U.S. blacklist fails to derail ambitions of Chinese AI start-ups

Top Chinese AI startups Megvii and SenseTime raise funds and win overseas contracts despite being blacklisted in the US last year, highlighting how far Beijing’s brightest startups are resisting on the reverse rather than scrambling to survive.

Megvii, one of eight companies on the U.S. Department of Commerce’s Entity List nine months ago, is in talks with new investors to raise funds after postponing an initial public offering in Hong Kong earlier this year , according to two people familiar with the situation. There are internal discussions about whether the $ 4 billion Chinese facial recognition startup needs the capital before or after a possible listing next year, the people added.

Alibaba-backed facial recognition software company SenseTime has turned to private investors to raise up to $ 1 billion in capital this year, with an IPO still a long way off, according to two other people familiar with the matter. .

Both companies declined to comment.

The United States blacklisted Megvii and SenseTime in October, along with voice recognition company iFlytek and AI unicorn Yitu, accusing the companies of contributing to “repression, arbitrary mass detention and high-tech surveillance.” In the western China’s Xinjiang region.

The Trump administration’s move, whose acrimony with Beijing increasingly involved the tech sector, struck at the heart of China’s burgeoning AI industry, a key facet of the ‘Made in China’ plan. China 2025 ”by President Xi Jinping. Megvii and SenseTime have several contracts with Chinese companies and cities and are among Beijing’s brightest prospects in the industry.

But after initially struggling with the US blacklist, which prevents them from purchasing components from US suppliers, they stabilized.

Megvii’s planned listing in Hong Kong was dropped and revenues were hit as the company halted numerous operations to assess the impact. The start-up, whose offshore backers include Macquarie and the Abu Dhabi Investment Authority, said it did not make any income on projects in Xinjiang in the first half of 2019.

Megvii’s revenue this year has returned to its pre-entity list levels, according to a person familiar with the situation. A relaunched IPO, this time potentially on the mainland’s tech-focused Shanghai Star board, is expected in 2021.

Shenzhen-based IFlytek said in April that the entity listing ban cost it $ 12.7 million, but net profit rose another 51% to 819 million rupees (117 million rupees). dollars) in 2019 compared to the previous year.

SenseTime has not commented publicly on the business impact, but it operates primarily in China and has little exposure to the US market.

Their situation echoes Huawei’s experience with a similar ban: not only did the Chinese telecom equipment maker’s sales increase despite being blacklisted in May of last year, but its spending with suppliers. Americans grew by 70% in 2019.

AI innovation remains “a top priority” for the Chinese government, said Yu Jiang, executive director and professor at the Institute of Policy and Management, part of the Chinese Academy of Sciences in Beijing . The coronavirus crisis has highlighted the benefits of AI for the medical industry, he added.

The overseas ambitions of start-ups are not discouraged either. Megvii’s smart temperature measurement systems, already adopted across China to help curb the spread of the coronavirus, have been deployed in Japan and the Middle East this year.

SenseTime, whose other backers include Fidelity, Qualcomm and Silver Lake, has held talks to deploy its software at a Singapore casino to help identify cheating. Earlier this year, SenseTime struck a deal with a Thai real estate developer for AI cloud services and was selected to help a large Japanese company upgrade their highway monitoring system.