In China, Foreign AI Companies Banned or Disadvantaged, Says Top China AI Company

By: John Honovich and Charles Rollet, Published on Aug 28, 2019

Non-China (PRC) companies are prejudiced and unfairly targeted inside of the PRC's booming AI market, which not only denies them revenue inside of the PRC but fosters domestic PRC giants that can then unfairly compete around the world.

Foreign AI Providers Banned or Disadvantaged In China

One of China's largest AI providers, Megvii, disclosed in its IPO filing that:

Foreign-owned entities are prohibited or disadvantaged in the relevant City IoT project bidding process in practice. In practice, when selecting service providers, many end users, as well as many direct customers (which are our system integrators) engaged by such end users to assist them in the supplier selection process, would set implicit requirements that the service provider must not have any foreign shareholder, or at least consider foreign ownership as a disadvantage in their decision making process. Some government agencies even explicitly set forth such requirements in their project bidding invitation documents [emphasis added]

This disclosure comes in stark contrast to the PRC government and major PRC manufacturers complaining strenuously about how unfair and unjust the US NDAA ban is.

Megvii Revenue Rocketing

Megvii's IPO document show 2018 revenue of ~$200 million, with H1 2019 revenue tripling, putting the firm on pace to generate $500+ million revenue in 2019.

PRC AI Market Booming

This shows a huge market in PRC for AI solutions, which Megvii estimated at almost $42 billion total (300 billion RMB) last year for the "city and community management" segment:

Owing to the gradual replacement of existing security solutions, implementation of smart community solutions and cost reduction of human staff, the market for computer vision technology under the city and community management context is approximately RMB300 billion as of 2018

This is driven in part by the PRC government's smart city spending, which Megvii expects to skyrocket from $1.66 billion in 2018 to over $14 billion by 2023:

The market size of China’s smart city management vertical in terms of revenue is expected to grow from RMB11.9 billion in 2018 to RMB103.1 billion in 2023 [...] Smart city management solutions are primarily provided to government agencies [...] Our growth, especially with respect to our City IoT solutions, depends in part on government spending and favorable government policies [emphasis added]

Indeed, a new IDC market report on PRC video surveillance says that the government accounts for nearly half of all PRC market spending:

The government is the largest industry in China's video surveillance, accounting for 47.6% of total expenditure.

Adds To Historic Video Surveillance Barriers

With all this spending, being shielded from foreign competitors is certainly a plus. However, this is neither new nor surprising. For years, the PRC has considered foreign video surveillance systems to be a security risk.

As such, even the biggest non-PRC companies such as Axis, Avigilon, Genetec, and Milestone have a negligible share of the PRC market.

Major Problem For Non-PRC Vendors

The outcome will be huge PRC AI vendors that will be far larger and have far more resources to compete globally against non-PRC AI vendors. This, of course, has already happened with surveillance cameras as Dahua and Hikvision built up huge protected markets inside of the PRC and then leveraged that to spend vastly on sales while undercutting the pricing of their foreign competitors. With these barriers, this could repeat with AI.

Contrast To The US NDAA

While the PRC is banning and disadvantaging foreign AI providers, the PRC, and its largest manufacturers have made repeated claims of how the US NDAA is unfair and unjust. This is ironic, since surely Huawei and Hikvision know the same thing Megvii knows, that they have benefited from unfairly undermining foreign companies inside their home country.

Both hurt targeted providers (in the case of the PRC, all foreign companies, in the case of the US, just PRC companies).


Ideally, both countries would support open trade and trust each other. This is unlikely to happen.

With AI becoming core to video surveillance in the next decade, this is shaping up to be a repeat of the 2010s, with huge PRC providers, benefiting from an unfairly protected home market, having far greater revenue and resources to undermine rivals throughout the rest of the world.

8 reports cite this report:

The 2020 Video Surveillance Industry Guide on Dec 20, 2019
The 300-page, 2020 Video Surveillance Industry Guide covers the key events...
Government-Owned Hikvision Wants To Keep Politics Out Of Security on Oct 21, 2019
'Politics' made Hikvision the goliath it is today. It was PRC China...
Hikvision Dissolves North American Business Unit, Splits Canada and USA on Oct 15, 2019
Hikvision has dissolved its North American Business Unit, splitting up US and...
Hikvision And Dahua Sanctioned For Human Rights Abuses on Oct 07, 2019
In a groundbreaking move that will have drastic consequences across the video...
US - China Review Commission Cites IPVM on Foreign Provider Threat on Oct 01, 2019
A bipartisan congressional commission cited IPVM twice in its analysis of how...
China Enforces Barriers Against Foreign AI and VSaaS Providers on Sep 30, 2019
While AI and VSaaS is the future of video surveillance, these are obstructed...
Critiquing Carnegie's AI Surveillance Paper on Sep 25, 2019
The Carnegie Endowment has issued an ambitious paper on the Global Expansion...
Megvii Financials and Growth Examined on Aug 30, 2019
Megvii has already received more than a billion dollars in investment. Now,...

Comments (9)

Only IPVM Members may comment. Login or Join.

As an interesting footnote, the reason that Megvii disclosed this is that even though they are, in reality, a Beijing HQ company with founders from Tsinghua (the top PRC university that, e.g., Xi Jinping attended), Megvii, like Alibaba, is structured with a holding company based in the Cayman Islands. So theoretically, the 'prohibition' against foreign companies could be applied to them, though, as they explain, at great lengths, this is unlikely to be the case.

The original / core operating company is:

As they explain in the IPO document, they created a Cayman Islands holding company later on:

To attract foreign investors to support our growing business, we incorporated our Company as an exempted company with limited liability in the Cayman Islands on January 30, 2013 as the holding company of our Group and exercised control over Beijing Kuangshi through the Original Contractual Arrangements

But that company does not directly own the PRC company, it has only a "Contractual Arrangements" with the PRC operating business, as they note:

we do not directly own any equity interest in our Consolidated Affiliated Entities.

The reason for this is that the PRC blocks foreign ownership, as they explain:

The PRC government imposes certain restrictions or prohibitions on foreign ownership of companies that engage in certain value-added telecommunications services

The company adds that while it does not have any equity interest, it has a contract that will allow it to receive economic benefits of the PRC operating company:

Although we do not have any equity interest in our Consolidated Affiliated Entities, we are able to exercise effective control over them and receive substantially all of the economic benefits of their operations through the Contractual Arrangements with Beijing Kuangshi and its shareholders.

Though they acknowledge that the PRC could change this in the future:

we have been advised by our PRC Legal Advisor that there can be no assurance that the PRC government authorities will not take a view in the future that is contrary to or otherwise different from the opinion of our PRC Legal Advisor stated above, and there is also the possibility that the PRC government authorities may adopt new laws and regulations in the future which may invalidate the Contractual Arrangements

That is business in the PRC.

On the plus side, these technicalities have resulted in Megvii disclosing something very important (that "Foreign-owned entities are prohibited or disadvantaged") that PRC companies tend to ignore or hide.

Isn’t that logically correct? If China become banned from west, why should west become welcome in east?

my 0.02$

The temporality is reversed, i.e., If the West becomes banned from China, why should the West welcome China?

China has been doing this for many years, it's just very rare for any official document from inside the PRC to acknowledge this publicly.

Same stuff, no difference in my opinion.

In your opinion, if you were any other country but China, what would you do if China blocked your country's companies from competing fairly in China?

Block them too of course.

Ideally, both countries would support open trade and trust each other.

“Ideally” as in if China was actually trustworthy?

Sure, though, keep in mind, from the PRC perspective, the US is not trustworthy either. More generally, when it comes to security, the PRC generally does not trust liberal democracies, as they view them as a threat / opposing their government. Of course, nearly all tech, outside of the PRC, comes from liberal democracies.

I think most Americans support free trade and have benefited from it for the most part (Consumers and outsourced mfgs have at least temporarily, as China as unloaded products artificially cheap into the US). We are a global economy but we are not in another sense. China has been playing unfairly for L O N G time and though it hurts, the Trump administration is doing the right thing with the trade war. Free trade needs to be fair trade and China has bee manipulating and cheating America for way too long. The standards the US uses in tech are generally universally applied in most every other country. China has finally got its hand caught in the cookie jar. They need to fess up, wash up and play fair.

Related Reports

Axis Exports To China Police Criticized By Amnesty International on Sep 21, 2020
Axis Communications and other EU surveillance providers are under fire from...
China General Chamber of Commerce Calls Out US Politics on Sep 24, 2020
While US-China relations are at an all-time low, optimism about relations...
Hikvision Put on US DoD "Communist Chinese Military Companies" List, Faces Risk of Presidential Sanctions on Jun 26, 2020
The US DoD has put Hikvision on a list of "Communist Chinese Military...
Beware Rigged China Fever Cameras on Sep 08, 2020
Many China fever camera manufacturers have rigged algorithms dynamically...
Bias In Facial Recognition Varies By Country, NIST Report Shows on Jul 15, 2020
While many argue that face recognition is inherently racist, results from one...
US Passes Uyghur Human Rights Law Condemning Mass Surveillance on Jun 18, 2020
The US government has passed the Uyghur Human Rights Policy Act of 2020,...
China Surveillance Vulnerabilities Being Used To Attack China, Says China on Apr 07, 2020
While China video surveillance vulnerabilities have been much debated in the...
South Korea Bus Outdoor Temperature Screening Endangers Public on Aug 26, 2020
These $80,000+ South Korea bus stations have gained world-wide attention but...
Netposa Stock Surges 46% After US Human Rights Abuse Sanctions on May 27, 2020
Last Friday, the US government announced it would sanction PRC video...
Panasonic i-PRO Hid Huawei, Does Damage Control on Aug 21, 2020
Panasonic i-PRO hid their usage of Huawei from the public, continues to...
"Beyond Reprehensible" Email Leads To Boycott of CPI Security on Jun 10, 2020
One of the largest US security integrators, CPI Security, with $100+ million...
Facial Recognition: Weak Sales, Anti Regulation, No Favorite, Says Security Integrators on Jul 07, 2020
While facial recognition has gained greater prominence, a new IPVM study of...
Sunell is The First China Manufacturer to Market NDAA Compliance on Jul 30, 2020
Most China manufacturers are going to be impacted by the NDAA 'Blacklist...
Temperature Screening Is Ineffective, Says US, UK, Canada, Israel, And Ireland Health Leaders on Aug 25, 2020
Health leaders around the world are increasingly speaking out about the...
Gait Recognition Examined on Sep 14, 2020
Facial recognition faces increasing ethical and political criticisms while...

Recent Reports

OnTech Smart Services Partners With Google and Amazon To Compete With Integrators on Sep 25, 2020
A pain point for many homeowners to use consumer security and surveillance is...
The Future of Metalens For Video Surveillance Cameras - MIT / UMass / Immervision on Sep 25, 2020
Panoramic cameras using 'fisheye' lens have become commonplace in video...
Hikvision Sues Over Brazilian Airport Loss on Sep 24, 2020
Hikvision was excluded from a Brazilian airport project because it is owned...
China General Chamber of Commerce Calls Out US Politics on Sep 24, 2020
While US-China relations are at an all-time low, optimism about relations...
Verkada Disruptive Embedded Live Help on Sep 24, 2020
Call up your integrator? Have someone come by the next day? Verkada is...
IP Networking Course Fall 2020 - Last Chance - Register Now on Sep 23, 2020
Today is the last chance to register for the only IP networking course...
Drain Wire For Access Control Reader Tutorial on Sep 23, 2020
An easy-to-miss cabling specification plays a key role in access control, yet...
Norway Council of Ethics Finds Hikvision Human Rights Abuses "Ongoing" on Sep 23, 2020
Hikvision's involvement in "serious human rights abuse" in Xinjiang is...
IPVM Camera Calculator User Manual / Guide on Sep 23, 2020
Learn how to use the IPVM Camera Calculator (updated for Version 3.1). The...
Installation Course Fall 2020 - Save $50 - Last Chance on Sep 22, 2020
This is a unique installation course in a market where little practical...
SimpliSafe Business Security Launched Examined on Sep 22, 2020
SimpliSafe has launched "SimpliSafe Business Security" that the company...
FLIR CEO: Many New Fever Entrants "Making Claims That The Science Just Won't Support" on Sep 22, 2020
FLIR's CEO joins a growing number calling out risks with fever / screening...
China Bems Temperature Measurement Terminal Tested on Sep 22, 2020
Guangzhou Bems (brand Benshi) is the manufacturer behind temperature...
Axis Exports To China Police Criticized By Amnesty International on Sep 21, 2020
Axis Communications and other EU surveillance providers are under fire from...
Milestone XProtect on AWS Tested on Sep 21, 2020
Milestone finally launched multiple cloud solutions in 2020, taking a...