HONG KONG/BEIJING – U.S. President Donald Trump’s latest salvo against China threatens to derail a $1 billion coming-out party for a prominent startup backed by Alibaba Group Holding Ltd., while curtailing the country’s broader ambitions of leading artificial intelligence in the coming decade.
The U.S. placed eight Chinese technology giants on a blacklist Monday, accusing them of being implicated in human rights violations against Muslim minorities in the country’s far-western region of Xinjiang.
Among those singled out for sweeping American export restrictions were SenseTime Group Ltd., the world’s largest AI startup, and Megvii Technology Ltd. — two giant enterprises that Beijing is counting on to spearhead advances into a revolutionary technology, aided by billions of dollars in foreign backing.
The White House’s actions — announced days before sensitive trade negotiations resume in Washington — cast a pall over not just Megvii’s capital-raising effort but the burgeoning Chinese sector.
Leading players like SenseTime and Megvii, already having trouble securing financing during an economic downturn, had considered international forays to sustain a sizzling pace of growth.
The U.S. Commerce Department’s action threatens to derail that effort while spooking the business, supply and research partners needed over the longer term. Nvidia Corp., for one, is a key supplier to both AI firms.
“This will make people think twice about working with these companies even if there are no legal reasons preventing them from doing so,” said Isaac Stone Fish, a senior fellow with the Asia Society’s Center on U.S.-China Relations. “Reputational costs will be greater than financial costs.”
Monday’s move marks another escalation in a U.S. effort to contain China’s technological ascendancy, a campaign that began by slapping curbs on Huawei Technologies Co. and now encompasses some of the country’s most promising startups.
Apart from SenseTime and Megvii, the Trump administration placed six other eight Chinese technology giants on its so-called Entity List. That bars them from doing business with American companies without a U.S. government license.
SenseTime and Megvii are trying to reduce their reliance on American software and circuitry by developing their own chips. Monday’s blacklisting could further decouple the two Chinese companies from the U.S. in terms of tech and funding. Megvii said on its WeChat social media feed the U.S. blacklisting was “unsubstantiated” and that the company complies with all regulations in the markets in which it operates. SenseTime and China’s Ministry of Commerce didn’t immediately respond to requests for comment.
Chinese AI has raised hackles in Washington like no other segment of the country’s vast corporate machine, in part because of the welter of headlines daily proclaiming how it may surpass the United States. Broadly defined as anything from autonomous driving and robot waiters to facial recognition systems, names like Megvii and SenseTime are joined by established players such as Huawei, Tencent Holdings Ltd. and Didi Chuxing Inc. in an effort that’s intended to seal China’s place at the nexus of the modern global economy.
Megvii’s IPO was supposed to have been the Chinese industry’s unofficial debut on the global stage. Already mothballed because of rising violence in Hong Kong, that offering now appears in question. While the startup warned in its prospectus about the unforeseen circumstances of conflict between Washington and Beijing, it never publicly addressed the prospect of getting cut off from American technology or markets.
It’s unclear how foreign investors may respond to Monday’s decision. Megvii counts Qiming Venture Partners and Chinese AI guru Lee Kai-Fu’s Sinovation Ventures as backers. SenseTime won funding from global powerhouses from Fidelity International and Silver Lake to Tiger Global and SoftBank Group Corp., en route to a valuation of $7.5 billion.
Both have enjoyed rip-roaring growth in recent years. SenseTime has expanded from facial recognition technology to financial security, robot deliveries and driverless cars. The 5-year-old startup now has 3,000 people and is hiring about 100 staff every month.
Revenue is still growing at triple-digit percentages, though it remains cash-flow-negative because of the need to invest in new areas such as AI chipmaking. While it still relies on Nvidia chips, it’s also developing in-house alternatives and investing in startups, SenseTime Chief Executive Officer Xu Li said in September.
Also on Commerce’s list were lesser-known Xiamen Meiya Pico Information Co. and Yixin Science and Technology, major resources for China’s police force. Meiya, whose products are used for data gathering and analysis, is controlled by China’s state capital management body. Yixin also provides big-data analysis for the Chinese authorities, according to its website.
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Xu Li, chief executive officer of SenseTime Group Ltd., is identified by the company's facial recognition system at SenseTime's showroom in Beijing in June 2018. | BLOOMBERG
