China has spent much of this year trying using surveillance tools to figure out where people are. The outbreak of a major epidemic challenged the government to track people’s movements. Local governments need to know who’s arriving on trains from epidemic hotspots, and, inside cities, who has been exposed to super-spreader events like the one at Beijing’s Xinfadi market.

The country has millions of surveillance cameras, and its companies are world leaders in face recognition. But this technology has been missing in action in China’s contact tracing efforts, while companies like Sensetime and Hikvision have seen their revenues hit during the pandemic.The video cameras that line China’s streets seem to have played no role in contact tracing. Systems to monitor social media turned out to be ineffective. Covid-19 simply ran circles around China’s surveillance apparatus.

Bottom line: China has been building a camera and face recognition-based surveillance system for years and this should have been its time to shine. Instead, star surveillance companies have seen revenue decline as contracts are delayed or canceled. As a new generation of infection tracking systems are rolled out, authorities are relying on a totally different model pioneered by consumer-oriented tech giants Tencent and Alibaba.

Get one client, make it big: International media love to tell stories of China’s facial recognition-driven panopticon. As overblown as they might be at times, they’re kind of true—and they’ve bred a huge market for facial recognition and surveillance equipment companies.

  • In 2013, at the annual meeting of the National People’s Congress, the country’s legislature, lawmakers announced that spending on domestic security would eclipse that of the military.
  • Local governments came through. In the southwestern city of Chongqing alone, there are nearly 3 million cameras—168 for every 1,000 people—according to figures from research firm Comparitech.
  • On the back of government spending, Chinese camera manufacturers have made it big. Out of Hikvision’s RMB 57.66 billion ($8.16 billion) revenue in 2019, about 70% came from China, and 40% of that came from government-related contracts, according to its annual financial results. That document does not make it clear how much of that comes from surveillance equipment.
  • Facial recognition algorithms to make sense of all that video data have also raked in some big bucks.
  • Sensetime has grown to become one of the most valuable AI companies in the world. The company has received backing from Softback, Qualcomm, Alibaba, and IDG Capital, among others.

Covid-era losses

A bad year: We would have expected surveillance and face recognition to hold up as Covid brought China’s economy to a halt, especially as contact tracing proved key to reopening. But the industry proved anything but immune.

  • Hikvision saw its operating income decline by 5% annually to RMB 9.4 billion in the first quarter. It did not provide details to explain the fall in revenue.
  • Dahua Technologies saw its revenue plummet during the same period The Chinese surveillance giant’s income fell by nearly 20% to RMB 3.5 billion. Like Hikvision, it did not explain the fall.
  • Megvii was reportedly one of around 300 companies that applied for bank loans to soften the blow of the epidemic. In February the company sought RMB 100 million to bankroll technology development, Reuters reported.
  • Megvii, Sensetime, and Yitu are not publicly listed, and are not required to disclose financial information.
  • More than 70% of security-focused companies in China saw flagging orders in the first quarter, according to a survey by information platform China Public Security (CPS). According to CPS, 7% of security enterprises have had orders canceled

What explains the losses? It’s not clear. A plateau in government contracts and US-led limits on exports probably both contributed. The biggest contributor to losses was likely falling public spending in the first few months of the year. After years of rapid growth, China’s investments in video surveillance have largely remained flat in 2020 in spite of the massive health crisis in the country.

Aside from a single large investment in the southern island province of Hainan, in the first half of 2020, proposed government investments in video surveillance projects around China amounted to RMB 2.7 billion in nearly 160 tenders, up marginally from RMB 2.5 billion in 2019, according to a TechNode analysis of public procurement data.

  • Stagnating procurements offer one explanation for surveillance companies’ recent troubles. Some of the country’s biggest AI companies—including Sensetime, Megvii, and Yitu—can largely attribute their success to government surveillance projects.
  • Revenues this year are driven by contracts awarded last year. In the short, the question isn’t how much is promised but how much is actually paid. Slowing procurement is likely related to reports of delayed projects.
  • Security companies have also seen significant delays to projects for which they have won tenders, according to CPS.
  • Delays in large construction projects may have contributed to revenue declines for some companies, as purchases of surveillance equipment were put off along with construction following citywide lockdowns.
  • To compound these issues, surveillance companies have also suffered as a result of the geopolitical tug of war between the US and China. The US placed Hikvision, Dahua, Sensetime, Megvii, and Yitu on its so-called Entity List, effectively barring them from doing business with American firms.

Bright spots: Two Chinese provinces stood out in procurement data as exceptions to the trend of falling surveillance contracts: Hebei, the province that surrounds Beijing, and the southern island of Hainan both bucked the trend.

  • In 2020, 49, or around a third of all surveillance tenders, focused on Hebei. Guangdong followed, with nearly half that number.
  • In 2019, the vast majority of these tenders focused on projects in Guangdong. Beijing and Shandong came in behind the southern province.
  • It’s unclear why Hebei saw a peak in surveillance projects.
  • One possibility is the province’s close proximity to Beijing. An effective surveillance system could act as a buffer between the capital and the rest of China and may provide more protection from subsequent waves of infections.
  • The province has also been working to build a system to enforce anti-straw burning laws, prohibiting open-air incineration of straw waste.
  • In Hainan, one tender worth RMB 45 billion for a project focused on provincial video surveillance sharing was made public. It is unclear whether this project has been started.

Missing in action

The dog that didn’t bark: The most surprising thing about the video surveillance industry in 2020 is what it didn’t do. As Covid-19 spread across China, the government went into crisis mode, launching efforts to track and control mobility. Despite tens of millions of cameras deployed across the country, officials turned to pen and paper to track where people were going and where they had been.

  • China initially responded to the outbreak by locking down cities—stopping people from moving at all rather than tracking them.
  • Travel that was allowed after the lockdowns was governed by paperwork. Train stations handed out paper health declarations as travelers returned home to their loved ones.
  • Officials were given access to telecoms data including location information, which proved largely ineffective in contract tracing, only giving estimated locations of a mobile phone’s owner.
  • In some cases, this data wasn’t enough to track down people government officials believed to be infected. “We did identify one man from Hubei [on the list from telecom operators]. We searched everywhere for him but just couldn’t track him down,” a cadre from a town in the southern province of Guangdong told the Financial Times.
  • TechNode was unable to find any evidence that video surveillance played an important role in tracking transmissions.

Thermal cameras: Surveillance companies in China ended up deploying thermal surveillance systems in public areas. These platforms were touted to be able to measure the temperatures of dozens of people at once.

  • These systems didn’t really catch on. They appeared sporadically in malls, schools, and subways, but the millions of checkpoints that government mobility mostly stuck to the infrared thermometer guns used during the outbreak of SARS in the early 2000s.

A new system emerges: As China re-opened, it built a new surveillance system to track where people went. Instead of turning to the camera companies, these contracts went to Alibaba and Tencent.

  • Tencent and Alibaba developed “health passports”—mini-apps that assign each user a rating based on their health status and travel history.
  • The platforms were completely novel and functioned both as an indicator of an individual’s risk of being infected but also as a way to track movement, as users were typically required to scan QR codes when entering public areas.
  • Cities around China were not required to adopt the platforms, but Alibaba said in March that more they were being used in more than 200 cities.

READ MORE: How China is using QR code apps to contain Covid-19

Does video surveillance have a post-Covid future?

Companies like Hikvision and Dahua seem determined not to let the same opportunities pass them by a second time. After the virus started taking hold internationally, the two companies began marketing epidemic surveillance products abroad.

Dahua has reportedly sold thermal imaging cameras to Amazon to measure its employees’ temperatures. Sensetime has also narrowed in on temperature screening, deploying its technology at the entrances to airports and subway stations in China. Meanwhile, Hikvision’s international website is mostly focused on products aimed at adapting to the “new normal,” such as handheld thermal cameras and other thermographic devices

Nevertheless, the failure to effectively contribute to contract tracing raises questions about the industry. If they can’t be deployed to aid in a time of crisis, what are these companies selling, and does it actually work?

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