Chinese firms scrambling to survive Trump blacklist

Bloomberg

The co-founder of China’s SenseTime Group Ltd was visiting New York to encourage more collaboration with the US on artificial intelligence when he heard the news: The Trump administration had blacklisted his company. So much for more cooperation.
Xu Bing, the 29-year-old co-founder, knew SenseTime was at risk given rising tensions between China and the US, but the timing took him by surprise. He was spending a few days showing off his latest products and meeting other AI researchers earlier this month when the Commerce Dept put his company and seven others on its “Entity List,” prohibiting American companies from providing crucial supplies like semiconductors. His phone flooded with calls and emails from worried employees and investors.
SenseTime is emblematic of the clash between the world’s two biggest economies. China is seeking to evolve economically by moving beyond manufacturing into the technology vanguard, with the explicit goal of dominating key fields like AI. Donald Trump’s administration is increasingly adamant about containing China’s rise, arguing that companies like Huawei Technologies Co steal intellectual property and threaten national security, while startups like SenseTime and Megvii Technology Ltd are complicit in human rights violations in the country’s Xinjiang region.
The company’s founders are a bit stunned at getting caught in the crossfire. They are mostly academics who decided to commercialise their technology five years ago, drawing attention from both US and China governments because of the applications for surveillance.
Now, they plan a shift away from hardware, which requires American chips, to focus on software for facial recognition and other applications. The founders think they can survive the existential threat.
“Long-term, the fundamentals of business are still most important,” says Xu, “so that’s what we will focus on.”
SenseTime, whose $7.5 billion valuation is the highest for an AI startup in the world, is trying to reassure investors, employees and customers.
The company said in a statement that it is “deeply disappointed” at the blacklisting decision and will seek relief. It emphasized it complies with all laws in local jurisdictions.
“These are real risks for tech companies in China,” says Crawford Del Prete, president of the market research firm IDC.
SenseTime has been preparing for the worst. The company raised about $2.5 billion last year from investors including Japan’s SoftBank Group Corp and Singapore’s Temasek Holdings Pte, according to a person familiar with the matter. That forestalls the need for an initial public offering any time soon.
Megvii, another AI startup that was blacklisted this month, is pressing ahead with its IPO plans, effectively testing whether investors will take on the risks of a blacklisting. (Megvii also says it’s done nothing wrong and plans to fight the US ban.)
For SenseTime, the biggest challenge of the Trump move is that it will lose access to US semiconductors, particularly from Nvidia Corp.
The chips are incorporated into AI cameras and other hardware SenseTime sells to corporations and government agencies.