AI companies plan IPOs even as China tightens tech crackdown

In November of last year, The Chinese government ordered Ant Group, the Alibaba spinout that operates ubiquitous mobile payments platform Alipay and other financial services, to call off its much-anticipated IPO at the last minute.

Shortly after ride-hailing giant Didi Chuxing (DiDi) pushed through with an IPO in New York this summer despite government concerns, authorities removed the company’s app from Chinese app stores and forced it to undergo an extensive cybersecurity review. commanded.

Shortly after, ByteDance, the company behind TikTok, the hugely popular news and entertainment app and short-video sensation outside of China, issued its own IPO plans have been shelved.

So it’s a little strange that SenseTime and Megvii, two giants of China’s artificial intelligence industry, are seemingly unconcerned with their IPO plans, listing on the Hong Kong and Shanghai stock exchanges, respectively.

After a decade of unbridled growth, many Chinese tech companies are now facing an entirely new reality, including canceled IPOs, tighter regulations and hefty fines. But some “AI unicorns” remain relatively untouched. One possible reason is that they are aligned with the government.

“AI companies are important providers of government services,” said Martin Bellaja, an MIT economics professor who studies China’s technology industry. “Facial recognition AI companies in particular stand out as key providers to China’s public security agencies.”

SenseTime and Megvii are both prominent providers of facial recognition technology to China’s private sector and public bodies such as city police. SenseTime said in its IPO prospectus that nearly 48% of its revenue came from its smart city business in the first six months of this year. The smart city business includes selling services such as surveillance and traffic management technology to local governments.

“Government spending may be subject to changes beyond our control,” the prospectus warns. “If government spending related to our business does not continue to increase or remain at current levels, our business could be materially adversely affected.”

The relationship between the two companies and the Chinese government has also attracted the attention of the US government. In October 2019, the Trump administration added SenseTime and Megvi to a list of companies prohibited from doing business with U.S. companies due to their ties to government surveillance of Muslims in the western Xinjiang region. Several other Chinese AI companies were on the list, including YITU Technology and iFLYTEK, which specializes in voice recognition and surveillance.

Amid widespread scrutiny of Chinese tech companies, the ability of companies to proceed with IPOs is clear. Ant’s parent company Alibaba has been fined a record $2.8 billion for hindering competition. The punishment was seen in part as a rebuke to Jack Ma, the prominent billionaire behind both Alibaba and Ant. Shortly before Ant’s planned IPO, Jack Ma gave a speech criticizing government regulators for hindering innovation.

Other affected companies include Tencent, which operates the “super app” and payment platform WeChat, as well as its entertainment and gaming businesses. Pinduoduo, group purchasing and e-commerce business. and Meituan, a popular food delivery company. The crackdown also affected education startups, recruitment agencies, and cryptocurrency startups.

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