SHENZHEN/HONG KONG/TAIPEI -- China's security industry is booming, driven by Beijing's drive to install state of the art surveillance technology on every street corner. Now, however -- just as many companies are beginning to succeed in markets beyond China's borders -- a new front may be opening up in Washington's trade war with China that could hinder those overseas ambitions.
Last month shares in a host of Chinese surveillance companies slumped amid reports that the U.S. was set to extend its offensive against China's Huawei Technologies to the public safety industry that tracks the country's 1.4 billion citizens. The New York Times suggested that the Trump administration was considering stopping the supply of U.S. components to Hangzhou Hikvision Digital Technology, the world leader in video surveillance, and four other Chinese companies.
"If the Trump administration imposes restrictions on [Hikvision's]... access to equipment produced by U.S. companies, such restrictions will pose [an] operational risk to the Chinese video surveillance solutions provider," said Ying Wang, a senior analyst at global financial service company Moody's.
The company uses "essential components such as chips imported from the U.S. for some of its leading-edge products," Wang said.
Among those reported to be at risk are some who have only recently raised millions from international investors, such as facial recognition startup Megvii, which completed a $750 million funding round in May. Others include Hikvision's domestic rival Zhejiang Dahua Technology, cybersecurity company Meiya Pico and artificial intelligence solution provider iFlytek.
All are key suppliers to the government, which has come under fire internationally for its mass surveillance of the country's Muslim Uighur population in the remote northwestern region of Xinjiang. While this could be the excuse for any eventual restrictions, some industry observers suggest the rumors of a crackdown may have been leaked to step up pressure on Beijing in the current trade dispute with Washington.
Whatever the truth, analysts say it is clear that the ban, if enacted, would deal a blow to the ambitions of China's surveillance industry as it prepares to expand beyond government and into the private sector, as well as new regional markets.
Up to date revenue figures are difficult to come by. According to the Beijing based China Security & Protection Industry Association, the country's surveillance and safety industry doubled sales from 235 billion in 2010 to 490 billion yuan ($70 billion) in 2015. Sales of Chinese surveillance products are forecast to rise strongly again, to 800 billion yuan by 2020. The number of surveillance companies in China has also mushroomed, increasing by 20% to more than 30,000 in 2015 from 2010.
Hikvision and others have been able to grow largely thanks to the government's desire to have an "omnipresent" national surveillance network by 2020.
About 176 million video surveillance cameras monitored China's streets, buildings and public spaces in 2016, compared with 50 million in the U.S., according to global consultancy IHS Markit.
The Xue Liang rural surveillance program, translated as "Sharp Eyes," and the urban "Skynet" and "Safe Cities" networks are ostensibly being deployed to defend the civilian population from threats of crime, terror and natural disasters.
In fact, access to the ocean of data generated by the national network has given the country's surveillance industry an edge in developing advanced systems. In 2017 alone, more than 530 patents linked to surveillance cameras and video surveillance were published in China, compared with just 96 in the U.S. the same year, according to convertible bond Insights.
The result has been a growing number of companies dominating their segments, at home and abroad. Few outside China have heard of Tongfang. But through its subsidiary Nuctech, Tongfang provides security inspection equipment for airport customs and border controls in more than 100 countries.
Similarly, Hikvision and its domestic peers lead the global security camera market. Hikvision climbed from the world's number 10 surveillance camera maker by revenue in 2010 to market leader in 2016, according to figures from asmag.com, an international security magazine. Among the top 20 global surveillance camera makers in 2018, six are Chinese.
The huge volume of image data collected by cameras deployed in China has also driven growth in the cloud-computing, storage and AI analysis segments. The world's No. 3 and China's biggest server maker Inspur is a key supplier of servers and data processing tools for the Xue Liang program, the company told Nikkei.
Riding on the back of government orders, the industry has expanded to the commercial sector where demand for intelligent surveillance equipment is growing not just for security, but for new technologies that monitor customers, workers and machinery.
Reconova Technologies, a Xiamen-based artificial intelligence startup, says it has won an order for face identification verification solutions at a factory of BOE Technology Group, helping the display panel maker to monitor the movement of its 30,000 workers in Wuhan.
"We are a relative latecomer to government projects like Xue Liang... But we see huge potential in commercial demand," said Morgan Guo, the company's sales director.
Reconova is also selling its facial recognition solutions to foreign companies, including 7-11 in Thailand.
Reconova is not alone in spotting export opportunities for its higher end surveillance technologies. Hikvision has more than doubled its overseas income from 6.7 billion yuan in 2015 to 14.2 billion yuan in 2018, according to annual reports. Its overseas branches also more than doubled in the same period. According to consultants IHS Markit, between 2015 and 2016 Dahua also doubled the number of its overseas subsidiaries. Vendors such as Uniview and Kedacom have also expanded their international networks. Their expansion was making an impact. Between 2013 and 2018, Hikvision saw its share of the global video surveillance market grow from 7.7% to 18.2%, according to Japanese research firm, Techno Systems Research, while Dahua went from 6.6% to 8.4%.
Chinese companies have taken advantage of Beijing's Belt and Road Initiative, a giant development program that aims to connect Asia to Africa and Europe through infrastructure projects. Exporting China's security technology to the countries participating in the Belt and Road projects has been a national endeavor, companies say.
"We are a state-backed company. It is what we should do to ride on opportunities of Belt and Road initiative with the country," Tongfang told the Nikkei.
Others tapping into the Belt and Road projects include government-backed server maker Dawning Information Technology, better known as Sugon, which is selling in Russia, and Huawei, which exports smart policing systems, transportation and events safety platforms to Africa, the Middle East, Southeast Asia and South America, the company told Nikkei.
"I think the Belt and Road helps a lot," Reconova's Gou said. "It is not about Chinese government offering financial support," but the policy helps foreign countries know who these companies are and what they can do, he said, which creates overseas opportunities.
But those opportunities could fade quickly if Washington decides to target the industry further. While China has succeeded in developing a fairly robust domestic supply chain for mass market, low to mid range surveillance products, it still relies on U.S. components for the more sophisticated deep learning technologies -- such as artificial intelligence, machine learning, and facial recognition -- that it has been promoting abroad.
The tensions have already taken a toll. In August, the U.S. government passed a bill to ban federal agencies from purchasing from Hikvision, Dahua and several other Chinese surveillance solution providers, citing national security as the chief concern. Hikvision last year saw overseas sales growth halve to 15.9%.
"The challenges the company face is greater than any years before," Hikvision said in its annual report.
"[Chinese] surveillance companies, at least the top two, have suffered from the so-called information security or national security concern," said Kyna Wong, the head of the China technology research team at Credit Suisse.
Taiwan-based surveillance camera maker GeoVision told Nikkei that the doubts had sparked requests from U.S. clients to exclude Chinese suppliers and products made in China for security reasons.
"Since last year, some clients in the U.S. specifically said they did not want products that were made in China, even though we are not a Chinese company," Ace Liu, a sales manager at GeoVision, told the Nikkei.
China's surveillance companies are taking steps to mitigate any fallout. Hefei-based company iFlytek told Nikkei it had already prepared "alternative plans against extreme situations."
Hikvision has appointed a U.S. agency to examine its business activities in Xinjiang, although it has "never been investigated by any governments" for violating human rights.
Meiya Pico, for its part, tried to dismiss concerns by saying that "less than 1% of the total revenue came from the overseas market."
Yet while the industry will feel the pain of a crackdown overseas, many insiders believe it would be difficult to deal a fatal blow to businesses that will continue to have the government's unflinching support -- if only for its own domestic purposes. "Government spending [in China] is a major force building the industry," said Brady Wang of Counterpoint Research.
Shipments in China alone grew by more than 20% in 2017 and 2018, and are projected to grow by around 18% in 2019, significantly more than the 11% forecast for the global market this year, Counterpoint estimates.
Nevertheless, it may still be difficult to push forward the most advanced technologies at home if access to U.S. components is curtailed.
"If one link is broken, the whole industry will feel the pain," Wang said.
Dahua, and Megvii did not respond to the Nikkei's request for comments.
Additional reporting by contributor writer Jenny Chen in Hong Kong