The Trump administration took a tough step against China’s technology industry Monday when the U.S. Department of Commerce added eight Chinese tech companies—including the country’s leading artificial intelligence firms and the world’s most valuable startup—to its Entity List of companies that cannot purchase goods from American companies without Washington’s approval.
While the official reason for the companies’ inclusion on the blacklist is their participation in human rights violations against Muslim minority groups in China, a desirable effect—for the Trump administration and American tech competitors—is to slow the development of China’s capabilities in the hotly contested A.I. market.
But changes in China’s tech industry may mean that the move is too little, and too late to meaningfully hamstring the Chinese industry’s rapid growth.
The new face of Chinese tech
The banned companies join telecommunications firm Huawei Technologies on the Entity List, and many of the targeted companies said they had been expecting their inclusion—and preparing for it—even before Huawei was blacklisted in May.
Hikvision, which calls itself the world’s biggest maker of video surveillance equipment, said it has a low reliance on U.S. products and has been bracing for a possible U.S. government ban for more than a year.
Voice recognition A.I. firm iFlyTek also said it has been preparing for such a situation and has “contingency plans” in place to ensure its business is minimally disrupted. The company reported healthy profit growth and forecast continued growth for the rest of the year in spite of being blacklisted by the U.S., and its chief executive said to staff in a Wednesday letter, “We will not be strangled.”
One reason for this confidence is a shift in Chinese reliance on U.S. suppliers for the most necessary components of their products. China’s tech firms used to depend on U.S. companies like Qualcomm for computer chips, but today many Chinese firms now make their own chips or are developing the capacity to do so.
Pascale Fung, director of the Centre for A.I. Research at the Hong Kong University of Science and Technology, says the list will accelerate Chinese firms’ efforts to develop homegrown chips and the firms will “increasingly not rely on U.S. technology.”
Fung says it is unlikely that the ban will result in significant long-term financial damage to Chinese A.I. firms, and notes that the Entity List is an embargo on U.S. companies exporting their products to China and thus will likely hurt American suppliers more.
Indeed, the consequences for Huawei and its U.S. suppliers may be a harbinger of what is to come. A month after the ban, Huawei founder and chief executive Ren Zhengfei said it was costing his company $30 billion in revenue. Ren has since scaled the estimate down to $10 million and said Huawei is adapting its supply chain so it can produce equipment without access to its U.S. suppliers, which have seen lower revenue due to the embargo. New Huawei phones also launched without crucial Google apps, since the blacklist bans U.S. companies like Google from doing business with Huawei.
Still, Fung says, while appearing on the Entity List may not have a large impact on the companies’s bottom line, inclusion is “really bad for their image.”
Image is an especially serious concern for the most prominent firms on the list, and for those closest to an IPO—and the public scrutiny an offering brings.
A.I. startup Megvii, valued at $4 billion and backed by Chinese e-commerce titan Alibaba, is expected to hold an IPO on Hong Kong’s stock exchange by the end of the year and raise between $500 million and $1 billion. If it goes public, it will become the first A.I. company from China to do so—but its appearance on the Entity List could spook foreign backers and jeopardize the listing. Goldman Sachs Group, a sponsor of Megvii’s planned IPO, told Reuters on Tuesday that it was “evaluating” its involvement “in light of recent developments.”
For Megvii, the sticking point is its facial recognition software. The firm is still smarting from a since-corrected Human Rights Watch report that implicated Megvii’s Face++ software in government surveillance of China’s Uighur Muslim minority. A reissued version of the report did not include Megvii in the list of involved companies, but the startup’s reputation still took a hit.
Wary of more controversy in the lead-up to its IPO, Megvii is setting up an ethics committee, and has pledged to not let its tech be used for “any illegal or inappropriate purposes, including infringement of human rights.”
Megvii said in a statement that there are “no grounds” to its inclusion in the list and as of now there are “no changes” to ongoing IPO plans.
World’s most valuable A.I. startup
With a valuation of more than $7.5 billion (up $3 billion in its most recent funding round earlier this year), A.I. unicorn SenseTime is often referred to as the most valuable A.I. startup in the world.
Unlike Megvii, SenseTime has said it has no immediate plans to go public. But similar to Megvii, SenseTime is backed by Alibaba, is best known for its facial recognition technology, and is similarly sensitive to controversies over the software.
SenseTime’s Chief Executive Officer Xu Li told Bloomberg that the startup doesn’t work directly with the Chinese government and doesn’t own or access customer data.
“We are deeply disappointed with this decision by the U.S. Department of Commerce and believe our company has been misunderstood,” a SenseTime spokesperson said in an email statement to Fortune, adding that the company plans to work with relevant authorities to “resolve the situation,” and that SenseTime is “in for the long haul.”
Ultimately, the import restrictions placed on companies on the Entity List may be eased once Washington’s trade war with Beijing comes to an end. But the long-running competition for A.I. primacy will continue.
“It’s a very familiar old story,” Fung says. “It’s like the space race in the old days, and now this is an A.I. race between two different superpowers.”
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