Published on: 18-Oct-2019
Last week, the Trump administration added 28 Chinese organisations and companies, including eight tech firms, to its "entity list", a blacklist that bans them from trading with the US.
Six of these tech firms are also among China's biggest and most important AI start-ups - enterprises that Beijing is counting on to lead it in key industries of the future and to help the country reach its goal of being a world leader in AI technology and applications by 2030.
The firms are SenseTime, Yitu and Megvii, known for their facial recognition technology used in smart city solutions; iFlyTek, a voice recognition specialist; and Hikvision and Dahua Technology, which make AI-driven video surveillance equipment.
The grounds for the blacklist, according to Washington, are that these companies have made products used to commit human rights violations against Uighurs and other Muslim minority groups in China's Xinjiang province.
For the US to cut off business ties with these Chinese firms is greatly detrimental to the companies as they rely heavily on American suppliers for components - in particular, semiconductor chips, said analysts.
Mr Ethan Qi, a senior analyst at Counterpoint Research, told The Straits Times that banning these companies from buying components from the US "is expected to bring adverse impact on their revenue performance".
SenseTime, for example, trains its AI algorithms using graphics processing unit chips made mostly by Californian company Nvidia.
According to a report by the Centre for Strategic and International Studies in the US, only 16 per cent of the semiconductors used in China are made within the country, and only half of those are produced by Chinese firms. The rest of the semiconductors used in China are produced mainly by the US and South Korea.
The trade ban, however, may just be the kind of push China needs to perfect its own chips so that the country will be less reliant on foreign partners, including the US, in the long term, said analysts.
Mr Qi said the banned Chinese firms will likely find back-up for most components locally, and cooperate more with native suppliers like Hisilicon. Hisilicon is the semiconductor division of telecommunications equipment maker Huawei. In August, it launched the Ascend 910, a chip designed for AI model training.
Professor Boh Wai Fong, who heads the information technology and operations management division at Nanyang Technological University's Nanyang Business School, said: "The blacklist will impact Chinese firms negatively for the short term, but might result in a greater push for Chinese to buy Chinese products.
"Right now, Chinese technology product alternatives exist, but they may be inferior to US technologies. Being forced to buy from Chinese firms will then result in the impetus and resources for Chinese firms to improve technologically over time."
Besides Huawei, Chinese e-commerce giant Alibaba has also debuted a computer server chip designed for machine-learning tasks in recent months, while Xiaomi formed a new subsidiary to produce its own AI chips.
The question is whether the Chinese will be able to play catch-up to the more superior American semiconductor technology quickly enough.
Mr Alex Capri, a visiting senior fellow at the NUS Business School's department of analytics and operations, said: "These firms will struggle to replace or replicate vital technology provided by US and other foreign firms. It could take years.
"Chinese firms are still way behind the state of the art in microprocessors. This cannot be overstated, as it represents a huge vulnerability for Chinese firms."
Besides denying these companies components, the trade ban also effectively stunts the firms' plans for international expansion and threatens their ability to attract foreign investment.
It cuts off various international research and development projects in AI as well, which will affect not only the Chinese but also their global partners.
SenseTime, for example, one of the firms aggressively trying to spread their technology overseas, opened a "smart health" lab in New Jersey last year to build on research into AI-driven cancer diagnosis.
The company also formed an alliance with the Massachusetts Institute of Technology to jointly fund research projects last year - a relationship that the school has said it will now review due to the blacklist.
Mr Capri said: "All of the Chinese firms on the blacklist are involved and tapped into global networks, so to suddenly chop their legs off from underneath them - it's going to have huge implications for everyone involved."
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