Blacklist: US efforts to cripple Chinese surveillance and AI

A look at the most recent Chinese high-tech companies to have been blacklisted by Washington over alleged human-rights abuses.

The ongoing US trade war against China often appears at first glance to be primarily a matter of restricting Chinese exports to America and other markets, and this is certainly occurring. However, more recent moves have in fact been aimed more at restricting the export of US technology to China.

Nowadays, around the world, an awful lot of the technology that people use or otherwise interact with tends to be made in China. Most of the world's smartphones, computers and other connected devices are assembled there. Much of the network backbone that connects the devices up comes from Chinese network titans like Huawei and ZTE. The 3G box on the Australian utility pole, the surveillance camera on the Argentinian street corner, the network box in the African Union's Addis Ababa headquarters - all of them quite likely come from China, and might be reporting back to China in ways that their nominal local owners might not want them to.

Meanwhile in China itself, an intensive surveillance state is burgeoning. In many cases, perhaps, local citizens don't mind having a facial-recognition camera on every street scanning for known criminals and alerting the local cops to their whereabouts. But in China's far northwestern Xinjiang province the camera may instead be identifying members of the Uighur ethnic group, targeting them so that they can be disappeared into an extrajudicial "re-education camp" where they may be brainwashed, tortured or simply not heard from again.

Nowadays a lot of people are aware of these issues. In the tech industry around the world, businesspeople are already closely monitoring the stances of their own governments around the world with respect to globally active Chinese firms such as Huawei: the solution to be offered to customers often depends heavily on which providers one is permitted to use.

It's actually all about US exports

What's less well known is the degree to which Chinese industry, assembling and deploying its products, is dependent on imports of advanced technology from overseas to make them. To begin with, China has never managed to establish an indigenous semiconductor base capable of serving its huge industrial needs. Then, Chinese developers, like everyone else, often need to use software from elsewhere, by no means all of it openly available.

Advanced Chinese products of all kinds are often developed with the help of overseas knowhow. And much of this key technology comes from the USA.

Last month the US Department of Commerce added 28 new companies and agencies to its blacklist of Chinese firms which US vendors are forbidden to do business with, focusing on companies that specialise in artificial intelligence, machine learning and digital surveillance.

The effect of the blacklisting is twofold. Firstly, it seeks to prevent China using advanced tech developed in the US for nefarious purposes: whether in the US - full of Chinese-manufactured equipment like everywhere else - or in Xinjiang, or for that matter in Africa or Latin America, both of which continents are also home to extensive Chinese-supplied surveillance networks and other infrastructure.

Secondly, if China can't get chips and software and knowhow from America it can't make products to export around the world: thus the US deals an economic blow at the same time as moving to guard its own security and restrict Chinese influence elsewhere. And America can - and does - state for the record that the blacklisting is actually to protect the Uighurs and other oppressed minorities in China.

So, which are the new names that IDG Connect readers need to take note of, and where may they be encountered?

The only one on the new list that's likely to be familiar already is Hikvision, which made headlines in 2017 after media reports revealed the company, effectively owned by the Chinese government, had equipment installed across sensitive locations in the USA, including military bases and government facilities.

Hikvision is one of the world's largest suppliers of surveillance kit and it's one of the most prominent firms benefiting from the Xinjiang security-tech boom. In 2017, it won at least five security-related contracts totalling 1.85bn yuan (US$260m) in Xinjiang. This included a deal to construct a "social prevention and control system" featuring tens of thousands of cameras.

However, nearly 30 percent of Hikvision revenue last year came from outside China. The company has said the US listing with its talk of human-rights violations in Xinjiang lacks "factual basis", and downplayed its impact in a conference call last month.

‘We'll make our own chips'

"The majority of US components can all be directly replaced or replaced with new designs," said Hikvision board secretary Huang Fanghong. "If it's necessary, we will design our own chips."

Another name on the list, Dahua Technology, is also a large video surveillance and security camera company, with 35 global subsidiaries and an active North American division. According to its 2018 financial report, about 36 percent of the Shenzhen-headquartered company's revenue came from abroad.

Other newly blacklisted companies are more focused on analysis than collection of data. One such is iFlytek, a speech recognition company that recently raised US$350m to invest in artificial intelligence. Shenzhen-listed, the firm is generally thought to be one of the top speech recognition companies in China. Reliable speech recognition is not only of immense commercial value: it is also extremely useful for intelligence and surveillance purposes.

Next is Megvii Technology, a facial recognition unicorn that filed for a Hong Kong IPO in August with valuation of approximately US$3.5bn. Backed by e-commerce giant Alibaba, Megvii's facial recognition is used across a broad range of applications in China, from "smile to pay" mobile banking to law enforcement.

Megvii said the US move "reflects a misunderstanding of our company", and stated that only one percent of its 2018 revenue was from projects in Xinjiang, and none in H1 2019. However, the New York Times reported earlier this year that several Chinese AI firms, including Megvii, Yitu, and SenseTime, had developed software capable of racially profiling and tracking Uighurs.

SenseTime is another AI firm, packaging its tech as software-as-a-service. Its valuation is now somewhere north of US$7.5bn, based on investment from backers including SoftBank of Japan, Alibaba, and US chipmaker Qualcomm. It was founded by Hong Kong university professor and MIT alumnus Tang Xiao'ou, and like Megvii it is active in the use of facial recognition for payment applications. The firm has a lab in Silicon Valley and is partnering with universities around the world, including MIT, on AI research. MIT for one has already pledged to review that relationship following the blacklisting.

SenseTime said it was "deeply disappointed" by the blacklisting and would "work closely with all relevant authorities to fully understand and resolve the situation".

The other listed tech firms are less active outside China, but may still be of interest. They are:

  • Meiya Pico, a digital forensics company that holds nearly half the market share for computer investigation products in China. It has drawn criticism since cybersecurity researchers said that the firm was behind "MFSocket", an app that enables police or others to extract contacts, messages, and other personal data from smartphones.
  • Yitu, an AI research company that offers a wide range of cloud-based facial recognition products.
  • Yixin Technology, also known as Ecguard, a security company whose tech is used in everything from burglar alarms to event security, counterterrorism, firefighting and public transport surveillance.

All these companies, quite apart from losing US and US-related business, will find it much harder to develop, manufacture and support their products in future. Designing one's own chips, as Hikvision's Fanghong no doubt knows, is an undertaking only for those with deep pockets.