U.S. drops Entity List hammer on Chinese facial recognition unicorns and biometrics providers
The U.S. Government has added 28 organizations to its Entity List, banning major biometrics companies including Dahua, Hikvision, iFlytek, Megvii, SenseTime, and Yitu, as well as a number of government agencies from the Xinjiang Uighur Autonomous Region (XUAR), for alleged involvement in human rights violations. The listing blocks the entities from buying American products, having them in their supply chain, or maintaining relations with U.S. companies.
A statement issued by the Department of Commerce says that “these entities have been implicated in human rights violations and abuses in the implementation of China’s campaign of repression, mass arbitrary detention, and high-technology surveillance against Uighurs, Kazakhs, and other members of Muslim minority groups in the XUAR.”
The New York Times reports that the immediate impact on the companies could be mixed, with some having found alternatives to American components in their offerings, or having stockpiled supplies in anticipation of a possible listing. Over the longer term, it could significantly damage their access to the North American and European markets.
“The U.S. government and Department of Commerce cannot and will not tolerate the brutal suppression of ethnic minorities within China,” said Commerce Secretary Wilbur Ross in a statement reported by the Times.
Both SenseTime and Megvii, which are the two biggest facial recognition unicorns in the world with valuations of $7.5 billion and $4 billion respectively, according to BuzzFeed News, have denied involvement in the Xinjiiang government’s extensive surveillance and detention programs.
Megvii had been reportedly under consideration for the list, but was subsequently cleared of involvement in an app used by government agencies which appear on the list by Human Rights Watch. A planned IPO by Megvii has been delayed, possibly by unrest in Hong Kong and a public relations incident, and may now be in jeopardy. That IPO was also reportedly being considered for the New York Stock Exchange as recently as March.
Bohai Harvest, an investment firm which Hunter Biden sits on the board of, is reported to have invested in Megvii in 2017. American universities, equity firms, and pension funds have also invested in Megvii and SenseTime, directly or indirectly.
SenseTime recently formed a partnership with China Tower to build a massive video surveillance network with facial recognition capabilities.
Hikvision said in a statement it has been trying to address U.S. concerns for the past year, and that the move will hurt the U.S. economy. Technology research firm Sanford Bernstein has said Hikvision could lose 10 percent of its revenue. For other companies, including Megvii and Yitu, the impact may be felt more in terms of recruiting foreign talent and collaborating with overseas institutions. Impact could be felt by American companies Qualcomm and Nvidia, which make sensors and chips used by some of the now-listed companies. Megvii said on WeChat that the allegations against it are “unsubstantiated,” The Japan Times reports.
Five entities were added to the list in June, and the U.S. has also blacklisted Huawei, while at the same time negotiating a trade deal to remove tariffs on hundreds of billions of dollars of goods and services flowing between China and the U.S.
SenseTime and Megvii have had difficulty raising funds during the recent economic downturn, according to The Japan Times, and will suffer greater reputational costs than direct financial ones, according to Asia Society’s Center on U.S.-China Relations Senior Fellow Isaac Stone Fish. SesnseTime’s revenue is reported to have a growth rate above 100 percent, but still be cashflow-negative as it invests in advanced AI technology.
China and the U.S. have also been competing for the global lead in artificial intelligence technology, with significant government initiatives and investments on both sides.