Wednesday, 12 Dec 2018

Huawei effect threatens Chinese champion of spy technologies

The future of the Chinese surveillance giant Hangzhou Hikvision Digital Technology Co.

For months, the risk of sanctions or other sanctions weighs on Hikvision, one of the largest manufacturers of security cameras and other spy equipment in the world.

In August, President Donald Trump signed a law banning US government agencies from buying surveillance products from Chinese companies, including Hikvision, ZTE Corp. and Huawei Technologies Co. In September, the New York Times announced that the United States was considering sanctions against Chinese companies and companies. Beijing detained thousands of members of the Uyghur population and other Muslim minorities in internment camps. Xinjiang, the western region where this happens, is dotted with Hikvision cameras. The arrest of Huawei's chief financial officer (and founder's daughter) Meng Wanzhou about potential violations of US sanctions against Iran puts all of this in mind.

If this is the problem that the Trump administration is now taking with Chinese companies, investors should not be surprised if Hikvision, whose main shareholder is a public company, opts for the future.

Like Huawei and ZTE, a US-based component-based company seems vulnerable at a time when Washington's enforcement of sanctions is becoming more robust. Hikvision has sold more than 1,000 cameras to a massive surveillance network across Iran on behalf of one of the country's largest lenders, Bank Tejarat. In November, the US Treasury reimposed sanctions on Tejarat and other Iranian entities. There is no indication that Hikvision sold US components to Iran in violation of sanctions, which caused ZTE to fall.

Consider how a supplier ban similar to the one imposed on ZTE earlier this year would hit Hikvision. For many of its components, there are not many non-American alternatives. He relies heavily on Xilinx Inc. and Intel Corp. for some integrated circuits used in its industrial cameras (which is part of its fastest-growing business), and relies on Intel and Advanced Micro Devices Inc. for parts of its central control equipment.

US supplier Ambarella Inc., which sells image processing chips to Hikvision, said in its earnings release last month that it is already witnessing "a reduction in their orders, especially in the high-end products normally associated with their export business, "Through the prohibition of purchase from the United States.

This is just the beginning. Bernstein analysts believe that Hikvision would have no access to US coins, according to a scenario of 10% of its risky turnover (with no alternative supplier) and 10 to 12% subject to a "medium risk" (without ideal risk). alternatives). Hikvision realizes a third of its sales abroad. About a quarter of them are in the United States and 20% in Europe.

Certainly, the rapid growth of China's home surveillance market in smaller cities and the increase in facial recognition, behavior prediction and so-called "deep learning" technologies could help offset some of this phenomenon. Hikvision has begun to move towards artificial intelligence with a mobile surveillance system that can store up to 300,000 faces.

At the same time, Hikvision's important security activity in China should be extremely cold given its reliance on imported US components. ZTE overcame its problems by paying up to $ 2.29 billion in penalties, but the impact of the entanglement with the US government on its business (and that of Huawei) will likely be lasting.

Hikvision USA Inc. has already formed a group of lobbyists, including Mercury Public Affairs, Burson-Marsteller LLC and Sidley Austin, providing them with hundreds of thousands of dollars to help them solve these problems, according to government documents . But the threat of sanctions weighed on Hikvision's share price. Shares were down about 27% this year on Wednesday, despite satisfactory financial results. Following the announcement of the arrest of Huawei on Thursday, they still lost 4.5%.

As fundamental as this company's fundamentals are, they will not have much weight with investors as long as US law is on the horizon.

To contact the author of this story: Anjani Trivedi at

To contact the editor responsible for this story: David Fickling at

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Anjani Trivedi is an editorialist of Bloomberg Opinion which covers industrial companies in Asia. She previously worked for the Wall Street Journal.

© 2018 Bloomberg L.P.


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