U.S. expands blacklist to include China's top AI startups ahead of trade talks

© Reuters. FILE PHOTO: An ethnic Uighur demonstrator wears a mask as she attends a protest against China in front of the Chinese Consulate in Istanbul

By David Shepardson and Josh Horwitz

WASHINGTON/SHANGHAI (Reuters) - The U.S. government widened its trade blacklist to include some of China's top artificial intelligence startups, punishing Beijing for its treatment of Muslim minorities and ratcheting up tensions ahead of high-level trade talks in Washington this week.

The decision, which drew a sharp rebuke from Beijing, targets 20 Chinese public security bureaus and eight companies including video surveillance firm Hikvision, as well as leaders in facial recognition technology SenseTime Group Ltd and Megvii Technology Ltd.

The action bars the firms from buying components from U.S. companies without U.S. government approval - a potentially crippling move for some of them. It follows the same blueprint used by Washington in its attempt to limit the influence of Huawei Technologies Co Ltd [HWT.UL] for what it says are national security reasons.

U.S. officials said the action was not tied to this week's resumption of trade talks with China, but it signals no let-up in U.S. President Donald Trump's hard-line stance as the world's two biggest economies seek to end their 15-month trade war.

The Commerce Department said in a filing the "entities have been implicated in human rights violations and abuses in the implementation of China's campaign of repression, mass arbitrary detention, and high-technology surveillance against Uighurs, Kazakhs, and other members of Muslim minority groups."

"The U.S. Government and Department of Commerce cannot and will not tolerate the brutal suppression of ethnic minorities within China," said Secretary of Commerce Wilbur Ross.

China said the United States should stop interfering in its affairs. It will continue to take firm and resolute measures to protect its sovereign security, foreign ministry spokesman Geng Shuang told a regular media briefing without elaborating.

Hikvision, with a market value of about $42 billion, calls itself the world's largest maker of video surveillance gear. [L3N26T1DD]

SenseTime, valued at around $4.5 billion in a May 2018 fundraising, is one of the world's most valuable AI unicorns while Megvii, backed by e-commerce giant Alibaba (NYSE:BABA), is valued at around $4 billion and is preparing an IPO to raise at least $500 million in Hong Kong.

The other companies on the list are speech recognition firm iFlytek Co, surveillance equipment maker Zhejiang Dahua Technology, data recovery firm Xiamen Meiya Pico Information Co, facial recognition firm Yitu Technology and Yixin Science and Technology Co.

STRONG OBJECTIONS

A U.S. Hikvision spokesman said the company "strongly opposes" the decision and noted that in January it retained a human rights expert and former U.S. ambassador to advise the company on human rights compliance.

"Punishing Hikvision, despite these engagements, will deter global companies from communicating with the U.S. government, hurt Hikvision's U.S. businesses partners and negatively impact the U.S. economy," the company added.

Hikvision also said that it was assessing the potential impact of the blacklisting and was working on contingency plans.

John Honovich, founder of surveillance video research company IPVM, said Hikvision and Dahua both use Intel Corp (NASDAQ:INTC), Nvidia Corp, Ambarella Inc, Western Digital (NASDAQ:WDC) and Seagate Technology (NASDAQ:STX) as suppliers and that the impact on the Chinese companies would be "devastating".

The blacklisting of Huawei has hurt many of its U.S. suppliers that depended on the world's largest telecommunications company for revenue and made it difficult for Huawei to sell new products.

Reuters reported in August Hikvision receives nearly 30% of its 50 billion yuan ($7 billion) in revenue from overseas.

SenseTime said in a statement it was deeply disappointed by the U.S. move, that it abides by all relevant laws of the jurisdictions in which its operates and that it has been actively developing an AI code of ethics to ensure its technologies are used responsibly.

Megvii said it strongly objected to being placed on the blacklist and that it required its clients not to weaponize its technology or use it for illegal purposes.

IFlytek said its placement on the blacklist would not affect its daily operations, while Xiamen Meiya said its overseas revenue was less than 1% of total revenue and that most of its suppliers were domestic companies.

IFlytek fell 2.7% and Xiamen Meiya lost 1.8% on Tuesday as investors factored in their limited exposure to overseas markets and the potential for the U.S. action to speed up restructuring, analysts said.

"China's stock market has become increasingly immune to bad news from the trade war. No more panic selling," said Stephen Huang, vice president of Shanghai See Truth Investment Management.

Hikvision and Dahua were suspended from trade at the companies' behest. U.S. supplier Ambarella fell 12% in after-hours trading.

In August, the Trump administration also released an interim rule banning federal purchases of telecommunications equipment from five Chinese companies, including Huawei and Hikvision.

Huawei has repeatedly denied it is controlled by the Chinese government, military or intelligence services and has filed a lawsuit against the U.S. government's restrictions.