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China tech

Why US blacklisting of China tech entities is unlikely to work

Beijing's AI-plans too advanced; many firms also anticipated US ban

HONG KONG/TAIPEI -- Washington's ban on U.S. tech exports to 28 Chinese entities is aimed directly at one of Beijing's top strategic priorities: its fast-growing AI capability that is already being harnessed in a nationwide surveillance system used to repress minority groups.

The action, the latest escalation in the two superpowers' battle for technological supremacy, has infuriated Beijing and will cast a dark shadow over ongoing trade talks.

It will also likely prove ineffective in slowing China's ambition to become the world leader in artificial intelligence. At a presentation last year, at Massachusetts Institute of Technology, SenseTime, a $5bn company that is on the blacklist although it is backed by U.S. chipmaker Qualcomm, boasted of a chilling 98% success rate for its facial recognition software and cameras.

Nor is it likely to do much in curbing the fast expansion of Chinese technology. Many of the affected companies, such as Hikvision, the world's largest video surveillance company which until recently was used on U.S. military bases, have taken measures in anticipation of the ban by stockpiling inventories of needed goods.

"Hikvision has been building up its key components inventory, which more than doubled between the end of 2018 and end of the first half of 2019," said Jay Huang, analyst at Bernstein Research. The value of its stockpile is currently around 8.61 billion yuan ($1.2 billion), according to its first-half results.

Hikvision, which has around 50 billion yuan in annual revenues, has also diversified its supply chain. "The company's reliance on U.S. components is very limited," Huang added.

The U.S. Commerce Department said of its decision on Monday that the eight tech firms that it had targeted are all implicated in "China's campaign of repression, mass arbitrary detention, and high-technology surveillance."

Washington has also imposed bans on 20 government agencies that are involved in the mass surveillance project in western Xinjiang province, where human rights agencies and the United Nations say more than a million Uighurs and members of other ethnic minorities have been rounded up in vast detention camps.

But artificial intelligence, which sets the foundation for next-generation technologies such as autonomous driving and smart manufacturing, is central to Beijing's pursuit of global technology leadership. The State Council, or China's cabinet, said in a 2017 report that the nation aims to become the global AI powerhouse by 2030.

On Tuesday, Chinese Foreign Ministry spokesman Geng Shuang gave a forceful response to the U.S. measure. "China will continue to take firm measures to resolutely safeguard national sovereignty, security and development interests," he said. "We urge the U.S. side to immediately correct its mistake, withdraw the relevant decision and stop interfering in China's internal affairs."

One advantage that Beijing has in the development of its AI industry is its nationwide surveillance programs, which provide massive amounts of data from cameras deployed on every street corner that can recognize faces, voices, images, gestures and even human thermal radiation. The AI-led processing and analysis of that data, in turn, reinforces the effectiveness of surveillance.

"The U.S. is worried that China will take a lead in the era of AI, as the latter does not have too much concern about privacy rights when practicing state-of-the-art technology," said Jonah Cheng, chief investment officer at J & J Investment, and a former veteran tech analyst at UBS. "Unfortunately, China is already ahead of U.S. [in terms of AI technology]."

In 2017 alone, more than 530 patents related to surveillance cameras and video surveillance were published in China, compared with just 96 in the U.S. the same year, according to New York-based market consultancy, CB Insights.

China has moved fast to develop its own software capabilities to world-class levels. Yitu Technology, while little-known outside China, won a spot on this year's "50 Smartest Companies" list from MIT Technology Review. Backed by California-based venture capital fund Sequoia, Yitu claims on its company website that it is can identify 1 billion faces every second.

Chinese tech companies have also moved fast to develop their own supply chains since the U.S. put a supply ban in place this May against Huawei, the world's largest telecom gear maker, which Washington views as central to Chinese surveillance systems.

"All of our core technologies are self-developed and therefore the U.S. entity list will not have any major impact on the company's day-to-day operations," voice recognition company Iflytek, one of the 28 newly blacklisted entities, said.

While the impact on Chinese technology may be limited, the effect on trade talks between Washington and Beijing could be substantial.

Paul Triolo, head of geotechnology research at risk consultancy Eurasia Group, described the U.S. move as a highly aggressive action that signaled the primacy of national security hawks over trade pragmatists within the Trump administration.

"It significantly lowers the odds of the two sides reaching an interim trade deal this year.... The U.S. action targets some of China's most prominent tech companies," Triolo said.

One area where the U.S. ban may also dent investor interest is China's tech companies.

Megvii, an AI startup backed by e-commerce conglomerate Alibaba Group Holding, filed plans in August for an initial public offering in Hong Kong. On Tuesday, the company said that there were "no changes" to those plans, although a banker close to the situation was skeptical.

"We can't say anything categorical yet [but] it adds to the uncertainty and raises questions about investor appetite for the share sale," the banker said.

Hikvision and Dahua, listed on Chinese stock exchanges, suspended trading on Tuesday, while Shanghai-listed Iflytek closed down nearly 3%.

Nikkei staff writer Narayanan Somasundaram in Hong Kong contributed to this report.

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