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Chinese Companies Scramble to Survive Trump’s Blacklisting

Chinese: Trump administration has blacklisted Chinese companies. One of them is SenseTime Group Ltd. Its 29-year old co-founder, Xu Bing heard the news while visiting New York. His visit was to enhance more collaborations with the USA on artificial intelligence.

Xu Bing knew SenseTime was at risk with the rising China-USA trade tension, but the timing shocked him.

Earlier this month, he had been showing off his latest products and meeting other Artificial Intelligence researchers.

Why Was SenseTime Blacklisted?

The Commerce Department blacklisted SenseTime and seven other companies. The Department prohibited American companies from supplying them with crucial supplies such as semiconductors. The move has left his employees and investors worried.

The founders are stunned at getting caught in the crossfire. They are academics who decided to make money from their technology five years ago. Their applications for surveillance drew attention from both the US and Chinese governments.

SenseTime, whose valuation is $7.5 billion, is the highest for an AI startup in the world. Its founders are trying to reassure employees, investors, and customers saying they will seek relief from the blacklisting decision and that they comply with all laws locally.

Crawford Del Pete, the president of IDC, a market research firm, said the blacklisting poses a real risk to tech companies in China.

Now, the plan to shift away from hardware, which requires American chips. Instead, focus on software for facial recognition and other applications.

However, the founders think they can survive the current threat. Xu says in the long term, the principles of business are still most important, and that will be their focus.

SenseTime is a representative of a clash between the world’s largest economies. China’s goal is to evolve economically- move beyond manufacturing into technology and dominate the AI field.

The USA is increasingly adamant about accommodating China’s rise. The United States argues that companies like Huawei Technologies Co steal intellectual property and threaten national security.

The US also argues that startup companies like SenseTime and Megvii Technology Ltd violate human rights in the Xinjiang region.

SenseTime prepared for the worst

Last year SenseTime raised $2.5 billion from investors. Investors include Japan’s SoftBank Group Corp. and Singapore’s Temasek Holdings Pte. The move forestalls the need for initial public offering (IPO) soon.

The biggest challenge for SenseTime is that it will lose access to U.S semiconductors, particularly from Nvidia Corp. They incorporate chips into AI cameras, and other hardware SenseTime sells to corporations and government agencies.

Without the chips, the company will market software that clients or resellers will then install on their own. That will cut into revenue growth since the hardware accounts for about half its revenue. Software sales tend to have a higher profit margin.

People familiar with the matter say SenseTime sales are likely to triple to about $900 million. They added that growth might flag, but revenue will still double annually for the next three years.

Xu Li, the SenseTime CEO, and another founder, said they were prepared for the longterm game.

Xu Li was a Ph.D. student in computer science at the Chinese University of Hong Kong when he partnered with a few other AI academics to establish SenseTime.

It was not easy for Xu Li. He spent most of his time recruiting scholars rather than customers. Skeptical salespeople fled until a venture investor prompted him to draw a business plan. The investor told Xu Li that hiring PhDs and publishing papers was not making a company, but making a university.

Nine months into it without any sales, Xu stumbled on an opportunity. Peer-to-peer lending was taking off in China, but fraud was a significant challenge, and companies desperately needed help.

What Is SenseTime Doing for China?

SenseTime devised a solution to take face scans with motion, such as turning your head winking or sticking your tongue out. All these were to ways companies would prove users were real people.

Their first client paid 20 million yuan ($2.8 million). Soon, several companies were lining up for its services.

Next, Xiaomi Corp, the smartphone maker, asked SenseTime to create customized photo albums for its users.

Bytendance Inc., the parent company of TikTok- a viral video app, asked SenseTime to build filters that beautify streamers. Steamers can slim their faces and tone complexities in realtime as they sing and dance.

SenseTime’s security-camera technology took off with China’s public security bureau owning about 30 million surveillance cameras. However, only 1% were smart cameras able to analyze what they were recording.

It costs $500 to $3000 to upgrade a device, depending on how many features one wants. Features include face identity, traffic, explosion, or fire.

Software upgrades to the government cameras are about 35% of SenseTime’s revenues.

The other 65% comes from commercial clients like shopping malls, property developers, and mobile phone providers.

In 2016, there were about 176 million video surveillance cameras monitoring China streets, public spaces, and buildings compared with 50 million in the U.S., IHS Markit revealed.

SenseTime is exploring other markets. It is developing similar camera technology for education, healthcare, logistics, and driverless cars.

Xu has been pushing SenseTime to develop its own AI chips and expand to Japan, Southwest, and South Korea. The idea is for China to create equivalent chips via Huawei, Alibaba, or SenseTime itself even if it loses access to the U.S chips.

Megvii, another AI startup blacklisted, is pushing ahead with its IPO plans. They are testing to see whether investors will absorb the risks of blacklisting. Megvii also says they will fight the US ban and that they have done nothing wrong.

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