Even as China Cracks Down on Tech, AI Companies Plan IPOs

SenseTime and Megvii both include facial recognition technology among their offerings and do a lot of business with government agencies. 

Last November, the Chinese government ordered Ant Group, a business spun out of Alibaba that operates the ubiquitous Alipay mobile payments platform and other financial services, to cancel its hotly anticipated IPO at the last moment.

Shortly after ride-hailing giant DiDi went ahead with an IPO in New York this summer despite government concerns, officials removed the company’s app from Chinese app stores and ordered it to comply with an extensive cybersecurity review.

Soon after, ByteDance, operator of wildly popular news and entertainment apps, as well as the short-video sensation TikTok outside of China, shelved its own plans for an IPO to comply with tighter government rules around data protection and security.

So it’s a little odd that two titans of China’s artificial intelligence industry, SenseTime and Megvii, are proceeding with plans for IPOs seemingly unbothered, with listings on the Hong Kong and Shanghai stock exchanges, respectively.

After a decade of unchecked growth, many Chinese tech firms now face a stark new reality, with canceled IPOs, stricter regulations, and hefty fines. But some “AI unicorns” remain relatively untouched. One potential reason: They are aligned with the government.

“AI companies are important providers of government services,” says Martin Beraja, an MIT economics professor who studies China’s tech industry. “Facial recognition AI companies, in particular, stand out as key providers to Chinese public security agencies.”

Both SenseTime and Megvii are notable providers of facial recognition technology to both the private sector in China and public entities like city police departments. SenseTime says in its IPO prospectus that during the first six months of this year, nearly 48 percent of its revenue came from its Smart City business, which involves selling services such as surveillance and traffic management technology to local governments.

“Government spending is subject to changes that are beyond our control,” the prospectus warns. “If government spending that relates to our business does not continue to grow or remain at the current level … our business could be materially and adversely affected.”

The two companies’ ties to China’s government have also attracted the attention of the US government. The Trump administration added SenseTime and Megvii to a list of companies barred from doing business with US firms in October 2019 over alleged ties to government surveillance of Muslims in the western province of Xinjiang. Several other Chinese AI companies were on the list, including YITU Technology and iFLYTEK, which specializes in voice recognition and surveillance.

The companies’ apparent ability to go ahead with IPOs comes amid far-reaching scrutiny of Chinese tech companies. Ant’s parent company, Alibaba, was fined a record $2.8 billion for allegedly hindering competition. The penalty has been partly seen as a rebuke to Jack Ma, the prominent billionaire behind both Alibaba and Ant, who gave a speech criticizing government regulators for hindering innovation shortly before Ant’s planned IPO.

Other affected companies include Tencent, which operates WeChat, a “super-app” and payment platform, along with entertainment and gaming businesses; Pinduoduo, a group-purchasing and ecommerce business; and Meituan, a popular food delivery firm. The clampdown has also affected education startups, recruitment firms, and cryptocurrency startups.

The motives behind the government action are complicated. Officially, it is designed to curb anti-competitive practices, secure private data, and address income inequality or “capitalist excess.” But it also brings powerful businesses closer in line with the Communist Party.

“When Alibaba, Tencent, and JD.com are worth billions or even trillions of dollars and yet they are not under the Party’s direct control, this is a totally new and unprecedented reality that China never experienced in history,” says Zhiwu Chen, a professor of economics at the University of Hong Kong.

Many experts describe the moves as a kind of punitive industrial policy—an effort to guide China’s technology industry toward areas seen as vital to economic development and geopolitical advantage. “Companies that are in hard technology, such as advanced engine manufacturing, computer chips, biotech, and defense—industries that China are really lagging behind in—are unaffected,” says Chen.

That could help explain why AI companies have gotten off lightly so far. “AI is of general importance to the economy,” says MIT’s Beraja. “It has been repeatedly named by Chinese officials as a ‘strategic industry.’”

The belief that AI could contribute to progress across dozens of industries was spelled out in a national-scale plan published by China’s State Council in 2017. The plan triggered widespread investment in AI by regional governments. Some AI companies have also benefited from government data, including images used to build and hone facial recognition systems.

Minyuan Zhao, an associate professor at Washington University in St. Louis who studies Chinese business, argues that AI companies are just as much in the crosshairs as anyone else, but they are already tightly tied to the government. “There’s less concern for the loss of control,” she says.

Graham Webster, a research scholar at Stanford who specializes in China, notes that the country’s new Personal Information Protection Law will tighten the rules for all companies handling personal information, including AI companies that sell facial recognition tech.

SenseTime warns potential investors that the data regulations might pose a headache. “It remains uncertain whether the proposed measures will be applicable to our business” or whether other changes could impose restrictions, the prospectus says.

In some sense, Beijing’s crackdown over personal information may serve to strengthen the government’s relationship with firms with which it shares data, if it helps build public trust in the idea that personal information is being guarded safely.

This might not insulate AI companies from further constraints or regulations indefinitely, however.

“AI is a relatively new field,” says Yun Sun, a director of the China Program at the Stimson Center think tank. “It is possible that the regulators do not yet fully comprehend the scope of the data security involved,” she says. “There is a pattern of the government reacting to such IPOs when the industry is more mature, actors are abundant, and regulation becomes a problem.”


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