Washington this week targeted Chinese facial recognition startups SenseTime, Megvii and Yitu over national security concerns and foreign policy interests, aggravating the clash between the two economic superpowers over who will dominate the technologies of the future.
SenseTime is the second-most valuable artificial intelligence startup in the world, with investments from tech giants SoftBank (SFTBF) and Alibaba (BABA) and a private market valuation of $7.5 billion, according to CB Insights. (The most valuable artificial intelligence startup is another Chinese company, ByteDance, which uses AI to power its popular apps, such as video platform TikTok.)
Megvii and Yitu are worth $4 billion and $2.4 billion respectively, according to CB Insights.
The three tech startups, along with a handful of other Chinese firms like AI-driven surveillance camera maker Hikvision and voice recognition firm iFlyTek, are now banned from buying US products or importing American technology.
The US Commerce Department added them to a trade blacklist this week, saying the companies had been implicated in human rights violations against Uyghurs and other members of Muslim minority groups in Xinjiang. Twenty government and security bureaus in China’s Xinjiang region were also included in the ban.
Chinese authorities dismissed the human rights allegations, and threatened retaliation against US companies.
“The US accusations against China are groundless and senseless. They only expose the evil motives of the United States to interfere with counterterrorism efforts in Xinjiang and thwart China’s development,” China’s Foreign Ministry spokesman Geng Shuang said on Tuesday, telling reporters to “stay tuned” for retaliation.
Beijing wants to turn China into a global AI leader by 2030. In 2017, it set out goals to build a domestic artificial intelligence industry worth about $150 billion in the next few years.
The potential economic and social benefits for AI breakthroughs are enormous. AI-powered machines are already being used to provide customer service, manage logistics, monitor equipment on factory floors, optimize energy consumption, and analyze medical records, according to a 2017 study from consulting firm McKinsey. McKinsey estimates that the total market for AI applications will reach $127 billion by 2025.
China has several advantages when it comes to the development of AI, including an army of young talent, a strong and unified government AI policy, and about 850 million mobile internet users fueling huge data sets daily.
Chinese tech giants Baidu (BIDU) and Tencent (TCEHY) have established AI research centers in the United States. Baidu (BIDU), in particular, has been extremely bullish on the industry.
SenseTime, Megvii and Yitu are smaller companies, but they were flourishing thanks to a glut of venture capital cash and the Chinese government’s push for investments into AI.
Being banned from buying tech and components from US companies could slow that momentum. Chinese AI companies rely on computer chips and graphics processing units from US companies such as Qualcomm (QCOM) and Nvidia (NVDA).
In a note this week, the Eurasia Group called the US move “especially aggressive” given the timing just ahead of trade talks and the scope of the targets.
The tech firms are some of China’s most prominent in the areas of facial recognition and artificial intelligence. Hikvision is a $42 billion company and the world’s largest video surveillance gear maker. SenseTime and iFlyTek were named to China’s National AI team in 2017.
While the move is “aimed more at the Xinjiang issue and not squarely at China’s AI ambitions,” it does fit into a broader narrative within the US government, said Paul Triolo, who specializes in global technology policy at Eurasia Group.
The “United States and China are in a long term struggle for dominating the technologies of the future, and part of that narrative is that China is using technologies such as AI in the service of government surveillance and in ways that go against Western values in terms of things like privacy,” he said.
Megvii tried to downplay its dependence on American suppliers, saying in a statement that its supply chain is global and “the US is just one part of it.” In a recent IPO prospectus, the company said its top five suppliers are based in China.
Megvii also said “there are no grounds” for the company being added to Washington’s trade blacklist.
“We are … in compliance with all laws and regulations in jurisdictions where we operate. We require our clients not to weaponize our technology or solutions or use them for illegal purposes,” the company said.
SenseTime said in a statement that it is disappointed by the Commerce Department’s decision and will work to resolve the situation.
“We have been actively developing our AI code of ethics to ensure our technologies are used in a responsible way,” the company said, adding that it has “robust reserves and continuity plans” to minimize the impact on research and development.
Yitu did not respond to requests for comment.
All of these companies have likely stockpiled supplies of computer chips and are working to develop alternatives, according to Triolo.
“Like Huawei, they will be able to continue to supply customers but the action could threaten there ability to design new and more advanced systems if they cannot find comparable alternatives to US supplied components,” he said.
And as Huawei has shown, it only takes dependence on one American firm to cripple global ambitions.
Washington added the Chinese technology company to the trade blacklist in May. The company said it has since found alternative suppliers for many of the parts it used to buy from American companies, but it couldn’t find a good replacement for Google services.
The company was forced to launch its flagship Mate 30 phone without access to popular apps like Google Maps and YouTube, and its global smartphone sales have suffered, with some analysts predicting “a steep decline” for the third quarter, when the US trade ban was in full effect.