China Enforces Barriers Against Foreign AI and VSaaS Providers

By: Charles Rollet, Published on Sep 30, 2019

While AI and VSaaS is the future of video surveillance, these are obstructed to foreign firms in China (the PRC), where authorities are tightening implementation of rules, as demonstrated by 2 recent examples of major PRC surveillance companies that IPVM found.

IPVM Image

This is in stark contrast to the US and EU, where foreign companies including PRC Hikvision owned Ezviz operate with virtually no restrictions for cloud services. This gives the PRC a massive advantage in the field thanks to its vast protected home market.

In this note, we explore this and more, including:

  • Strict Foreign Ownership Caps
  • Enforcement Rises
  • Face++ Gets ICP License After Operating For Years Without One
  • Megvii Rival Also Gets ICP License in 2019
  • Expert: 'Beijing Intensifies Its Control Over Network Sector'
  • Prior "Uncertainties" Now Clear
  • China's Booming AI Surveillance Market
  • All Video Surveillance Will Become AI / VSaaS
  • Why This Matters For Video Surveillance

Foreign Ownership Caps

The PRC has long required that online services, e.g., SaaS, offered in the PRC for a fee obtain a commercial ICP (Internet Content Provider) license, which is unobtainable by foreign-controlled entities; Face++/FaceID are clearly SaaS, as stated in Megvii's own IPO:

IPVM Image

Under PRC regulations, value-added telecommunications/SaaS firms cannot be more than 50% foreign-owned, with narrow exceptions for e-commerce, call centers, and domestic multiparty telecommunications, e.g. British Telecom was recently allowed operate in the PRC for the first time.

Enforcing "Network Sovereignty"

Such PRC government regulations are common. The PRC is a strong proponent of "network sovereignty" (网络主权), the doctrine stating that each country has the right to control all networks (telecoms, internet, etc) within its own borders. This means the PRC not only mandates data is kept on servers in-country but also bars foreign SaaS firms and foreign cloud providers like AWS, as Amazon declared in 2017:

Get Notified of Video Surveillance Breaking News
Get Notified of Video Surveillance Breaking News

Chinese law forbids non-Chinese companies from owning or operating certain technology for the provision of cloud services

Megvii IPO Example

IPVM Image

Top PRC facial recognition provider Megvii stated in its recent IPO filing that its critical Face++ & FaceID solutions in the PRC engage "in the operation of online channels to provide information processing services to customers for fees". Thus, the entity controlling these services is categorized as a value-added telecommunications service (VATS) and required to obtain an Internet Content Provider (ICP) license from the government:

IPVM Image

Face++ Gets ICP License After Operating For Years Without One

While this restriction is longstanding and well-known, in its IPO, Megvii disclosed that it had not applied for an ICP license for Face++/FaceID's parent entity until only a few months ago, despite operating since 2015. Megvii had an "interview" with the Beijing Communications Administration (BCA) officials about the topic in June 2019.

In the IPO, Megvii gave a range of reasons for not having obtained the license: that the entity's operations were conducted "on a trial basis before 2018", that their scale was "relatively small", that its solutions were "innovative" and officials had "uncertainties" about how to categorize them, and that there was no "material negative social impact":

IPVM Image

IPVM Image

However, according to its IPO, Megvii’s revenue from its SaaS personal IoT business was $19m in 2017 and $24m in 2018, certainly not small. IPVM could find no national PRC regulations permitting such operations without an ICP license as long as they were small-scale or on a trial basis - indeed, operating without this license runs the risk of being shut down.

The entity controlling Face++ ended up getting an ICP license less than a month before Megvii's IPO filing on August 25. Because Megvii is a Cayman Islands (and thus technically foreign) firm, equity had to be transferred from the Face++ entity to Megvii's PRC citizen co-founders to allow this. (This is not uncommon in the PRC, for example, Alibaba is also registered as a Cayman company, but clearly is not viewed as 'foreign'.)

Yitu Also Gets ICP License in 2019

Another top PRC facial recognition provider, Yitu, has also recently obtained a commercial ICP license despite having operated for years, according to the PRC Ministry of Industry and Information Technology (MIIT):

IPVM Image

Yitu's license number (2019-0650) indicates that, like Megvii, it obtained the license in 2019 (the rest of the numbers have no relation to month/day). Yitu was founded in 2012. Yitu did not respond to IPVM's request for comment.

IPVM could not find the two other PRC surveillance giants Sensetime and Cloudwalk in the MIIT's database, which could be a limitation of the specific database search interface.

Expert: 'Beijing Intensifies Its Control Over Network Sector'

IPVM Image

PRC authorities have been tightening their implementation of the longstanding ICP rules since 2018, according to Steve Dickinson, an attorney at international law firm Harris Bricken with extensive China experience.

Avoiding the commercial ICP license requirement means no foreign ownership caps and no costly/time-consuming application process. Dickinson said that prior to 2018, some SaaS firms operated in the PRC without this license, with local regulators turning a blind eye "as long as they got an ordinary registration license" in order to attract business. (Dickinson said it's also possible some local regulations explicitly permitted such operations.) But this has all changed, and now, Beijing is cracking down:

We are being informed that this enforcement of the SaaS/ICP law as written will become more aggressive over time in China: more intense, not less. Looking the other way is becoming impossible for the local regulators in China as Beijing intensifies its control over the network sector.

IPVM asked Megvii whether Face++/FaceID's parent underwent a similar process. Megvii declined to comment for this article.

China's Booming AI Surveillance Market

China's AI surveillance market is massive and growing fast - this market is currently $2 billion and expected to grow to almost $19 billion by 2023 as shown in Megvii's IPO:

IPVM Image

While exact projections are hard to make, undoubtedly cloud-based AI is fast growing and a core to where video surveillance technology is moving in the 2020s.

All Video Surveillance Will Become AI / VSaaS

Over the next few years, virtually all video surveillance will have cloud and AI components, something we examined in 'CCTV' Is the Past, Cloud Video Surveillance Is the Future. The advantages of having AI and cloud applied to video surveillance are too great to avoid.

Why This Matters for Foreign Video Surveillance

But so long as the PRC enforces such restrictions against foreign providers, virtually all foreign companies will be undermined or blocked inside of the world's largest video surveillance market.

The longstanding ICP license requirement and the fact that implementation is tightening makes it harder than ever for foreign providers to compete in the PRC. Instead, they must operate through a PRC partner, which adds a host of risks and added costs, including IP theft, splitting profits, and the difficult process of finding a good local partner, to begin with.

This adds to existing challenges of doing business in the PRC, as the PRC has long informally discriminated against foreign firms in its massive government-funded surveillance projects: Megvii itself stated in its IPO that "foreign-owned entities are prohibited or disadvantaged in the relevant City IoT project bidding process in practice", while PRC officials have labeled foreign surveillance equipment "risks to national security" since 2012.

Conclusion: PRC Massive Advantage In AI Video Surveillance

Thanks largely to the PRC government mandating video surveillance across the country, the PRC's AI surveillance market is massive. With the ICP license requirement and tightened implementation, the PRC thus has a massive advantage in the global AI / VSaaS market in a similar way to traditional video surveillance manufacturing.

1 report 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...
Comments (32) : Members only. Login. or Join.

Related Reports

NetApp Video Surveillance Profile on Mar 09, 2020
NetApp is increasing its efforts in video surveillance and told IPVM...
Hikvision Global News Reports Directory on Jun 18, 2020
Hikvision has received the most global news reporting of any video...
Remote Network Access for Video Surveillance Guide on Jul 27, 2020
Remotely accessing surveillance systems is key in 2020, with more and more...
Milestone Presents XProtect On AWS on May 04, 2020
Milestone presented its XProtect on AWS offering at the April 2020 IPVM New...
Converged vs Dedicated Networks For Surveillance Tutorial on Feb 12, 2020
Use the existing network or deploy a new one? This is a critical choice in...
TVT / InVid White Light Camera Tested Vs Hikvision ColorVu on Mar 18, 2020
With mega China manufacturers Dahua and Hikvision facing both bans and human...
Video Surveillance History on May 06, 2020
The video surveillance market has changed significantly since 2000, going...
Hikvision Fever Screening Thermal Solutions Examined on Apr 13, 2020
Hikvision is marketing "safer, faster, smarter" with their Fever Screening...
ZKTeco Body Temperature and Mask Detection Reader Tested on May 26, 2020
While dedicated fever cameras emerged first, now tablet/kiosk fever detectors...
"He Is An Idiot!" Exclaims SIA Director John Mack on Mar 23, 2020
Here is another inside look into the "leaders" of the security industry. SIA...
JCI "Fever Camera" Partners With China TVT on May 19, 2020
Johnson Controls (JCI) is the next big player to get into the 'fever camera'...
LSP Presents 2nd Generation FP Power Supplies on Apr 29, 2020
Life Safety Power (LSP) presented its FP2 power supply in the April 2020 IPVM...
Last Chance - Spring 2020 IP Networking Course - Register Now on May 06, 2020
This is the last chance to register for the only networking course designed...
Add Door Operators To Fight Coronavirus on Mar 31, 2020
IPVM recommends that integrators advocate and end-users consider adding door...
Sunell Panda Cam Body Temperature Measurement Camera Tested on May 14, 2020
Sunell is far less well known than its gargantuan domestic competitors Dahua...

Recent Reports

Video Analytics Online Show September 2020 Opened - Axis, Avigilon, Bosch, BriefCam, Genetec, Milestone + 30 More on Aug 12, 2020
IPVM's sixth online show will feature 35+ Video Analytics companies...
The German Company Powering Many China Temperature Tablets (Heimann) on Aug 12, 2020
Many fever tablet suppliers market German-made Heimann thermal sensors while...
Salesforce Drops Dahua and Hikvision on Aug 12, 2020
Salesforce has dropped Dahua and Hikvision as customers, forcing the two mega...
Access Control Course Fall 2020 - Register Now - Save $50 Last Chance on Aug 12, 2020
IPVM offers the most comprehensive access control course in the...
Genetec CEO Declares "We Don't Negotiate Payment With Patent Trolls" on Aug 11, 2020
Are patent trolls like terrorists? Genetec's CEO is coming out strongly...
Hanwha AI Analytics Camera Tested on Aug 11, 2020
Hanwha has released their Wisenet P AI camera, adding person and vehicle...
Alabama Schools Million Dollar Hikvision Fever Camera Deal on Aug 11, 2020
The Baldwin County, Alabama public schools purchased a $1 million, 144-camera...
Dahua Taunts Australian Government, Continues To Sell Illegal Fever Cameras on Aug 10, 2020
Dahua is effectively taunting the Australian government by continuing to sell...
HID Releases VertX Replacement Aero on Aug 10, 2020
HID is replacing two established and broadly supported types of access...
NDAA Compliant Video Surveillance Whitelist on Aug 10, 2020
This report aggregates video surveillance products that manufacturers have...
Telpo China Temperature Tablets Tested on Aug 10, 2020
The provider for overseas companies ranging from Canon Singapore to US'...
Dangerous Hikvision Fever Camera Showcased by Chilean City on Aug 07, 2020
Deploying a fever camera outdoors, in the rain, with no black body, is...
"Grand Slam" For Pelco's PE Firm, A Risk For Motorola on Aug 07, 2020
The word "Pelco" and "grand slam" have not been said together for many years....
FLIR Stock Falls, Admits 'Decelerating' Demand For Temperature Screening on Aug 07, 2020
Is the boom going to bust for temperature screening? FLIR disappointed...
VSaaS Will Hurt Integrators on Aug 06, 2020
VSaaS will hurt integrators, there is no question about that. How much...