Is it possible for SenseTime to become China’s AI champion?
Three years ago, Tang Xiao’ou joked to an audience at Massachusetts Institute of Technology that it was his company, SenseTime, rather than Google, that instantly came to mind when people talked about artificial intelligence.
Today, SenseTime, one of China’s brightest hopes for its plan to lead the world in AI, is preparing for a $2bn public listing in Hong Kong that may come before the end of the year.
Known for its expertise in facial recognition, SenseTime has raised more than $3bn from investors including SoftBank, Alibaba, Tiger Global and Silver Lake, making it one of the four most hyped AI companies in China, together with its peers Megvii, Yitu and CloudWalk.
All four have grown rapidly with Beijing’s backing, which has allowed them to gather and process swaths of data on the country’s huge population, are now trying to list, and have ambitions to expand overseas.
But all four companies have also suffered concerns over the use of their technology and have been hit by sanctions from the US for allegedly aiding human rights abuses in the western region of Xinjiang, a charge the companies have denied.
Since then, the companies have had to tread a careful path to maintain good relations with their most visible and most important customer: the Chinese government.
SenseTime is “caught in a conundrum”, said Jeffrey Ding, postdoctoral fellow at Stanford’s Center for International Security and Cooperation. “Western investors might want them to be more forthright in disavowing [ethnic profiling] . . . but this would lose them business in China.”
Documents filed by the start-up ahead of its IPO reveal the extent of its reliance on Beijing. Its five largest customers make up almost a third of its Rmb3.4bn ($525m) of sales. Its Smart City business, which includes facial recognition and predictive policing, contributed 40 per cent of its sales last year and customers are mostly what SenseTime calls “system integrators”, which serve city administrators.
Since 2008, at least 500 Chinese cities have tried to install so-called Smart City technology, working with private companies like SenseTime, Alibaba, Hikvision and Huawei to find digital solutions to urban problems.
SenseTime’s software has been deployed in 119 cities, the vast majority of which are in China. In one city, its systems are being used to detect people not wearing seat belts in cars, with a claimed precision rate of 94 per cent. It can also spot drivers who are using mobile phones with 86 to 96 per cent accuracy.
In another top-tier city in southern China with 17m people, SenseTime’s traffic management system logged traffic violations by people on mopeds. Police tracked down 50,000 such incidents, and the drop in monthly abuses by mopeds dropped by more than half in just a couple of months. The number of drivers choosing to wear a helmet, meanwhile, rose from under half to 94 per cent.
Megvii, the oldest of the four AI start-ups, also counts the government as its biggest customer. The Alibaba and Ant Group-backed company last year derived 64 per cent of its revenue from smart-city technology. The facial recognition technology company was forced to abandon its Hong Kong listing when Washington blacklisted the company in October 2019.
But international expansion has been hampered by concerns about Chinese influence. UK intelligence agencies have, for instance, been pushing for limits on whether local authorities can purchase the software, fearing that it might be used for espionage or surveillance.
SenseTime has over the past couple of years added offices and customers across south-east Asia, north Asia and the Middle East, where reservations over surveillance are also less pronounced.
But it does not give many details on how many overseas deals it has done, especially in the wake of its blacklisting in 2019.
A long-discussed project to detect fraud and cheating in casinos with the leisure group Genting, which operates Singapore’s casino on Sentosa island, has yet to result in any concrete public information. A research hub in Abu Dhabi to provide “AI capabilities” to local start-ups has not announced many deals since it was set up in 2019.
Meanwhile, other Chinese tech companies are investing in their own AI capabilities, in a potential hit to SenseTime’s “Smart business” enterprise arm.
“Unicorns and the other big technology companies increasingly have their AI in house,” said William Bao Bean, a Shanghai-based general partner at global venture capital firm SOSV. “Most Chinese corporates are not in the habit of paying for software, which is why a lot of clients for companies like SenseTime are government.”
One former SenseTime employee told the Financial Times that in the early days it won tech customers including ByteDance, the owner of TikTok, and Hikvision, which makes CCTV cameras.
But by 2019, ByteDance, was “heavily disengaging” from SenseTime in favour of building its own internal teams after working with it on AI facial filters. “It is faster as they had quicker access to the data, and they don’t need to pay SenseTime,” the person said.
A person close to the company acknowledged that it had lost some business but was continuing to expand its base of more than 2,400 customers.
SenseTime has tried to push more heavily into hardware and offer a broader package to clients. It wants to spend a significant amount of its IPO proceeds on research and development, which includes a new AI supercomputing data centre close to Shanghai to be completed in 2022. It is also developing AI chips, which are designed to process AI tasks faster and more efficiently.
Another area is software to support autonomous driving — a phrase mentioned 68 times in its documents, compared to just six mentions of “facial information”.
Even here, SenseTime has tough competition, said experts, and currently the company’s auto division contributes less than 5 per cent of its sales.
“Autonomous driving is a crowded market and SenseTime is a late entry. A lot of dance cards have already been filled by the likes of Baidu, Pony.ai and WeRide,” said Tu Le, founder of consultancy Sino Auto Insights. “I don’t think many would dual source or abandon current partners for SenseTime.”
But many investors are encouraged by the company’s support from the government. SenseTime received Rmb352.8m in government grants in 2020, an increase of 42 per cent on what it received in 2019.
Producing cutting-edge and agenda-setting technology is key to president Xi Jinping’s stated aim that China should be an AI leader by 2030. The success of SenseTime and other AI including Megvii, Yitu and CloudWalk feeds directly into that ambition. The AI sector has not received the degree of scrutiny from regulators that other Chinese internet companies have this year.
As one mainland-based investor in Megvii said: “Is it a bad thing right now if your biggest customer is the Chinese government, which is invested in making sure you do well? We don’t think so.”
*This article has been amended to clarify that Washington blacklisted Megvii in October 2019 — not last year