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China’s biometrics sector faces interesting hurdles but it’s not slowing soon

China’s biometrics sector faces interesting hurdles but it’s not slowing soon

An investigative article out of China indicates that four biometrics unicorns in that country face substantial problems meeting earlier market expectations.

Indeed, Chinese news publisher Caixin Global took a look this week at SenseTime Group, Megvii, CloudWalk Technology and Yitu Internet Technology and found room for worry.

Caixin editors talked to many indigenous industry sources (several of which go unnamed, unfortunately) and found that sources of capital — including IPOs in the United States — could become scarce for China’s leading facial recognition providers.

Investors are beginning to question AI’s short- and mid-term prospects based on trends, some of which would not raise an eyebrow in Silicon Valley but are making some in China nervous.

For instance, the four’s revenue is modest, which has managers at leading AI firms doing something they have so far been able to avoid — cutting costs. Caixin reports that CloudWalk and Yitu plan to cut costs aggressively enough to product profits in five years.

The cost of sales is very high and could remain uniquely so for some time. Examining the quartet’s prospectuses, Caixin found that they spent 1.85 yuan to bring in 1 yuan.

Labor ate 75 percent of revenue. A lopsided figure like that can be expected in manufacturing, but not in coding where productivity typically is higher.

Also, the quartet is highly dependent on government surveillance contracts for facial recognition products, both in China and globally.

It is hard to ignore the fact that the Chinese government has focused intently on funding face biometrics and AI surveillance to exert control over its own citizens and areas like Tibet, which Beijing effectively annexed. Biometrics vendors in developed economies have diversified to a greater extent, into health care and other industries.

The quartet has struggled to make inroads in new industries and international markets. That is especially the case in the critical U.S. market.

Protectionist barriers in there are holding back overall sales growth and making U.S.-based IPOs impossible. And for a variety of reasons, private investment is losing interest in AI.

At the same time, Beijing has begun to treat AI-software companies as potential threats to the authoritarian Communist Party’s exalted position in society. Regulators who had been minor inconveniences for the quartet are serious hindrances now, according to the Caixin article.

This is not the prettiest picture for the unicorns, but it is not dire. U.S. antipathy for Chinese biometrics and AI products generally is going to be around for years.

But product diversification is possible and could provide incremental revenue boosts if cost-cutting does not make that impossible.

And labor costs could become less of a factor. Right now, algorithmic needs are almost unique to each customer, as Caixin points out. New clients mean hiring new employees to service that client.

It is conceivable that trends like standardization could mean less client-specific products.

Throwing a shadow over most of the worries faced by the quartet right now is the fact that Beijing will never let irreversible harm come to the unicorns.

AI is a critical industry to every coherent government on Earth. Just as with China’s space program, a superior AI capability is a matter of pride for the nation.

See more Yitu coverage here; Megvii here; CloudWalk here and SenseTime here.

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