea into a full concept note in March 2014. Mwangi’s family was well-connected in Kenya, and through her family network AVIC INTL managed to mobilize the then vice president (and president since 2023) William Ruto for the “Africa Tech Challenge” ceremony. Through his personal network, Li met the founder and CEO of China House, Huang, a Columbia University graduate and freelancing journalist who had created a Kenya-based CSO to help connect Chinese companies and Kenyan local communities. In his emails with AVIC INTL-PEC headquarters, Li mentioned China House and explored the possibility of contracting with China House to help with the development of AVIC INTL’s CSR project. Li wrote in his email to AVIC INTL headquarters:

Huang is very familiar with the media. At the time [of the competition], we will need the help of such talents in media public relations and writing various English reports… China House can recruit excellent summer volunteers to help us solve the labor shortage during the busiest season of AVIC INTL’s Kenya office.⁴²

Seeking to secure the first project, Huang’s friendship with Li led to a service contract between AVIC INTL and China House on the ATC in June 2014. China House recruited two full-time staff for the delivery of AVIC INTL’s contract. Among others, China House’s main responsibilities included (1) coordinating ATC stakeholders, including MOEST, public relations companies, social media, and the United Nations; (2) publicizing the ATC via China House’s own channels; and (3) providing a project evaluation summary report on the ATC’s effects to participants and media. Huang brought in his media connections and sensitivity to the ATC’s implementation and the involvement of China House was key to the development of the ATC.

Li convinced AVIC INTL headquarters to conduct the ATC as a machining skills competition in cooperation with MOEST. Li, with the help of the Ministry and together with China House, visited twenty-six out of forty-six TVET institutions in Kenya and received twenty-nine team applications, with three members in each team. Each school could nominate one or two teams with one advisor who was responsible for the organization of the participants. In the preliminary round, eighteen teams were selected and the top six then participated in the final competition. After twenty-three days of training, three winning teams were awarded US$100,000 in machine parts contracts and three individual awards with opportunities to continue education in China.⁴³ AVIC INTL subcontracted with the Inner Mongolia Technical College of Mechanics & Electrics to design the short training curriculum and flew two teachers from Inner Mongolia to Nairobi to train Kenyan candidates and prepare them for the competition. The ATC started in late July 2014 and the final competition was held on 5 September.

AVIC INTL’s Kenyan office developed the ATC and media relations strategy not through imposition or borrowing experience from Beijing headquarters but from the company’s interaction with stakeholders in Kenya. In addition to China House, AVIC INTL’s Kenya office also contracted with a Kenyan public relations (PR) company to run the ATC opening and award ceremonies and media engagement. Invited leaders from AVIC INTL and its parent company, the Chinese Ambassador, the Economic Councilor, the Kenyan Minister of Education, Science and Technology, and other government leaders attended the awards ceremony, which attracted wide media coverage. In fact, PR was a key component of ATC from the project design stage onward. PR costs represented 24% of the total ATC budget with expenses including PR company service fees, social media company service fees, and billboard rental and printing fees. AVIC INTL rented a billboard in Nairobi’s busy Harambee Avenue for multiple weeks. The ATC project evaluation report conducted by China House showed that the media influence of ATC included fifty-three media items at various stages of the ATC, including the opening and award ceremonies, during training, and the candidates’ recruitment. Nine out of the fifty-three pieces were from Chinese media groups in Kenya with the remainder from Kenyan and African media. Western media groups were absent.⁴⁴

The first ATC emphasized entrepreneurship and women’s empowerment as key themes beyond general skills training. The theme of entrepreneurship was implemented through ATC Talk, mimicking the format of a TED Talk. This idea emerged from a brainstorming session between Li’s team, China House, and the local PR company. The PR company invited successful Kenyan entrepreneurs and young leaders to communicate face-to-face with the students to share their entrepreneurial experiences and growth stories. In August and September 2014, three Kenyan entrepreneurs were invited to give talks to ATC candidates to create opportunities for candidates to interact with local businesses. Invited entrepreneurs shared their thoughts on topics such as “How to become an entrepreneur” by Samuel Kasera, CEO of Mutsimoto Motor Company, and “From student to entrepreneur: dream or reality” by David Muriithi, CEO of the Creative Enterprise Centre. The theme of women’s empowerment was addressed by making sure to give at least one female candidate the opportunity to study in China.⁴⁵ Charity, the only female winner among three candidates who were awarded a scholarship, continued her study at Beihang University in China and was featured in AVIC INTL’s short movie, A Kenyan Girl’s Dream to Become an Engineer.

The success of ATC resulted in AVIC INTL highlighting it as the company’s signature CSR project to be held annually. The ATC was an innovative idea for AVIC INTL, whose existing CSR projects were educational philanthropy, a signature project being a rural teacher training program named “Blue Chalk.”⁴⁶ It was also AVIC INTL’s only overseas CSR project. Each year, the ATC was featured in AVIC INTL headquarters’ annual documentary series, Glories and Hope. Although the revenue of the TVET project cannot compete with major construction projects from other AVIC branches, the ATC project was so unique that Li was awarded AVIC INTL “Best Overseas Employee.” The success of ATC Season I earned AVIC INTL wide media coverage in Kenya, enhanced client relationship with MOEST, and boosted Chinese domestic recognition.

Publicity for the ATC in China has not been as systematic as overseas in Africa where AVIC and China House’s connections were based. In explaining why the ATC’s overseas publicity is more important to AVIC INTL than domestic publicity in China, the current TVET project manager Yang explained: “We mainly target the overseas market, so domestic publicity is not very focused. At AVIC level, when they receive notifications from the government, AVIC sometimes requests us to report the ATC case.” The ATC project won the “2020 Excellent Case for Chinese Companies Overseas CSR Award,” an annual award jointly organized by the State-owned Assets Supervision and Administration Commission of the State Council Information Center, the China Press Office of the China International Publishing Administration, and the International Communication and Culture Center of the China Foreign Publishing Administration.⁴⁷ Utilizing its mobilization strength among university students in China, China House has also presented the ATC as a successful activity during policy conferences and student meetings.

Starting in Season III, ATC expanded beyond Kenya with teams invited from Ghana, Uganda, and Zambia. Cooperation with China House, however, finished. Since then, the ATC has become more closely aligned with AVIC INTL’s TVET project and women’s empowerment and entrepreneurship elements have not been featured.

Since 2014, ATC has been held once a year, and as of 2019, it has successfully held six competitions (see Table 2.1.1). Each year, AVIC INTL allocates approximately RMB 3 million to the event.⁴⁸ Due to the global outbreak of the COVID-19 pandemic, the event was temporarily suspended, but in July 2022, after suspension for two years, ATC Season VII launched online. The training was also conducted online through a newly developed app that AVIC INTL developed to use for its TVET projects in response to the pandemic and expanding business globally. The preliminary round of ATC VII has expanded to 42 schools entering 65 teams from six countries, namely Egypt, Ghana, Kenya, Uganda, Zambia, and Zimbabwe, and a total of 259 students.

Table 2.1.1 The seven ATC seasons and coverage

	Training and competition majors	Participating countries	Number of teams and participants	Award
ATC-1 (2014)	Machining	Kenya	29 teams from 26 universities and institutions, 116 participants	AVIC INTL placed products order worth US$100,000s 3 fully funded scholarships to study at Beihang University US$3,600 bonus
ATC-2 (2015)	Machining, computer programming, and mobile app development	Kenya	18 teams, 126 participants	3 fully funded scholarships to study at Beihang University US$19,000 bonus
ATC-3 (2016)	Basic and CNC machining	Kenya, Ghana, Uganda, and Zambia	30 teams, 120 participants	AVIC INTL placed products order worth US$100,000s 3 fully funded scholarships to study at Beihang University US$11,200 bonus
ATC-4 (2017)	Construction works		103 participants recruited from society	AVIC INTL placed products order worth US$100,000s 25 employment positions at AVIC INTL
ATC-549 (2018)	Mechatronics, and CNC lathe	Côte d’Ivoire, Kenya, Gabon, Ghana, and Zambia	26 teams, 124 participants	AVIC INTL placed products order worth US$100,000s 3 fully funded scholarships to study at a Chinese TVET institution US$170,000 bonus
AT C-650 (2019)	CNC lathe	Kenya, Uganda, Tanzania, Ethiopia, Gabon, Ghana, Côte d’Ivoire, and Zambia	17 teams, 64 participants	AVIC INTL placed products order worth US$100,000s 3 fully funded scholarships to study at a Chinese TVET institution US$170,000 bonus
ATC-751 (2022)	Reading and drafting of construction drawings	Egypt, Ghana, Kenya, Uganda, Zambia, and Zimbabwe	65 teams, 259 participants	To be announced

Yang, the current AVIC INTL’s TVET project manager, who was in charge of ATC, explained how this CSR project is being used to develop AVIC INTL’s main TVET business. ATC’s participating countries are usually the ones the company has already had TVET projects in or in which it plans to cultivate TVET cooperation:

We approached officials from the respective country’s Ministry of Education or their Vocational Education Department under the Ministry when we invited them to form teams to participate in the ATC, and for the award ceremony, we invited them over to Nairobi to attend. Similarly, we invite headmasters of TVET institutions in these countries. For each country, we have two official invitation quotas for the ATC award ceremony, and more Kenyan government officials are invited. At the third season of ATC, the current president-elect, William Ruto came.⁵²

This quote shows that the SOE smartly connects its CSR project to business development and market expansion. Although business development has not been made directly through the ATC, this platform is used to cultivate and maintain relationships with the leadership from TVET institutions and government officials of the target countries.

4 Conclusion

The ATC, AVIC INTL’s signature CSR project, is an example of a multinational company’s willingness to adapt to host country situations. First, AVIC INTL’s Kenya office demonstrated a learning curve with respect to CSR norms and practices in the host country. Over time, AVIC INTL developed an innovative and successful CSR project with an elevated PR strategy and aspects of gender equality and youth entrepreneurship. Second, the SOE’s project manager actively learned through interacting with a variety of stakeholders in Kenya through his personal and professional networks. Project manager Li incorporated expertise from Kenyan counterparts and drew on his knowledge of Japanese corporate practices and JICA projects to come up with tailored solutions appropriate for his project. MOEST’s successful multiyear experience of hosting the Robot Contest, in cooperation with Samsung’s CSR department and China House’s media relations and public engagement expertise, all contributed to the development and implementation of the ATC. Finally, the SOE’s internal structure may serve as a channel for the diffusion of good practices from field offices to Beijing headquarters and further spread to other Chinese companies through government promotion. Through AVIC INTL’s internal structures, information and experiences from the SOE’s field offices in Kenya were applauded by their headquarters in China and shared in internal meetings. The ATC as a case study also received an award from the Chinese government and was promoted to the wider SOE community.

5 Discussion Questions and Comments

5.1 For Law School Audiences

Upon completion of TVET Phase I, AVIC INTL identified the lack of usage of the machines they provided, which could potentially harm their success of securing Phase II funding from Exim Bank. Mediocre implementation on the host state side is a problem that extends well beyond the TVET case, and thus has broader significance for analyzing China–Africa projects. In the TVET case, substandard implementation was also the motivation for the company to innovate on a CSR project that could “train the trainers” to run the machines. To address the problem, AVIC INTL could have pursued a number of different strategies. For example, instead of initiating the ATC, another approach would have been for AVIC INTL to resort to litigation or other formal dispute resolution means. What are the legal merits for AVIC INTL’s claim should it want to sue the Kenyan government for not implementing its part of the contract? What are the potential risks for AVIC INTL if it pursued a legal rather than CSR route to solve the challenge? Do you agree with the company’s decision for not resorting to legal procedures?

5.2 For Policy School Audiences

The ATC case raises two main questions with policy relevance. First, are CSR activities instruments of Beijing’s global soft power outreach or are Chinese SOEs making genuine progress toward localization and further internationalization? And are these mutually exclusive explanations? Arguably, Chinese SOEs, particularly their CSR activities, are part of Beijing’s broader soft power projection in Africa. Indeed, it is frequently perceived that Chinese SOEs, particularly given their state-owned nature, sometimes have broader, noncommercial aims providing a pivotal role in establishing connection between the Chinese government, local media outlets, and universities to promote a positive image of China in Africa. This case study, however, shows a CSR initiative developed by an SOE’s Kenyan subsidiary after the Kenyan project manager rejected the original CSR project proposal from the SOE headquarters. Following its success, the CSR project was then promoted by the SOE headquarters and the Chinese government as creating business development opportunities and as an example of corporate stewardship overseas. This case may thus show less a coordinated effort by the Chinese government in Beijing and more a localized learning endeavor by the SOE’s Kenyan subsidiary seeking to advance its business through an innovative and targeted CSR project. At the same time, in spite of the fact that the project was driven by local needs and interests, such facts are not to say that the Chinese government in Beijing could not then use the project for its own soft power benefits. Discuss these alternatives.

Second, is ATC an example of African agency or Chinese agency? Is China in Africa more precisely perceived as a global power exercising influence in small states? Or should we see this relationship as an interactive process where both parties have the agency to shape outcomes? We may emphasize the structural asymmetry between global economic and political strengths between smaller African countries and China, the world’s second largest economy and a rising power. In dealing with Chinese SOEs, we may perceive Kenyan bureaucrats, media, and CSOs as lacking the agency to shape the behaviors of Chinese SOEs to their benefit. An opposing perspective is to view Chinese SOEs’ activities in African countries, and in this case, AVIC INTL’s CSR initiatives in Kenya, as jointly shaped by Chinese managers and a variety of Kenyan actors. Discuss these diverging perspectives.

5.3 For Business School Audiences

AVIC INTL’s innovation underlines how CSR could help address several operational risks and opportunities for the overseas endeavors of Chinese SOEs and multinational corporations in general, particularly those operating in developing countries. What drives multinational companies’ CSR activities? The ATC case shows that in countries with relatively weak social and environmental regulations, CSR could help multinational companies earn the social license to operate and reduce compliance risks. In countries with strong socio-environmental protection laws that are strictly implemented, these legal regulations serve as a guidance for multinationals, particularly those that newly entered a market, to develop amiable community relations and avoid local pushback against their products and operations. In countries where the implementation of socio-environmental regulations is relaxed or even incomplete, how could companies use CSR activities to help them navigate community relations in host countries?

Second, the ATC case also demonstrates an opportunity for companies to strategically connect CSR and business development activities. How specifically did AVIC INTL manage to achieve this connection? In AVIC INTL’s case, the ATC’s success motivated the company’s leadership to further invest in the project and connect it to market expansion opportunities in neighboring African countries. In other words, this is a bottom-up and ad hoc connection between CSR and business development. What are options for companies to cultivate this connection? Could top-down design provide an alternative (or complementary) strategy?

Case Study 2.2 State Grid’s Localization Strategies in Belo Monte, Brazil

Marco Germanò

1 Overview

This case study delves into the State Grid Corporation of China’s (SGCC’s) localization strategies within the Belo Monte hydroelectric project in Brazil, highlighting the challenges and learning experiences of Chinese state-owned enterprises (SOEs) in expanding their reach into Latin America. Over recent decades, Chinese SOEs have emerged as potential collaborators for Latin American countries in need of investment and technology for critical infrastructure projects. SGCC’s role in constructing the Xingu-Estreito transmission line for the Belo Monte hydroelectric plant stands as a prime example. This line, among the world’s largest and first to implement ±800kV ultra-high-voltage direct current (UHVDC) technology outside China, represents not only an engineering triumph for SGCC but also a significant business and legal accomplishment. The company adeptly navigated the complex Brazilian legal environment, addressing multifaceted regulatory, financial, and environmental challenges. While the Brazilian government has lauded the project for advancing energy security, it has also faced considerable criticism over socio-environmental issues. This case study, drawing on government and corporate documents as well as confidential interviews, examines SGCC’s approach to procurement, financial structuring, environmental licensing, and operational management in the context of these grandiose transmission lines.

Our company is from China, works in Brazil and gives back to the whole world; hence, the better its localization strategies, the more international it becomes.

Cai Hongxian, Chairman of State Grid Brazil Holding (2010–2020)

The size of this project is the size of our people. It is grandiose. It is a grandiose power project. The best way to describe Belo Monte is this word: grandiose.

Dilma Rousseff, President of Brazil (2011–2016)

Our fish are gone, our village is gone, the blue of the lake we used to care for is gone. They violated our rights and threw us in the trash as if we were disposable.

Leonardo Batista, a riverside dweller affected by the Belo Monte hydroelectric project

2 Introduction

On 7 February 2014, executives at the SGCC headquarters in Beijing’s Xicheng District celebrated their successful bid to construct the Xingu-Estreito transmission line with a toast and smiles. Ten thousand miles away, in Rio de Janeiro, Brazil, the celebration was a bit more boisterous. The victory in the Transmission Auction No. 011/2013 was a watershed moment for SGCC’s operations in Latin America. It marked its largest venture in the region and positioned the company as one of the largest foreign players in Brazil’s electricity sector. This achievement would be a triumph for any foreign company emerging in a market as competitive as Brazil’s. However, this example is particularly remarkable as SGCC had been operating in the country for less than three years – a short time for such a complex economic sector and jurisdiction.

When Cai Hongxian, a 46-year-old senior executive at SGCC, arrived in Brazil in September 2010, he faced the daunting task of leading the company’s most significant venture outside China. At that time, SGCC was already the world’s largest electricity company, holding assets worth US$3.9 trillion and providing power to more than 1.1 billion people in China (Figure 2.2.1 gives an overview of SGCC’s global assets as of 2021). However, the company had little experience investing overseas, having only previously ventured into the nearby Philippine market. Brazil was certainly the company’s biggest international challenge at the time – and its greatest economic opportunity. The country had a large consumer market, geographic characteristics similar to China’s, and was building stronger political ties with the Chinese government. Furthermore, Brazil was experiencing an economic boom, with a corresponding energy demand increase.

Figure 2.2.1 Overview of SGCC’s global assets, 2021

Conversion rate: RMB to US$ at 6.5 (Bloomberg, August 2021).

Source: Based on Fortune Global 500 (2021 list); SGCC, ‘Corporate Social Responsibility Report 2020’ (2020) bit.ly/3VSZJm3.

Cai was tasked with a clear goal: to make Brazil a successful case in SGCC’s emerging international portfolio, particularly since the board was interested in expanding into new markets. However, the means to achieve this goal were uncertain. When the executive arrived in Brazil, he exemplified SGCC’s general lack of knowledge about the country. He did not speak Portuguese, had a limited understanding of the complex regulatory environment surrounding the electricity sector, and was not familiar with the country’s business culture. Cai was accompanied by a small team of Chinese colleagues, SGCC’s technical expertise, and a blank check from headquarters – the Chinese board pledged to provide financial support for SGCC’s activities in Brazil as long as they were sound and profitable.¹ Nonetheless, Cai had to find a way to establish a successful company that could thrive in Brazil’s highly complex, competitive, but lucrative electricity market.

This case study explores SGCC’s foray into Brazil, drawing on a range of sources, including publicly available governmental, corporate, and regulatory documents, along with disclosed and undisclosed interviews with the company’s directors and legal advisors. The case study proceeds in five sections: the first provides an overview of the regulatory framework in Brazil that SGCC encountered in 2010; the second outlines the legal and corporate steps taken by SGCC upon entering the country; the third presents the Belo Monte hydroelectric project; the fourth examines the construction of the Xingu-Estreito transmission line; and the fifth evaluates the business aftermath of the line’s construction. Finally, the study concludes by highlighting SGCC’s successful localization strategies and discussing potential regulatory issues for the local government arising from the company’s expanding influence in Brazil.²

3 The Case

3.1 Background: The Regulatory Framework of Brazil’s Electricity Market

Though SGCC made a swift entry into the Brazilian market, it was nevertheless a latecomer compared to other Western players. When Cai announced SGCC’s first investment in Brazil in mid 2010, that country’s electricity market was at the apex of a two-decade-long reform period. This era not only revolutionized electricity production and commerce but also led to the establishment of an interconnected grid system under a revamped regulatory structure, known as the National Interconnected System (Sistema Interligado Nacional).

This reform process can be traced back to the early 1990s. Facing a shortage of dollars stemming from a structural balance of payment crisis and an inability to meet foreign commitments, the Brazilian government embarked on a large-scale reform program under the neoliberal auspices of the Washington Consensus. Within the electricity market, the restructuring was grounded in the three principles of the British power grid model: promoting competition through staged segmentation; relinquishing the state’s monopoly and encouraging foreign direct investment; and repositioning the government from an active economic participant to a supervisory entity. Accordingly, the Brazilian government first segmented the electricity production chain into four stages: generation, transmission, distribution, and commercialization. Each segment was to be governed by its own set of regulations, standards, and supervisory institutions. Additionally, the government established three platforms for electricity trading: a system of public auctions to allocate concessions for each segment, a wholesale market for facilitating bilateral contracts between agents operating at different stages, and a secondary market for negotiating previously auctioned concessions.

Public and private companies, whether domestic or foreign, were allowed to participate in each segment either by securing new auctions or by acquiring existing concessions in the secondary market. The resulting “4-stages, 3-markets” framework was designed to mitigate risks of market control and supply chain verticalization, while assigning the Brazilian government the responsibility of managing the energy supply in line with its policy objectives.³

The liberalization scheme brought about by these reforms significantly reduced public assets and redirected the state’s focus toward market regulation. The government created several new bodies to oversee economic activity across all stages, including the National Electric Energy Agency (Agência Nacional de Energia Elétrica, ANEEL), a quasi-independent regulatory agency responsible for supervising all stages and guaranteeing market competition. ANEEL also was tasked with coordinating public auctions for long-term energy concessions, where the bid is awarded to the company that offers the highest discount rate on the annual allowed revenue (receita anual permitida, RAP), that is, the lowest annual amount in fees.

The ensuing scenario marked a notable change in the nature of electricity production, transitioning from a predominantly state-owned economic activity to a decentralized, stringently regulated environment with a rising private sector. The market became fragmented, with successful privatizations resulting in the establishment of more than 280 companies in Brazil. Foreign participation became a cornerstone across all stages of the electricity production chain, surging from almost negligible to approximately 21% in the country’s installed capacity, 23% in transmission lines, and 52% in energy distribution.⁴ In contrast to other Latin American economies such as Mexico and Paraguay, which primarily depend on state-led activities, Brazil boasts one of the most liberalized electricity markets in the region.⁵ The majority of these companies are from Europe, North America, and, most recently, China.

Overall, the three reform pillars – competition, regulation, and private/foreign participation – effectively bolstered energy supply and resilience in the country while fostering market competition. From 1990 and 2022, the installed capacity in the country increased markedly from 49,760 MW to 206,451 MW, with the length of transmission lines correspondingly expanding from about 56,000 km to 165,667 km.⁶ Brazil now ranks as the sixth-largest electricity producer worldwide, contributing 49.8% to Latin America’s total installed capacity.⁷

Despite its progress, Brazil’s energy sector still faces critical challenges related to water availability and transmission distances. The heavy reliance on hydropower, accounting for 63% of Brazil’s electricity, renders the country vulnerable to climate-induced stresses, as highlighted by the severe 2020 drought.⁸ The majority of energy demand, around 48.6%, is in the southeast’s urban centers, while approximately 70% of untapped hydropower resources are in the underdeveloped northern region – an area characterized by poor infrastructure, low population density, and a significant distance from consumer centers.⁹ Developing projects in this region requires the construction of extensive transmission lines, which incurs efficiency costs and necessitates increased infrastructure investment.

3.2 The Company: SGCC Lands in Brazil

SGCC, a state-owned “profit-driven” utility company headquartered in Beijing, People’s Republic of China (PRC), operates under the oversight of the State Council State-owned Assets Supervision and Administration Commission, the body tasked with supervising China’s SOEs.¹⁰ Established on 29 December 2002, SGCC emerged from an extensive reform within China’s electricity sector, which dismantled the former all-purpose China State Power Corporation (CSPC). This restructuring was driven by the policy of “grasping the large and letting go of the small” (zhua da fang xiao), adopted by the 15th Communist Party Congress in September 1997, with the aim of enhancing market competitiveness and fostering innovation through equity segmentation. The subsequent “Plant-Grid” reform led to the fragmentation of CSPC into five smaller generation groups and two grid companies, SGCC – which retained about 80% of CSPC transmission assets and the responsibility for orchestrating the general operations of the grids across the country – and the smaller China Southern Power Grid Company.

In the following years post-reform, SGCC established itself as the dominant force in China’s transmission sector, buoyed by public funding, easy credit access, market barriers for new entrants, and a vast consumer market. However, at the turn of the century, SGCC’s operations were predominantly confined within China, and few foresaw its venture into overseas investments. This direction shifted with the PRC’s “go out” (zouchuqu) policy in the early 2000s, encouraging outbound investment. Concurrently, SGCC’s business strategy expanded to encompass foreign markets, initially focusing on three objectives: enhancing technology for improved domestic outcomes, securing higher profits compared to the more price-restricted Chinese market, and strengthening its position within China’s political landscape.¹¹

As a result, in 2007, SGCC embarked on its first international venture in the Philippines. The company secured the operation of the national power grid during a privatization auction of the state-owned National Transmission Corporation (TransCo).¹² A consortium comprising SGCC and two Philippine companies, Monte Oro Grid Resources Corporation and Calaca High Power Corporation, clinched the bid with an offer of US$3.95 billion for a twenty-five-year license to operate TransCo. Within the newly formed National Grid Corporation of the Philippines, SGCC held a 40% stake and was able to appoint its chairman. SGCC hired Goldman Sachs to help with the deal.¹³

In the following months, SGCC swiftly enhanced its corporate structure to better manage its emerging international portfolio. The restructured framework included the establishment of various subsidiaries, each tailored to oversee distinct aspects of its global activity.¹⁴ These entities were not limited to but included (1) State Grid International Development Co. Ltd. (SGID Co.), a limited liability company organized under the laws of the PRC; (2) State Grid International Development Limited (SGID), a private company limited by shares organized under the laws of Hong Kong SAR; (3) International Grid Holdings Limited (IGH), a corporation organized under the laws of the British Virgin Islands; and (4) Top View Grid Investment Limited (TVGI), a corporation organized under the laws of the British Virgin Islands (BVI). IGH and TVGI are each direct wholly owned subsidiaries of SGID. SGID is a direct subsidiary of SGID Co., which is a direct wholly owned subsidiary of SGCC.

The Philippines venture highlighted both profits and challenges for SGCC. Initially harmonious, the relationship deteriorated due to events including the 2010 Manila hostage crisis and the 2011 South China Sea dispute. In 2012, the Philippines denied visas to twenty-eight SGCC executives and employees. Diplomatic efforts failed, and SGCC ceased further investments, while Monte Oro sold their shares to a local holding, OneTaipan. By 2015, the Philippines claimed technical self-sufficiency, leading to the exit of remaining SGCC experts. Although SGCC continued to receive dividends, its operational influence ended. Currently, no SGCC executive serves on TransCo’s board.

The Philippine experience highlighted the importance of political risk management and stability in international investments for SGCC. It provided valuable lessons that shaped SGCC’s more strategic and locally attuned approach to entering the Brazilian market. This new foray into Latin America was also informed by dialogues with the Chinese government, which equipped SGCC’s board with insights into global economic opportunities. This advice was crucial in light of the challenges other Chinese SOEs were encountering in their international ventures.¹⁵

Subsequently, on 28 April 2010, SGCC announced its entry into Brazil by confirming the creation of State Grid Brazil Holding (SGBH), a privately held company focused on managing local equity interests.¹⁶ SGBH was incorporated in Rio de Janeiro as a subsidiary of TVGI and IGH with a 0.0001% and 99.9999% interest, respectively. The incorporation was soon followed by the announcement of SGBH’s first investment in the country.

On 16 May 2010, the newly formed board confirmed the conclusion of negotiations to acquire seven transmission lines from the Spanish consortium Plena Transmissoras, led by Isolux, Cobra, and Elecnor, for US$989 million plus debt assumption. This deal also included a thirty-year license to operate approximately 3,000 km of the consortium’s transmission networks in Brazil. The deal involved Brazilian and Anglo-American law firms and was also supported by SGCC’s expanding in-house global legal team.¹⁷ While the external firms addressed corporate and transactional legal issues, the internal team spearheaded legal research and played a pivotal role in shaping the investment strategy.

SGBH’s investment also coincided with a series of political agreements between Brazil and China. From 2002 to 2010, both governments signed various legal instruments, such as a Joint Plan of Auction and multiple Memoranda of Understanding (MOUs), highlighting economic opportunities and synergies. These documents frequently mentioned energy cooperation, with China expressing interest in Brazil’s electricity market.¹⁸

Thus, when SGBH announced its entry into Brazil, it was celebrated by both presidents, Lula da Silva and Hu Jintao, for fulfilling the pledge of the Chinese government to invest in Brazil’s infrastructure gap. For SGCC, the Brazilian market seemed to be the right choice to bolster the company’s internationalization drive and it targeted Brazil for several reasons. The 1990s reforms in Brazil had gained international recognition, attracting an increasing number of foreign companies. Post-2008 financial crisis, European utilities, seeking capital, were keen to sell their local assets. Additionally, Brazil was anticipating a 4–5% annual growth in electricity demand from 2001 to 2021, further driven by Rio hosting the 2014 World Cup and the 2016 Olympics. As Cai stated in 2011: “Brazil is a politically stable country and has friendly relations with China … We were attracted to the Brazilian market due to its mature market operations mechanism, transparent decision-making, and orderly sectoral supervision.”¹⁹

The 2010 acquisition proved to be just the beginning of SGCC’s plans for Brazil. Over the next few years, SGBH expanded its operations by acquiring other operational Special Purpose Vehicles (SPVs) and participating in public auctions conducted by ANEEL. From 2011 to 2013, SGBH acquired five additional transmission lines (covering 1,960 km) from the Spanish group ACS for US$940 million and won four public auctions (covering 1,700 km) to construct new transmission lines in the country.

Despite financial support from the parent company for these operations, the initial phase was challenging for SGCC, as it had no previous experience operating in Brazil. The management team sent to the country, though well-versed in the market’s economic prospects, had minimal grasp of the complex regulatory landscape, the rigorous environmental licensing processes, and the robust labor protections involving a unionized workforce. As highlighted by a former SGBH director, the Chinese management, accustomed to a centralized political culture, “did not [initially] understand the regulatory, environmental, and labor intricacies of the country.”²⁰ As a result, the Chinese group employed various strategies to overcome the initial informational asymmetry and cultural gaps.

First, SGBH participated in public auctions as part of consortiums with Brazilian SOEs, a method used in three of the four initial auctions. In Auction No. 006/2011, SGBH secured a 51% majority stake in the Luziânia-Niquelândia substations system concession by forming a consortium with the state-run Furnas, offering a discount rate of 5.2% below the reference value. Similarly, in Auction No. 002/2012, SGBH joined forces with another Brazilian SOE, Copel, to obtain a 51% share in the Tele Pires transmission lines concession, including the Matrinchã and Guaraciaba projects, with substantial discount rates of 43.01% and 28%, respectively. In Auction No. 007/2012, SGBH collaborated with both Furnas and Copel to win a 51% share in the Paranaíba transmission lines project. As the SGBH Investment Director emphasized in 2012, the company’s strategy in Brazil at the time was centered on forming alliances with local companies, stating, “Our goal is to seek cooperation rather than competition.”²¹

Second, through acquiring Plena Transmissoras and ACS, SGBH gained access to a skilled pool of professionals. Between 2010 and 2013, the company recruited several managers and workers from the acquired companies and the broader market, dramatically expanding its office in Brazil. One notable example was the hiring of Ramon Haddad, a former Plena Transmissoras professional widely recognized as a market expert, who later became the vice president of SGBH. As noted by a former SGBH director, “these acquisitions quickly provided operational infrastructure, but more importantly, valuable knowledge on how to navigate the Brazilian market in terms of regulations and professional networks with authorities.”²²

Over the next few years, the company consistently prioritized local expertise in its board and management roles. While the positions of chairman, CEO, and one vice president were held by long-standing SGCC employees, the other two vice presidents and senior directors were predominantly Brazilian. Of the initial 300 hires within the first three years, nearly all were locally sourced. By 2013, SGBH had also formed a dedicated in-house legal team, even incorporating Brazilian legal professionals who had assisted with the company’s initial M&As and public auctions.²³ This team grew over time, taking on most of SGCC’s in-house legal responsibilities in Brazil. Currently, they collaborate with local and, occasionally, foreign law firms for complex or specialized legal advice.²⁴

This move to localize both the operational and business decisions was a conscious one as Cai explained in 2013:

Given that we are a Chinese company entering a foreign market, we knew we had to adapt to the local culture and operational environment. We decided right from the beginning to bring twenty Chinese employees to Brazil to give us support through the process of adapting our Chinese culture to the Brazilian way of business. Such first steps are always tentative but we are here to stay and we are ready to do what is necessary to accomplish our targets.²⁵

Finally, during the initial period between 2010 and 2013, SGBH focused on strengthening its ties with local economic and political stakeholders, forging its own MOUs independently of the PRC government. A notable collaboration was formed with Brazilian SOE Eletrobras in 2011 during President Dilma Rousseff’s visit to China. This MOU facilitated interactions and technical knowledge-sharing between both electricity giants. Shortly thereafter, SGBH and Eletrobras deepened their partnership beyond political engagement, collaborating economically on the Chinese company’s most significant overseas investment at the time: constructing the first transmission line of the Belo Monte hydroelectric power plant, a grandiose dam marred by its socio-environmental impact.

3.3 The Project: The Belo Monte Hydroelectric Power Plant

In March 2010, ANEEL released the construction notice for the Belo Monte hydroelectric dam, inviting bids under specific conditions. Accordingly, Brazil was set to build the third largest hydroelectric dam in the world, with an installed capacity of 11,233 MW across eighteen turbines. The proposed power plant, designed as a “diversion” or “run-of-river” facility, differed from traditional Brazilian hydroelectric plants that store river water. This design aimed to minimize the socio-environmental impact of the project.²⁶

The announcement of the Belo Monte dam project was greatly celebrated by then president Lula, whose administration revived the plan, originally conceived by Brazil’s military government in 1975. Lula’s administration advocated for the dam as crucial for Brazil’s energy security. However, civil society and environmental groups raised significant concerns. They criticized the project’s potential environmental and social impacts, particularly on Indigenous communities. Despite the design with reduced impacts, issues like water management and economic viability remained contentious.

Additionally, the dam was to be built in the Xingu River in the state of Pará, far from the country’s industrial region (Figure 2.2.2 provides an aerial view of the dam and its location). According to the transmission technology available in the country at the time, such long distances would result in significant losses during transmission to Brazil’s southeast. The most advanced transmission line in Brazil at the time was the Rio Madeira high-voltage direct current (HVDC) system. It consisted of two bipolar ±600 kV DC transmission lines, each with a capacity of 3,150 MW, and an approximate loss rate of 11%.

Figure 2.2.2 The Belo Monte dam and its location in Brazil

Source: Bruno Batista, licensed under CC BY 2.0 https://bit.ly/3U6F6BD; NordNordWest, licensed under CC BY-SA 3.0 https://bit.ly/49u6ga6.

Some of the concerns surrounding the project proved to be valid. The dam led to the displacement of several communities and significantly altered the region’s environmental conditions.²⁷ Fluctuations in river flow affected power production, with the dam’s guaranteed minimum capacity set at 4,571 MW, approximately 39% of its maximum capacity (Figure 2.2.3 gives annual average production). Furthermore, the consortium that won the bid for the hydroelectric plant, comprising several prominent Brazilian companies, faced numerous corruption allegations and environmental disputes in federal courts. These challenges delayed the dam’s completion by fourteen months and doubled its total cost from approximately US$9 billion to US$18 billion.²⁸ Despite these issues, the initial fears of energy loss did not materialize, as Brazil was on the brink of witnessing the construction of one of the world’s largest UHVDC lines.

Figure 2.2.3 Belo Monte dam’s daily average energy production, 26 February 2016 to 30 December 2023 (median megawatts, MWmed)

Source: Operador Nacional do Sistema Elétrico, ‘Resultados da Operação: Geração de Energia’ www.ons.org.br/Paginas/resultados-da-operacao/historico-da-operacao/geracao_energia.aspx

3.4 The Line: Xingu-Estreito

The construction of the Belo Monte dam started in 2011, but only two years later the auction notice for its transmission lines was made public – a short but crucial period for the lines’ design. ANEEL produces feasibility studies before officially launching a project via its Energy Research Office (Empresa de Pesquisa Energética, EPE), which details the expected technicalities required in each project. In 2007, EPE published the first studies for a transmission line connecting the Belo Monte dam to the national grid. These studies proposed using an HVDC of ±600 kV, similar to that seen in Rio Madeira.

In 2011, EPE conducted new feasibility studies. This time it recommended using a UHVDC system consisting of two bipolar ±800 kV DC transmission lines, each with a capacity of 4,000 MW. UHVDC technology offers lower transmission costs and higher efficiency for transmitting very high power over long distances. However, at the time, the technology for this voltage level was not only unavailable in Brazil but only used in one place in the world: China.

On 19 December 2013, the auction notice for the Xingu-Estreito line was then published, confirming the use of UHVDC. When the offers for the construction and thirty-year use concession were opened on 7 February 2014, a consortium composed of SGBH and two Eletrobras subsidiaries, Eletronorte and Furnas, won the bid to Auction No. 011/2013. The three companies offered US$217 million of annual revenues to build and operate the lines, a 38% discount rate to the notice threshold. Chinese officials noted that SGCC’s competitive bid was enabled by its ability to source significant equipment from China.²⁹

In March 2014, the three companies then established an SPV named Belo Monte Transmissora de Energia (BMTE) in Rio de Janeiro, Brazil. SGBH held a majority stake of 51% in BMTE, with Eletronorte and Furnas splitting the rest equally. The company’s governance structure balanced Brazilian and Chinese influences, featuring an evenly shared presidency and board with three members from each country. Senior management roles were jointly held, pairing a director and a deputy for each area, representing both nationalities.

The partnership between SGBH and Eletrobras proved effective for handling the complexities of the Xingu-Estreito project. Despite SGBH’s growing familiarity with Brazil, this project posed larger technical, environmental, economic, and political risks. The planned transmission line, traversing sixty-five municipalities, four states, and three biomes in Brazil, presented a challenging terrestrial landscape. The legal complexities were even more daunting, requiring billion-dollar funding, negotiations with numerous landowners, and adherence to strict environmental standards. Collaborating with Eletrobras, Brazil’s largest energy player, presented an advantageous opportunity. SGCC brought state-of-the-art technical expertise, while Eletrobras contributed extensive local knowledge of Brazilian regulations and authorities. As an SGBH former director aptly put it, “This was a successful business strategy from SGCC to adapt to Brazil, mitigate risk, and accelerate learning.”³⁰

Although the companies collaborated, each had a specific role in particular aspects of the venture. SGBH managed the financial side and appointed the Financial Director to BMTE. Eletronorte was in charge of obtaining environmental licenses and naming the Environmental Director. Furnas handled the technical design and appointed the Technical Manager. Furthermore, Eletrobras engaged in shaping public opinion through a media campaign to address ongoing criticisms of the Belo Monte project.

A distinctive feature of this management structure was the implementation of a “shadow management” system. In this arrangement, whenever a Brazilian professional held a managerial role, a Chinese deputy was assigned to work alongside them. This Chinese deputy closely collaborated with the Brazilian manager, providing insights and relaying important information back to the Chinese headquarters. As explained by a former director: “Every senior executive at SGBH had a Chinese shadow at his side. And this Chinese shadow made reports to the Chinese headquarters on the matters dealt with. It was a way that the Chinese found to learn about the Brazilian operation in practice.”³¹

In legal matters, the SGBH in-house team led operations for BMTE in conjunction with teams from Eletronorte and Furnas, maintaining close collaboration with the Chinese management, the global SGCC legal team, and external law firms, especially for intricate tasks such as debenture issuance, audits, and labor- and tax-related issues. While ultimate decision-making authority rested with the Chinese management, the Brazilian legal team enjoyed significant autonomy in handling local affairs. As one SGBH lawyer noted, “Brazilians were at the forefront of all legal operations, reporting to Chinese managers. Direct interactions with Chinese executives were rare.” A former director further explained, “Cai had the final say, but our legal team had substantial independence in determining the best strategies for matters involving concessions, public bids, or landowner negotiations to achieve the company’s economic goals.”³²

To finance its investment, BMTE used a combination of loans, private debt, and equity, totaling an estimated US$1.8 billion. The consortium secured 46% of this amount, approximately US$818 million, in loans from Brazil’s Development Bank (Banco Nacional de Desenvolvimento Econômico e Social, BNDES). Benefiting from BNDES’s special subsidized credit line, BMTE accessed the long-term interest rate (taxa de juros de longo prazo, TJLP), enjoying interest rates between 2.98% and 4.10%, notably lower than typical market rates. Additionally, BMTE raised US$600 million in private debt through a debenture issuance, facilitated by local law firms.³³ The consortium also received an equity infusion from its shareholders to support construction costs. Over time, BMTE further diversified its financing by issuing a second debenture and obtaining additional loans from BNDES, thereby spreading out operational costs and risks.

Upon securing local financing, BMTE then faced a significant challenge in acquiring environmental licenses, due to Brazil’s extensive and complex regulatory landscape featuring more than 20,000 environmental standards. This framework poses considerable hurdles for foreign entities, as exemplified by China Railway Eryuan Engineering Group’s failed attempt to construct the Brazil–Peru Transcontinental Railway.³⁴ To navigate these complexities, BMTE employed a locally focused approach, engaging an interdisciplinary team of Brazilian experts for conducting Environmental Impact Assessment (EIA) studies.³⁵ Furthering its strategy to local expertise, BMTE engaged Tracbel, a subsidiary of the French multinational utility company Engie, renowned for its extensive experience in Brazil.

BMTE’s EIA outlined eighteen initiatives to mitigate environmental concerns, including route optimization, implementation of forest replenishment programs, and provision of support to affected communities. The final line design stretched over approximately 2,089 km, surpassing the direct distance between stations (about 1,990 km), to navigate around sensitive environmental areas (Figure 2.2.4 gives the line design). On 20 May 2015, Brazilian authorities granted approval to the studies, marking a crucial milestone in the project’s progression.

Figure 2.2.4 Design of the Xingu-Estreito transmission line highlighting ecological parks, buffer zones, and conservation units

Source: JGP Consultoria (n 40) 29.

BMTE then enlisted a mix of Brazilian, European, and Chinese contractors. The line was segmented into eight stretches, each around 260 km in length, and corresponding engineering, procurement, and construction (EPC) contracts were awarded for these sections. Brazilian firms Tabocas (for sections 3 and 4), São Simão (sections 6 and 7), and Incomisa (section 8) were engaged, while the Chinese company SEPCO 1, a subsidiary of PowerChina, took on sections 1, 2, and 5. In addition, infrastructure components like towers and substations were contracted to other companies, including Brametal, Electrovidro, SAE Towers, and Siemens. While BMTE oversaw the EPC contractors’ operations, it did not directly involve itself in the construction process. SGCC’s affiliates – such as NARI, CET Brazil, and Xuji – also played a pivotal role by providing specialized automation and smart metering technologies. Notably, NARI established a manufacturing plant in São Paulo at the time, aiming to emerge as a key supplier for Brazil’s grid construction efforts.

The construction of the transmission line involved approximately 8,000 workers, predominantly Brazilian. As Cai noted in 2012, SGCC’s approach in Brazil did not rely on importing Chinese labor: “Our strategy involves bringing Chinese executives to Brazil while also employing local workers. We aim to blend the best aspects of Chinese and Brazilian work cultures.”³⁶ To bridge cultural gaps, SGBH even engaged a firm specializing in cultural integration to facilitate interactions between Brazilian workers and Chinese managers. A former SGBH executive reflected, “from their arrival in Brazil, there was a focused effort to enhance company performance by integrating Chinese and Brazilian cultural elements.”³⁷ Nonetheless, linguistic barriers remained a persistent challenge, even during the operational phase of the project, as highlighted by another director: “Language has always remained a challenge, even today with an operational line.”³⁸

Construction of the line began in June 2016 and finished by December 2017, two months ahead of schedule. Upon completion, SGBH solidified its presence in Brazil, establishing significant operations in Rio de Janeiro with a local workforce of 800 and investing US$60 million in five floors of a 16-story building, which also accommodates other Chinese companies. The project not only deepened SGBH’s understanding of the Brazilian market but also strengthened its local team and its relationship with Brazilian partners. This experience would soon prove valuable for the construction of the Belo Monte hydroelectric plant’s second line – currently the world’s largest transmission line. However, this time, SGBH embarked on the new project alone.

3.5 Aftermath: SGBH Accessing Other Stages of the Production Chain

The successful completion of the Xingu-Estreito transmission line significantly elevated Brazil’s status within SGCC’s global operations, positioning it as the corporation’s second most crucial market after China. The construction and overall operation of the Xingu-Estreito line was also a testing ground for the Chinese in both exploring new markets and experimenting with their UHVDC technology outside of China. These achievements sparked heightened interest from SGCC’s headquarters, and over the following years SGCC aimed to broaden its portfolio in Brazil. The aftermath saw two distinct strategies: securing a more robust position in the transmission market through ANEEL auctions and shifting the initial emphasis from transmission lines to other segments of Brazil’s electricity production chain.

First, SGBH made significant investments in new public auctions, thereby extending its control over more than 16,000 km of transmission lines, which currently accounts for approximately 10% of Brazil’s total high-voltage network. Notably, in 2015, the company won the auction to build and operate the second line of the Belo Monte project, the 2,543 km Xingu-Rio UHVDC transmission line (Figure 2.2.5 showcases the second line’s design, detailing the sections handled by EPC contractors).³⁹ The strategies used in this second venture were inspired by the successes and mistakes of the first operation. In areas such as financing, the same approaches were used, while environmental strategies were refined. In 2023, SGBH secured another major project, constructing 1,463 km of HVDC lines, offering a 40% RAP discount rate, and committing to invest an additional US$3.6 billion. In both instances, SGBH submitted bids independently, marking a departure from its previous strategy of collaborating with local SOEs. The company managed construction on its own, subcontracting for equipment and line construction, while engaging a larger number of Chinese companies in the projects.

Figure 2.2.5 Design of the Xingu-Rio transmission line detailing sections handled by EPC contractors

Source: Ricardo Abranches Felix Cardoso Júnior and others, ‘A XRTE e o Meio Ambiente’ (Rio de Janeiro 2020) 12.

Second, SGBH broadened its scope within Brazil’s electricity chain, moving beyond transmission to acquire operational assets in other stages. A significant development occurred in August 2016, when SGCC’s subsidiary, SGID, invested US$1.8 billion to acquire a 23% stake in Companhia Paulista de Força e Luz (CPFL), the largest private player in the Brazilian electricity sector and a publicly traded company on São Paulo’s B3 stock exchange. To manage CPFL’s assets, SGID incorporated State Grid Brazil Power (SGBP) as a new holding company based in Campinas, São Paulo. This acquisition was further reinforced by a Public Offer for Acquisition (PAO) in November 2017, valued at US$3.5 billion, which aimed to purchase shares from CPFL’s minority shareholders. The successful PAO led to SGCC acquiring a controlling interest of 83.7% in CPFL, along with complete ownership of CPFL Renováveis, a subsidiary specializing in renewable energy. While CPFL’s remaining shares continued to be traded freely, its American Depositary Shares were delisted from the New York Stock Exchange, and CPFL Renováveis was fully withdrawn from B3.

The acquisition of CPFL positioned SGCC as Brazil’s second largest electricity utility, only behind Eletrobras. By 2021, SGCC had a significant presence in the Brazilian electricity sector, both directly and via its subsidiaries. The company controlled 4.4 GW, or the equivalent to 2.1% of the country’s generation capacity, and owned 22,000 km of transmission lines, representing 11% of Brazil’s network. Additionally, it managed the electricity distribution for 10 million clients, accounting for 13% of Brazilian consumer units (Figure 2.2.6 provides a comprehensive view of SGCC’s assets in Brazil via SGBH and CPFL as of 2021). SGCC’s operations in Brazil are organized under a holding model, managing more than sixty SPV companies through SGBH, SGBP, and CPFL. As of 2021, SGCC held US$6 billion in Brazilian assets, and its reported revenues and net profit in the country were US$8.4 billion and US$2.2 billion, respectively.⁴⁰

Figure 2.2.6 SGCC’s assets in Brazil via SGBH and CPFL, 2021

Cai served as the chairman of SGBH until 2020, after which he returned home upon completing his mission in Brazil. In China, he assumed the role of General Manager of State Grid Fujian Electric Power Co., an SGCC subsidiary focused on providing electricity to the province of Fujian. He also became a frequent spokesperson of SGCC success in Brazil. Meanwhile, SGCC went abroad, expanding its activities internationally and becoming the world’s fifth largest company by total assets. As of 2023, it has investments in nine countries – Australia, Brazil, Chile, Greece, Italy, Oman, Pakistan, the Philippines, and Portugal – and activities in more than forty countries. Its overseas investments surpass US$21 billion, with approximately 60% of these funds allocated to Brazil. The Belo Monte transmission lines, along with CPFL, are among the crown jewels of SGCC’s global portfolio.

4 Conclusion

This case study explores SGCC’s strategic foray into Brazil, highlighting its effective approach compared to its earlier challenges in the Philippines. Yet it also points to concerns about SGCC’s increasing influence in Brazil’s electricity sector, especially after diversifying its operations post the Xingu-Estreito transmission line project. Key issues involve potential impacts on market competition and the necessity for regulatory oversight to prevent market dominance (Figure 2.2.7 details market share by nationality in Brazil’s generation, transmission, and distribution sectors from 2010 to 2019).

Figure 2.2.7 Market share by nationality in Brazil’s generation, transmission, and distribution sectors, 2010–2019 respectively

Source: Pedro Henrique Batista Barbosa, ‘New Kids on the Block: China’s Arrival in Brazil’s Electric Sector’ Global Development Policy Center GCI Working Paper No. 012 (December 2020) www.bu.edu/gdp/files/2020/12/GCI_WP_012_Pedro_Henrique_Batista_Barbosa.pdf.

Evaluating the impact of Chinese investments in Brazil’s electrical sector requires a nuanced analysis that considers diverse perspectives. While these investments typically comply with Brazilian corporate legislation, their alignment with national policy objectives and the market’s design remain a matter of debate. This issue is critical not only for Brazil but also for other developing nations grappling with inadequate infrastructure, economic instability, and reliance on foreign capital. Moreover, despite having regulatory bodies like the Administrative Council for Economic Defense (Conselho Administrativo de Defesa Econômica, CADE) to monitor market concentration, Brazil lacks specific measures for national security considerations, unlike mechanisms such as the Committee on Foreign Investment in the United States.

Reflecting this complexity, two former SGBH directors present differing views. One states, “Regardless of market concentration, a company in the Brazilian market does not have much power such as to dictate prices or take control of an asset. Everything is a concession under a robust regulatory framework.”⁴¹ Another counters, “Chinese investments raise many issues, including market concentration. It is not just a matter restricted to Chinese investors, but it is clear that their financial capacity and interest in new investments in Brazil are now relevant. … We need to think seriously about this.”⁴²

5 Discussion Questions and Comments

5.1 For Law School Audiences

SGCC’s venture in Brazil’s Belo Monte project introduces several intricate legal challenges of foreign companies emerging in new jurisdictions. These may include navigating a complex regulatory environment, addressing socio-environmental concerns, and ensuring compliance with both local and international legal frameworks. Given the information provided in the case, discuss the following questions:

1. 1. Regulatory Navigation: How did SGCC successfully navigate the complex regulatory framework in Brazil, particularly in contrast to its Philippine experience? Analyze the specific legal strategies employed by SGCC in Brazil, evaluating their effectiveness in adapting to this market. Further, consider which of these strategies could be feasibly replicated by other multinational companies in similar contexts, and discuss any factors that might limit their viability.

2. 2. Financial Design: Analyze SGCC’s legal strategies that supported the financial design for the Xingu-Estreito transmission line project in Brazil. Discuss how these strategies facilitated effective risk management and consider their adaptability to similar projects in other countries. Evaluate the availability of funding options domestically in China or in other countries, locally in Brazil, or transnationally, and assess which approach might be most advantageous for other multinational companies venturing into developing countries.

3. 3. Corporate Governance: Explore the legal consequences of SGCC’s decision to delist CPFL from the NYSE and CPFL Renováveis from B3. How does this decision reflect SGCC’s corporate governance and market strategy in an international context? If you were part of SGCC’s legal team, would you have advised in favor of this move? Discuss the potential benefits and drawbacks of such a decision from a legal and corporate strategy standpoint.

4. 4. Legal Team Localization in Multinational Corporations: To what extent does the localization of a legal team within a multinational corporation, such as SGCC in Brazil, enhance the company’s capacity to effectively navigate intricate local regulatory and legal landscapes? Delve into the advantages and potential obstacles associated with this strategy, particularly in regions where legal norms and practices diverge significantly from the corporation’s home country.

5. 5. Market Integration and Competition Law: With SGCC’s rapid expansion and integration into the Brazilian market, questions regarding competition law and national security have come to the forefront. Delve into the legal implications of SGCC’s increasing market influence, including the challenges it poses to the Brazilian market design and potential national security concerns. Consider whether these concerns would be the same if the case involved a company from a different nation and how regulatory bodies should oversee such complex issues.

5.2 For Policy School Audiences

SGCC’s involvement in the Belo Monte hydroelectric project in Brazil presents a compelling case for exploring policy implications in international energy projects for developing countries. This case study offers an opportunity to analyze policy decisions related to energy security, environmental sustainability, international cooperation, and developmental policies. The case also aims to scrutinize the interplay between business interests, governmental regulations, and public policy, highlighting the complex dynamics that shape such projects. Given the information provided in the case, discuss the following questions:

1. 1. Regulatory Frameworks, Market Concentration, and Investment Attraction: Discuss the specific regulatory measures in Brazil aimed at preventing market concentration in critical infrastructure sectors. Assess the impact of these regulations on the competitive environment and the flow of foreign investments. Examine if the current design is under constraint by the activity of SGCC. If so, how could regulatory oversight be improved to maintain competition and still be attractive to foreign investment.

2. 2. Energy Security and Environmental Concerns: Policymakers often grapple with complex decisions when dealing with projects like Belo Monte, balancing energy security needs with environmental considerations. Explore Brazil’s energy security imperatives and the role of projects like Belo Monte in meeting these requirements. Analyze the environmental consequences of large-scale hydroelectric projects and Brazil’s policy choices in mitigating them while pursuing energy security goals. Gain insights from international experiences and compare how other nations have addressed similar policy dilemmas, providing a comprehensive perspective on the topic.

3. 3. Sustainable Energy Transition: Large-scale hydroelectric projects offer a shorter path for countries to align with their sustainable energy transition goals. However, these projects also have significant socio-environmental impacts. Explore strategies and policy options that could reconcile the energy potential of projects like Belo Monte with socio-environmental considerations. Analyze how countries can enhance sustainability in energy projects, ensuring minimal harm to local communities and ecosystems. Additionally, discuss the role of technology and innovation in mitigating environmental impacts while meeting energy security needs.

4. 4. International Cooperation in Collaborative Infrastructure Projects: Analyze the significance of international cooperation in advancing development through collaborative infrastructure initiatives. Delve into the advantages and obstacles associated with global collaboration in achieving development goals, including technology transfer benefits and the potential financial burdens on host nations. Additionally, explore the potential roles of international agencies in facilitating and supporting such collaborative endeavors.

5.3 For Business School Audiences

SGCC’s involvement in Brazil’s Belo Monte hydroelectric project represents a successful case in international business strategy and operations. As one of the world’s largest utility companies, SGCC’s expansion into the Brazilian market poses a range of challenges and opportunities. This case study delves into the strategic decision-making processes, risk management techniques, and stakeholder relations in SGCC’s venture. Given the information provided in the case, discuss the following questions:

1. 1. International Expansion Strategy: Assess SGCC’s approach to entering and expanding in the Brazilian market. Examine the critical factors that shaped their decision-making and the risk management strategies they employed in executing this extensive international project. Explore the limitations and shortcomings of SGCC’s strategies. Compare and contrast SGCC’s international expansion strategy with those of other multinational companies entering global markets, drawing insights from other relevant case studies.

2. 2. Overcoming Information Asymmetry in a New Market: Delve into the specific strategies that SGCC implemented to tackle the complex issue of information asymmetry when entering the Brazilian market. Explore the intricacies of information gaps, including differences in local knowledge, business practices, and regulatory nuances. Assess the effectiveness of SGCC’s chosen strategies in not only facilitating a successful market entry but also sustaining ongoing operations. Additionally, analyze the potential applicability of these strategies for other multinational corporations seeking to enter markets characterized by information asymmetry.

3. 3. Navigating Financial and Operational Challenges: Discuss the landscape of financial and operational challenges that SGCC encountered during its involvement in the Belo Monte project, such as funding constraints, logistical complexities, and regulatory issues. Investigate the strategies and solutions that SGCC employed to effectively address these challenges, whether through innovative financing, project management techniques, or regulatory negotiations. Assess the outcomes and lessons learned, highlighting both successful approaches and areas that presented difficulties. Identify transferable insights and best practices that can serve as valuable guidance for companies venturing into large-scale international projects in the future.

4. 4. Localization Strategies: Explore how SGCC’s localization strategies influenced its success in Brazil. Assess whether a more globally centralized approach could have achieved similar results and analyze SGCC’s unique decision not to centralize all management decisions, such as funding and financial risk activities. Discuss the implications for multinational corporations operating internationally.

Case Study 2.3 TikTok versus United States

Han Liu and Ji Li

1 Overview

This case study provides a comprehensive analysis of the intricate political risks faced by TikTok, the Chinese social media giant, within the complex US political landscape. Beginning with an exploration of the security concerns articulated by the US government, including during President Trump’s administration, the discussion centers on TikTok’s data collection practices and their perceived impact on US national security.

The narrative unfolds by elucidating the multifaceted strategies employed by TikTok and its parent company, ByteDance, to address these challenges, including litigation, endeavors toward Americanization, and technological adaptations. It also examines the evolution in the US government’s stance as the Biden administration assumes leadership as well as TikTok’s adaptive strategies aimed at sustaining and expanding its presence in the US market.

The study depicts the responses of the Chinese government to US policies, unraveling the broader implications of these developments on the global political-economic landscape, exploring the intricate dynamics involved in US-China relations, and providing readers with a deeper understanding of the complexities inherent in such interactions.

Finally, this case study invites readers from the fields of law, business, and policy to engage in contemplation on the broader themes of political risks faced by multinational corporations, the challenges inherent in navigating global legal frontiers, and the intricate nature of US-China relations, understanding how multinational corporations adapt to the complexities of international political environments.

2 Introduction

In August 2020, former US president Donald Trump issued two executive orders to effectively ban TikTok, one of the most popular social media apps owned by a Chinese company ByteDance, from the US market, drawing TikTok into the middle of the US-China geopolitical rivalry. Since then, the Chinese-owned company has been confronting increasing political risk in the United States, and to mitigate this risk it has taken a variety of coping measures. This case study examines these measures and their institutional contexts, shedding light on how other China-based multinationals with substantial outbound foreign investment react to ever-growing political risks in their host countries.

2.1 ByteDance and TikTok

TikTok’s parent company, the Beijing ByteDance Technology Co., Ltd. (hereinafter “ByteDance”), is a privately owned, multinational technology company incorporated in the Cayman Islands and based in Beijing, China. The multinational company has opened offices in the United States, the United Kingdom, Singapore, and other countries. Founded by Chinese entrepreneur Zhang Yiming in March 2012 and owned by Zhang and major global institutional investors, some of which are based in the United States, ByteDance owns a set of popular social media products such as Toutiao (one of the most famous Chinese online news platforms), Douyin (one of the most popular video-sharing apps in China), its overseas version TikTok, and Watermelon Video, among other apps.

ByteDance has achieved great business success within a relatively short period. By 2018, ByteDance’s mobile apps had more than 1 billion monthly users and was valued at US$75 billion, surpassing Uber to become the world’s most valuable startup.¹ Among Chinese high-tech social media startups, ByteDance is the first one that did not seek commercial protection or financing from one of the few established internet powerhouses such as Alibaba, Tencent, or Baidu. Rather, ByteDance emerged as their fierce competitor. As of March 2020, ByteDance’s 2019 revenue was estimated at RMB 104 billion to RMB 140 billion, more than Uber, Snapchat, and Twitter combined.²

With success in China, ByteDance began to pursue an expansive global strategy in 2016, when it released TikTok, the overseas version of Douyin. In just a few years, ByteDance has become one of the most successful, internationalized Chinese tech companies, generating vast user bases in the United States, Southeast Asia, Japan, and other places. As of July 2019, ByteDance’s products and services have spread across 150 countries and regions in 75 languages and have been ranked at the top of app store lists in more than 40 countries and regions.³ Notably, ByteDance has been more successful than Alibaba, Baidu, and Tencent in terms of overseas businesses. It excels in attracting younger audiences abroad. The Economist labeled ByteDance the first global Chinese tech giant.⁴

The most successful app ByteDance owns and operates outside China is TikTok, an application that provides an online platform for users to create and share short-form videos.⁵ Like its Chinese version Douyin, TikTok was an immediate business success. In November 2018, it ranked first in the number of app downloads and installs in the US market and topped the overall charts of App Store or Google Play many times in Japan, Thailand, Indonesia, Germany, France, and Russia.⁶ By September 2021, TikTok’s global monthly active users had reached 1 billion.⁷

As in other countries, TikTok gained popularity in the United States, especially after 2018 when it purchased Musical.ly, a Chinese social media company based in Shanghai with millions of US users. In October 2018, TikTok became the most downloaded and installed app on a monthly basis in the United States,⁸ putting a great deal of pressure on established US social media platforms such as YouTube and Instagram.⁹ In terms of corporate structure, TikTok is owned and operated by ByteDance’s subsidiary TikTok Inc., an American company incorporated in California and headquartered in Los Angeles with a US-based management team. Its key executives responsible for the operation of TikTok in the United States, including its CEO, global chief security officer, and general counsel, were, at one time, all Americans.

3 The Case

3.1 Trump’s TikTok Ban: Background and Facts

3.1.1 Background

An old Chinese proverb says, “tall trees catch much wind.” The business success of TikTok in the United States has triggered many concerns and controversies. TikTok’s overseas expansion largely coincided with the deterioration of US-China relations. And given its investors’ Chinese ownership and its business nature, TikTok has been caught in the crossfire of US-China rivalry. Its collection, storage, and use of US user data have been regarded as a threat to US national security. For example, in May 2019, the White House issued an executive order declaring a national state of emergency related to information and national security: “foreign adversaries are increasingly creating and exploiting vulnerabilities in information and communications technology and services, which store and communicate vast amounts of sensitive information, facilitate the digital economy, and support critical infrastructure and vital emergency services, in order to commit malicious cyber-enabled actions, including economic and industrial espionage against the United States and its people.”¹⁰ The first among the “foreign adversaries” was China.¹¹ Large-scale use of foreign information and communications technology and devices was thought to constitute an “unusual and extraordinary threat to the national security, foreign policy and economy of the United States.”¹² Naturally, TikTok caught the spotlight. On 11 January 2019, the Peterson Institute for International Economics issued a report describing TikTok as a major threat to national security in the United States and the West.¹³ On 23 October 2019, Republican Senator Tom Cotton and then Democratic Senate Minority Leader Chuck Schumer jointly called on then acting Director of National Intelligence to keep a watchful eye on the potential risks of censorship and data security of TikTok.¹⁴

TikTok soon responded directly to the allegations. On 25 October 2019, TikTok issued a public statement on its official website, stating: “We store all TikTok US user data in the United States, with backup redundancy in Singapore. Our data centers are located entirely outside of China, and none of our data is subject to Chinese law.”¹⁵ Besides, TikTok stated: “TikTok does not remove content based on sensitivities related to China. We have never been asked by the Chinese government to remove any content and we would not do so if asked. Period.”¹⁶

But TikTok’s statement failed to ease the national security concerns of the US government. On 17 December 2019, the US Navy banned the use of TikTok on government mobile devices, deeming the app a cybersecurity threat. Users who had installed TikTok software on government mobile devices were not allowed to access the internal network of the US Marine Corps or use TikTok while in uniform.¹⁷ In January 2020, the US Army also announced it was banning TikTok on government-distributed phones.¹⁸ In February 2020, the US Transportation Security Administration (TSA) barred employees from using TikTok to create videos on their personal devices for use in TSA’s social media outreach.¹⁹

Meanwhile, a more threatening political risk was looming. In October 2019, Senator Marco Rubio asked the Committee on Foreign Investment in the United States (CFIUS) to investigate TikTok and ByteDance for its threat to US national security.²⁰ In November 2019, CFIUS began to review ByteDance’s acquisition of Musical.ly in 2017.²¹ In July 2020, the United States Treasury Secretary Steve Mnuchin confirmed that TikTok was under a national security review by CFIUS.²² If a national security threat is found, the agency has the authority to order a foreign investor to divest its US investment.

As one of the most popular social media apps in the United States, TikTok could not stay away from American politics, especially in the year leading up to the 2020 presidential election. Since mid 2020, TikTok users had amassed millions of posts about American politics. Many videos shared on TikTok mocked and satirized Donald Trump. For example, the comedienne Sarah Cooper used Trump’s own words to ridicule him in her videos, which attracted millions of followers. Moreover, many American anti-Trump politicians used TikTok, like Governor Michael DeWine of Ohio, Senator Ed Markey of Massachusetts, and Governor Gavin Newsom of California. This led to President Trump’s reelection campaign putting out Facebook advertisements asking his supporters to sign a petition to ban TikTok.²³

In June 2020, some TikTok users coordinated mass ticket reservations for Trump’s reelection campaign rally in Tulsa, which caused a huge embarrassment for the president’s campaign, because fewer than expected participants appeared at the Trump rally.²⁴ On 31 July 2020, a furious Trump declared his intention to ban TikTok: “As far as TikTok is concerned, we’re banning them from the United States.”²⁵ Trump’s ire, even if not the sole determinative factor, greatly contributed to TikTok’s political troubles in the United States.

3.1.2 Trump’s TikTok Ban

On 6 August 2020, invoking presidential powers granted by the International Emergency Economic Powers Act (IEEPA) and the National Emergencies Act, Trump issued the Executive Order on Addressing the Threat Posted by TikTok (hereinafter “the first order”).²⁶ The order banned “any transaction by any person, or with respect to any property, subject to the jurisdiction of the United States, with Byte Dance Ltd. … or its subsidiaries,” and it would become effective within forty-five days (i.e., 20 September 2020).²⁷ Although the order did not directly prohibit the use and operation of TikTok in the United States, the ban on any transaction by any company, like Apple and Google, would make the TikTok app effectively dysfunctional in the United States.²⁸

The Chinese background of TikTok’s parent is the stated cause of the national security concern. According to the first order, “TikTok automatically captures vast swaths of information from its users, including Internet and other network activity information such as location data and browsing and search histories.”²⁹ That would allow the Chinese authorities to gain access to American’s personal and proprietary information and potentially track the locations of US employees and contractors. Moreover, the US government argued that TikTok could censor what Chinese authorities deem as sensitive information.³⁰

On 14 August 2020, Trump issued a second executive order concerning ByteDance’s acquisition of Musical.ly, which closed in 2018.³¹ Following CFIUS’s national security retroactive review of that acquisition, this second order compelled ByteDance to divest its US investment by selling or spinning off TikTok within ninety days (i.e., before 12 November 2020). Trump stated in this order that “credible evidence” had made him believe that ByteDance constituted a great threat to US national security.³² All in all, the message sent to ByteDance was clear: sell TikTok to American companies or be banned.

3.2 TikTok’s Coping Strategies

3.2.1 Americanization

On 2 August 2020, shortly after Trump’s announcement that he was going to ban TikTok, Microsoft declared in a statement that it was discussing with ByteDance about a potential purchase. While Microsoft initially only considered a minority investment in TikTok, Trump’s declaration to ban TikTok encouraged Microsoft to contemplate a total acquisition. As Microsoft announced: “Following a conversation between Microsoft CEO Satya Nadella and President Donald J. Trump, Microsoft is prepared to continue discussions to explore a purchase of TikTok in the United States.”³³

Yet, after the second executive order, Trump announced that Oracle was his acceptable choice of the company acquiring TikTok.³⁴ Meanwhile, SoftBank, a Japanese company, came up with an acquisition plan with Walmart and Google that would make Walmart a majority shareholder and SoftBank and Alphabet (Google’s parent company) minority shareholders.³⁵ Trump, however, rejected that plan. On 27 August 2020, Walmart declared that it would try to purchase TikTok with Oracle. On 14 September 2020, Oracle confirmed a US Department of Treasury’s announcement that Oracle was a party to the proposed transaction involving TikTok.³⁶ Trump said he was satisfied with that plan.

However, disagreements over the concrete terms of the deal quickly transpired. Reacting to the Oracle plan, ByteDance said it would own 80% of TikTok Global, a new US-based company to be set up to facilitate the transfer of TikTok ownership.³⁷ That meant ByteDance would continue to own TikTok. However, Oracle responded that ByteDance would not have any stake in TikTok Global. ByteDance explained that, despite its continuous ownership, TikTok Global would remain under American control, as ByteDance itself was about 40% owned by US investors.³⁸

Yet some politicians opposed that proposed solution. On 14 September 2020, Senator Josh Hawley criticized the deal with Oracle and urged CFIUS to block it. He argued that the plan would fall short of fully implementing the president’s second order because it would still allow Chinese forces to influence the United States.³⁹ Four days later, the US Department of Commerce issued a rule to implement the first TikTok executive order.⁴⁰ Under this rule, from 27 September 2020, app stores in the United States would not support or distribute the TikTok app, and, from 12 November 2020, all other transactions vital to TikTok’s operation, such as storing data, would be prohibited.⁴¹

3.2.2 Litigation

The plan to divest TikTok through a sale was met with strong resistance in both the United States and China, so the company soon resorted to legal means. On 24 August 2020, TikTok Inc. filed a complaint in the federal court for the Central District of California, where the company was based, challenging the Trump ban.⁴² TikTok argued that the ban was motivated by Trump’s personal goal of reelection, and it violated the Fifth Amendment of the US Constitution by denying due process rights of TikTok and other companies. On 20 September 2020, TikTok voluntarily withdrew the case,⁴³ as it filed lawsuits in other courts. Meanwhile, Patrick Ryan, a TikTok employee, sued Trump as well as the Secretary of Commerce and sought an injunction to prevent the enforcement of the executive orders banning TikTok.⁴⁴ Ryan contended that Trump’s ban would cause US employees of TikTok to lose their salaries, thus violating the Fifth Amendment by denying their right to due process and taking property without just compensation. He also claimed that the ban was motivated by Trump’s personal reasons and anti-China bias.

On 23 September 2020, a group of US users of WeChat, a China-based “super app” used by many in the United States to communicate with families and friends in China and owned by a separate Chinese company from ByteDance, won a case against Trump’s executive ban of WeChat.⁴⁵ The WeChat ban parallels the TikTok ban and the two evoke the same set of legal authorities and have similar constitutional implications. Therefore, shortly after the court decision in favor of the WeChat users, TikTok Inc. sued the Trump administration in the federal court for the District of Columbia, seeking to enjoin the enforcement of the order prohibiting US companies from supplying services to TikTok. TikTok contended that the ban went beyond the president’s emergency powers under IEEPA because no emergency or grave threat to national security exists in the TikTok case. Moreover, it argued that IEEPA forbids the president from regulating or prohibiting the importation or exportation of “information or informational materials,” which qualifies as an exception to the emergency powers.⁴⁶

Four days later, just before the deadline for the TikTok ban, Judge Carl Nichols, a federal judge nominated by Trump, enjoined part of the Department of Commerce’s order implementing Trump’s executive order. Judge Nichols supported the argument of TikTok that the information and informational materials exception applies to the TikTok case and Trump’s executive order was ultra vires.⁴⁷ On 7 December 2020, Judge Nichols granted a preliminary injunction against the ban on other transactions.⁴⁸

TikTok also mobilized its users to join the litigation efforts.⁴⁹ Parallel to TikTok’s suit, three TikTok creators, who described themselves as comedians, fashion creators, and musicians with millions of fans on TikTok, sued Trump in the US District Court for the Eastern District of Pennsylvania.⁵⁰ Their complaint was that Trump’s ban on TikTok violates their right to free speech and deprives them of “professional opportunities afforded by TikTok” since the TikTok platform is unique and irreplaceable; they also argued that the ban was ultra vires.⁵¹ On 30 October 2020, Judge Wendy Beetlestone sided with these TikTok creators and ruled that the executive order barring new downloads of the TikTok app violated the informational materials exception under IEEPA and would result in the TikTok creators’ loss of connections to millions of followers as well as related brand sponsorship.⁵² Therefore, a preliminary injunction was granted, blocking the implementation of the TikTok ban by the US Department of Commerce. Notably, Judge Beetlestone did not touch upon the free speech argument, because the plaintiffs’ ultra vires argument was enough to buttress the preliminary injunction.⁵³

Shortly after the above cases, TikTok, as well as ByteDance, began to challenge CFIUS in the federal bench. On 10 November 2020, they sued CFIUS in the US Court of Appeals for the D.C. Circuit.⁵⁴ They made four main arguments. First, the CFIUS order was ultra vires; second, it violated their due process rights; third, it violated the Administrative Procedure Act since the order was arbitrary; and fourth, the compelled divestment of TikTok to a US government-supported company violated the Fifth Amendment of the US Constitution since it constituted a taking without just compensation.

Before the court issued an injunction against the CFIUS order, the federal government extended the deadline of implementing the order several times as the negotiation of ByteDance’s divestiture continued. On 12 November 2020, CFIUS extended the deadline from 12 November 2020 to 27 November 2020.⁵⁵ On 25 November 2020, CFIUS granted another one-week extension, that is, from 27 November 2020 to 4 December 2020.⁵⁶ As 4 December 2020 approached, the Department of Treasury refused to extend it further, but it also stated it would not compel transaction.⁵⁷ CFIUS scrutiny of TikTok survived the Trump administration, and the agency demanded in March 2023 that its Chinese owners sell their shares.⁵⁸

3.2.3 Coping Strategies in the Biden Era

The United States in 2021 under the Biden administration amended its policies on TikTok. On 19 February 2021, Biden moved the D.C. Circuit court to hold the CFIUS case in abeyance, pending a review, and the court subsequently dismissed the case following a joint stipulation of both parties.⁵⁹ On 9 June 2021, the US government withdrew the two executive orders of Trump and its appeal of the TikTok case. On 4 July 2021, the D.C. Circuit granted the Biden administration’s motion to dismiss the appeal. On 20 July 2021, the case was dismissed.⁶⁰

In place of Trump’s two executive orders, the Biden administration issued a new order about TikTok, commanding the Secretary of Commerce to review the TikTok app for national security concerns and emphasizing that the review must be based upon “rigorous, evidence-based analysis” while scrutinizing and addressing the risks of national security, economic interest, and core values of the United States.⁶¹ Notably, the Biden administration did not fully change the CFIUS order. That meant that TikTok still needed to be divested from its Chinese mother company, but the timetable was voided.⁶²

Though some consider the Biden administration’s approach to have “importantly depoliticized the treatment of TikTok,”⁶³ the ease of the political pressure proved ephemeral. Given the intensifying US-China rivalry, TikTok’s status in the United States remains highly precarious. Legally speaking, it is still under CFIUS review. TikTok also faces spreading bans at the state level and a partial ban at the federal level. On 2 December 2022, Chris Wray, Director of the Federal Bureau of Investigation, raised national security concerns about TikTok, warning that the popular video-sharing app was “in the hands of a government that doesn’t share our values, and that has a mission that’s very much at odds with what’s in the best interests of the United States.”⁶⁴ Then some Republican-controlled states barred the use of TikTok on government electronic devices.⁶⁵ Starting from late 2022, many public universities have restricted or banned the use of TikTok on school computers, mobile phones, and other devices, following the orders of those states,⁶⁶ with students questioning those decisions.⁶⁷ Congress also passed a law to forbid the use of TikTok on federal devices.⁶⁸

In 2022, a news wave targeting TikTok for data and national security reasons emerged. In June 2022, the American digital media BuzzFeed News issued a report about TikTok.⁶⁹ Citing leaked audios from more than eighty internal meetings of TikTok, it said that ByteDance employees in China could get access to US data, especially the personal information of American users. TikTok responded to the report in an official statement that all the US users’ traffic had subsequently been routed to US-based servers of Oracle Cloud and all US users’ data was to be deleted from TikTok’s own data centers.⁷⁰ On 28 January 2023, it was reported that ByteDance’s general counsel was no longer overseeing US government relations for TikTok. The change was part of a shake-up to improve TikTok’s standing facing stringent national security review in the United States.⁷¹

3.3 Reactions from ByteDance and the Chinese Government

The Chinese government opposed the US government’s ban on TikTok. As soon as Trump issued the two executive orders, the Chinese government denounced his multiple actions against TikTok as a “smash and grab” and “an officially sanctioned ‘steal’ of Chinese technology.”⁷² In addition, it made an appeal to the United States that it should “earnestly maintain fair and transparent international rules and order.”⁷³ The Chinese Ministry of Foreign Affairs proposed the Global Initiative on Data Security on 8 September 2020, emphasizing that: “States should handle data security in a comprehensive, objective and evidence-based manner, and maintain an open, secure and stable supply chain of global ICT products and services.”⁷⁴

The initiative was a countermeasure to the Clean Network Program of the US government, “which would exclude Chinese telecommunications firms, apps, cloud providers and undersea cables from internet infrastructure used by the US and other countries.”⁷⁵ On 17 September 2020, during the regular press conference of the Chinese Ministry of Foreign Affairs, responding to a reporter’s question about the TikTok issue, the spokesperson of the Ministry of Foreign Affairs Wang Wenbin said: “We urge the US side to respect the market economy and the principles of fair competition, abide by international economic and trade rules, stop politicizing normal economic and trade cooperation, and provide an open, fair, just and non-discriminatory business environment for foreign enterprises to invest and operate in the US.”⁷⁶ After Biden issued the new executive order about TikTok, Gao Feng, spokesman for China’s Ministry of Commerce, said the reversal of the previous administration’s executive order on TikTok and other apps was “a positive step in the right direction.”⁷⁷

The Chinese government changed relevant policies in the meantime to respond to Trump’s plan of selling TikTok to American companies. On 28 August 2020, the Chinese Ministry of Commerce and the Ministry of Science and Technology expanded restrictions on technology exports, now covering “computing and data-processing technologies as text analysis, content recommendation, speech modeling and voice-recognition.”⁷⁸ Although not explicitly pointing to the TikTok issue, in effect, under the new rule, if ByteDance sought to transfer its proprietary algorithms to Oracle or other foreign companies, it would need to get approval from the Chinese central government.⁷⁹ As noted, this new rule created a high regulatory hurdle that precluded any planned sale of TikTok to a US buyer, which has not been publicly discussed since the amended Chinese export control regulation.

After Trump’s ban, China passed a series of laws related to the TikTok issue. First, on 17 October 2020, the Standing Committee of the National People’s Congress of China (NPCSC) passed the Export Control Law (formally implemented on 1 December 2020), tightening the export control system and providing an underlying legislative basis for relevant lower-level rules like the restrictions on technology exports.

Second, starting from June 2020, the NPCSC began to review the draft of China’s Data Security Law, which was passed on 10 June 2021 and came into force on 1 September 2021. In particular, Article 26 of that law stipulates: “When any country or region adopts discriminatory prohibitions, restrictions, or other similar measures against the PRC relevant to investment, trade, etc., in data, data development and use technology, etc., the PRC may take reciprocal measures against that country or region based on the actual circumstances.” This gives the Chinese government another tool to respond to US restrictions or bans on Chinese telecommunications and internet companies operating in America. China has not taken any action against US measures on Chinese companies like Huawei and ZTE during the Trump administration, but after the implementation of the Data Security Law, China can take reciprocal action against American companies in China when the United States takes action against Chinese companies on a case-by-case basis. The Data Security Law poses a threat to any future action that the Biden administration or Congress might take against Chinese companies operating in the United States.

Third, on 10 June 2021, the NPCSC passed the Anti-Foreign Sanctions Law and it came into force on the date of promulgation. Article 3 of the Anti-Foreign Sanctions Law stipulates: “Where foreign nations violate international law and basic norms of international relations to contain or suppress our nation under any kind of pretext or based on the laws of those nations to employ discriminatory restrictive measures against our nation’s citizens or organizations or interfere with our nation’s internal affairs, our nation has the right to employ corresponding countermeasures.” This article, together with others in that law, adds to a toolkit of measures available to the Chinese government when responding to foreign sanctions or restrictions on Chinese companies doing business overseas.

3.4 The Battle Escalates: 2024 House Bill to Ban TikTok

Just as TikTok management thought the darkest moment had passed and they had effectively managed US political risks,⁸⁰ the House of Representatives surprised them by passing a bill that would either ban TikTok or compel ByteDance’s divestiture.⁸¹ The bill received unanimous support from the Committee on Energy and Commerce (50–0), and the vast majority of the House Representatives (352–65).⁸² Moreover, President Biden publicly announced that he would sign it into law if it has passed both chambers of Congress.⁸³ While it is still uncertain whether the Senate will deliberate on the bill and pass it, especially given the fact that Trump has surprisingly voiced his objection to banning TikTok,⁸⁴ the potential risk is material. While powerholders on Wall Street have jumped at this opportunity and started to work on a possible acquisition of TikTok,⁸⁵ one can expect other key stakeholders to react in ways similar to what we have described in this case study. First, the Chinese government has “reiterated common criticisms of US policy as unfair to China,” and the amended export control regulation requires government approval for any sale of TikTok to a US buyer.⁸⁶ Second, TikTok will for sure double down on its lobbying efforts at the Senate level. Third, had the bill passed the Senate and became law, TikTok would most likely challenge its constitutionality in court. Unlike previous cases, however, this time the court will be forced to make the difficult balance between the constitutional mandate for the protection of free speech and due process on the one hand and congressional authority on the other. The saga continues to unfold, and given the complexity of the geopolitical rivalry between China and the United States, only time will tell how it will end.

4 Conclusion

Caught in the US-China geopolitical rivalry, TikTok faces constant political challenges at both the federal and the state level. In response, the firm has adopted an array of coping measures, including litigation, lobbying, and seeking diplomatic assistance. Other Chinese multinationals with substantial US investment have made similar efforts in managing an increasingly hostile host-state regulatory environment.⁸⁷ These measures in turn are shaping US-China relations. The story of TikTok in the United States goes on, yet its ending remains unknown.

5 Discussion Questions and Comments

5.1 For Law School Audiences

5.1.1 Navigating Global Legal Frontiers

The political challenges TikTok faces also manifest at the state level, as exemplified by the fact that, as of the time of this writing, more than thirty state governments have prohibited the use of TikTok by government employees on government-owned devices. While the federal government ban has been stalled by legal actions, the state government of Montana has taken the lead in excluding TikTok from the state. On 17 May 2023, the governor of Montana, Greg Gianforte, signed a bill banning TikTok in the state. The ban “imposes a 10,000 dollar penalty for each ‘discrete violation,’ defined as any time an individual in Montana accesses TikTok, is offered the ability to access TikTok, or is offered the ability to download TikTok.”

In response to the accusations, TikTok claimed that it does not share user information with the Chinese government and that it stores all US TikTok data with Oracle, a prominent US public company. In addition, TikTok’s Community Guidelines restrict nudity, sexual content, and anything else deemed harmful. TikTok uses technology and human moderators to remove any content that violates the Community Guidelines. Additionally, “for U.S. users under thirteen, TikTok provides a different, age-appropriate experience, with stringent safeguards and privacy protections designed specifically for this age group.” Parents with children under thirteen can link their accounts to their child’s account in order to set specific parental controls. TikTok also does not require users to use their real names when registering and does not collect GPS information from US users.⁸⁸

TikTok sued Montana, arguing that the ban violates the First Amendment of the US Constitution, along with federal preemption, the Commerce Clause, and the bill of attainder. TikTok claims that the ban violates the First Amendment’s guarantee of freedom of speech by shutting down a forum for free speech. Moreover, TikTok argues that the Constitution vests the authority for foreign affairs and national security in the federal government rather than in the state governments. Because Montana cites the Chinese government possibly having access to US users’ data as one of the reasons for the ban, this is an issue of national security that the federal government should handle. TikTok contends that the ban interferes with the congressional process for addressing national security concerns. Congress is currently considering “the Restricting the Emergence of Security Threats that Risk Information and Technology Act, or ‘RESTRICT Act,’ which according to the federal Executive Branch would provide the federal government with ‘new mechanisms to mitigate the national security risks posed by high-risk technology businesses operating in the United States’”⁸⁹ In addition, TikTok and CFIUS had negotiated for three years on how to restructure the app to address national security concerns, and the Montana ban is interfering with this process. Furthermore, TikTok argues that the Commerce Clause does not allow states to interfere with interstate commerce. Since the ban applies to everyone in the state of Montana, regardless of whether they are residents or visitors, it violates the Commerce Clause. Also, TikTok argues that the ban constitutes an unconstitutional bill of attainder, as it applies to only one firm.⁹⁰ The Montana Tiktok ban was blocked by a federal judge in late 2023 and has subsequently become embroiled in legislation.

Given the above, discuss the following questions:

1. 1. What are the legal merits of these claims? Are there any other claims TikTok could have made?

2. 2. Compare your answers to (1) to the court’s decision rendered on 30 November 2023.⁹¹ How will the judicial decision implicate US law in these subject matter areas?

3. 3. What are the main differences between the legal actions and lawsuits at the federal versus state levels?

4. 4. TikTok has been subject to regulatory oversight and lawsuits in a number of other regions and countries around the world, including the EU, India, and Pakistan.⁹² To your knowledge, how do these actions (both on the side of the host-state regulator and on TikTok) differ from the US experience? In other words, is the United States an outlier in foreign investment screening?

5.2 For Policy School Audiences

5.2.1 Policymaking Dilemmas in Geopolitical Tensions

The TikTok case underlines multiple policy issues. First, how to balance national security concerns with maintaining an open economy and the rule of law? How should national security be defined? Does it include speculated risk of foreign government influence? When the Trump government issued the executive order to ban WeChat, it cited national security threat as the primary reason. Yet, as the lawsuit against the ban has revealed, the claim was largely based on speculative evidence.⁹³ Overly broad or arbitrary interpretation of national security threat risks undermining the rule of law and disrupting market order.⁹⁴ On the other hand, the rising influence of China does pose legitimate challenges to the US-led global order. What alternative policy frameworks may better guide policymakers in addressing national security concerns in the current global geopolitical context?

Second, the TikTok case demonstrates the dynamic and triadic interactions between multinational firms and the world’s two superpowers. Whether and how should US policymakers factor the preferences and interests of Chinese non-state actors into the making of foreign policies? Where are US-China relations, arguably the most important bilateral relationship in the next decade or two, headed? TikTok represents a large group of China-affiliated actors that constitute what, in Karl Polanyi terms, could be called the “peace interest,” constituencies heavily invested in preserving inter-state collaboration in trade and investment. How should US policies address the “peace interest,” the power and influence of which arguably will have profound implications on the future of the global economic, legal, and political orders?

5.3 For Business School Audiences

5.3.1 Multinational Companies in the Headwinds of Globalization

The TikTok case reveals two major risks confronting multinational companies, especially those based in countries that are not US allies, in the current global political environment: growing political risk and compliance risk. In coping with political risks, TikTok has actively employed legal strategies, which have proven to be effective so far. Are there other coping measures multinationals may adopt to address host-state political risk? For instance, TikTok has engaged in active lobbying in the United States and mobilized TikTok users to pressure policymakers. Are these better tools than litigation? What are the trade-offs between these different tools? Among all the potential means to mitigate host-state political risk, how should multinational firms make the selection?⁹⁵ How may they effectively be used in concert or in parallel?

Additionally, multinational firms also face a compliance dilemma, as evidenced by the TikTok case. To comply with Trump’s executive order, TikTok’s Chinese owners initially contemplated a sale to US investors. Yet, as the negotiation was ongoing, the Chinese government amended its export regulation to prohibit any sale of proprietary advanced intellectual property to non-Chinese parties without government approval. As the US law and the Chinese law directly conflict, TikTok simply could not comply with both simultaneously. It therefore had to pursue other solutions. Multinational firms increasingly face such a compliance dilemma, as intensified US-China geopolitical rivalry spawns a proliferation of conflicting laws between the two countries. How do firms with extensive exposure to both jurisdictions address the growing compliance risk? What options do they have? Is exiting from one of the markets the optimal solution? How do coping strategies adopted by multinational firms fit in the broader picture of US-China economic decoupling?⁹⁶ Can “forum-shopping” in terms of entering other and diverse markets suffice as an alternative strategy?