The US move to blacklist Chinese artificial intelligence and surveillance companies has met with widespread condemnation in China despite the companies’ claims that the prohibition won’t have long-term effects on their operations.

On October 7, the US Commerce Department placed several high-profile Chinese AI firms and government agencies on the Entity List—effectively blocking them from doing business with American companies without prior approval.

The organizations include Sensetime, the world’s most valuable AI startup, and the speech recognition and natural language processing firm iFlytek, as well as surveillance camera makers Hikivision and Dahua Technology.

Also included are Alibaba-backed Megvii, which recently filed to go public in Hong Kong—the first Chinese AI startup to do so—and its counterpart Yitu.

In its statement, the Commerce Department said that the companies have been “implicated in human rights violations and abuses” in northwest China’s Xinjiang Uyghur Autonomous Region, home to predominantly Muslim ethnic minorities. According to US officials, the blacklisted companies were involved in creating the mass surveillance apparatus used to monitor minorities in the region.

Sensetime, Megvii, Yitu, and Hikvision all issued statements opposing the US decision, saying that they comply with Chinese laws. Megvii claimed its inclusion on the list was the result of a “misunderstanding.”

The US announcement came days before Chinese vice-premier Liu He’s visit to Washington to resume trade talks. The Commerce Department maintains that the ban is unrelated to the negotiations.

The blacklisting of these companies is a direct affront to China’s technological ambitions. The country has plowed billions of yuan into shifting its economy up the industrial value chain through the development of the robotics, electric vehicle, semiconductor, and AI sectors. Given that China’s goal is to overtake the US by becoming an AI frontrunner by 2030, the Commerce Department’s move appears to takes aim at that ambition.

While US human rights and pro-democracy groups applauded the export restrictions, the conversation within China has remained focused on the affected companies. Meanwhile, nationalistic fervor has reached fever pitch, with state media claiming the move is just the latest attempt by the US to undermine China’s rise.

Support at home

China swiftly hit back at the ban, saying that the human rights claims are “fact-distorting gibberish” that attempt to limit China’s counterterrorism efforts.

“Xinjiang does not have the so-called human rights issue claimed by the US. The accusations by the US side are merely made-up pretexts for its interference,” said Geng Shuang, China’s Foreign Ministry spokesperson, on Tuesday.

Meanwhile, state-backed Xinhua News Agency said the ban was aimed at “hindering China’s development,” rather than any real concerns over human rights.

The Global Times, a Communist Party mouthpiece, referred to the ban itself—as well as subsequent visa restrictions on Chinese officials believed to be involved in human rights violations in Xinjiang—as “shameful,” adding that the sanctions will have “little effect.”

Much of this rhetoric was mimicked on Chinese social media, where the majority of netizens put their support behind the homegrown companies.

“America is worried about the rise of great Chinese companies,” one user said, commenting on a statement published by Sensetime on the popular messaging app WeChat.

“Without the US Entity List, many people wouldn’t know that Chinese innovation is leading the way,” said another.

On Weibo, users attributed the ban to the perceived fear of China in the US.

“When the US wildly starts boycotting China, it shows China is powerful enough to scare them,” commented one user from eastern China’s Shandong province.

Meanwhile, the Washington-based NGO Freedom House saw the move as a long-awaited offensive against alleged human rights violations in Xinjiang.

The organization said in a statement on Wednesday that it “applauds” the decision, urging the US government to expand the export restrictions to encompass more companies involved in surveilling dissidents in China.

The Republican senator Ted Cruz, who—as part of a bipartisan coalition of US senators—has pushed for sanctions against entities suspected of involvement in human rights violations in Xinjiang, called the move an “excellent step forward.”

What next?

Despite the polarizing effect of the ban, the prohibition did not come as a surprise. Megvii, which provides its facial recognition technology to smartphone maker Xiaomi and payments firm Ant Financial, had alluded to the risks of a potential blacklisting when filing for its Hong Kong IPO.

“If we were subject to economic and trade restrictions, we could be prevented from procuring certain goods and technologies, and our ability to develop and provide our solutions might be impaired.” the company said in its prospectus.

Megvii cited Huawei as an example. Earlier this year, the Chinese telecommunications giant was added to the Entity List over alleged national security concerns related to the company’s technology.

Other companies, including iFlytek and Hikvision, began making contingency plans as far back as last year.

Hikvision said it had begun seeking alternative suppliers to limit its reliance on the US in late 2018, the same year that Chinese telecommunications giant ZTE was banned from sourcing American components for violating US sanctions against Iran and North Korea. ZTE has subsequently been taken off the blacklist.

In an internal memo to employees on Wednesday, iFlytek CEO Liu Qingfeng said the company had already made plans to deal with the situation, adding that he still expected positive financial results for the remainder of the year.

The overall impact on companies such as Sensetime, Megvii, and Yitu is likely to be limited. Megvii’s overseas business accounted for less than 5% of its total revenue during the first half of 2019. Sensetime and Yitu’s financial records are not currently available, as the companies have not submitted listing documents.

Nonetheless, being added to the blacklist could have severe reputational impacts. Chinese AI firms have established partnerships with universities around the world, which these academic institutions are now rethinking.

In June, prior to the export ban, the Massachusetts Institute of Technology (MIT) reportedly began reassessing its partnership with iFlytek as a result of the speech recognition firm’s technology being used in Xinjiang. The review came after Rutgers University severed its relationship with the company.

Just last week, MIT began reassessing its partnership with Sensetime after the firm was added to the blacklist. Sensetime has similar partnerships with research institutions as well as research centers and offices in Japan, Singapore, and the United Arab Emirates.

The effect on companies like Hikvision, which has become the largest supplier of surveillance equipment in the world, could be more pronounced. Around 30% of the company’s operating income currently comes from its overseas sales, according to figures for the first half of the year.

In addition, the company’s components are sourced from a vast array of US manufacturers, including Intel, Seagate, Nvidia, and Western Digital, according to John Honovich, the founder of IPVM, a video surveillance research company. But the company also has a number of non-US suppliers.

Nevertheless, Hikvision executives claim that the company’s reliance on US technology is “relatively low,” instead opting to use semiconductors from companies including Huawei’s chipmaking subsidiary HiSilicon, among others.

Christopher Udemans is TechNode's former Shanghai-based data and graphics reporter. He covered Chinese artificial intelligence, mobility, cleantech, and cybersecurity.

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