Security

Megvii Announces $935M IPO as China’s AI Dragons Prepare to Fly

“As a society, we have experienced three distinct industrial revolutions: steam power, electricity, and information technology. I believe artificial intelligence (AI) is the engine fueling the fourth industrial revolution globally, digitizing and automating everywhere,” says Kai-Fu Lee, chairman and CEO of Sinovation Ventures and author of ‘AI 2041: Ten Visions for Our Future’. “China is at the forefront in manifesting this unprecedented change.” The evidence suggesting China is leading the race to AI supremacy is growing. Last year China overtook the US in terms of AI-related academic citations for the first time, representing 20.7% of the total, against 19.8% for the U.S., according to a report from Stanford University. At the last Conference on Neural Information Processing Systems, a leading international conference on AI, researchers from China accounted for the largest share (29%) of the presentations, with the US in second (20%). While in the smart buildings sector, Chinese AI startups are far ahead in terms of funding and […]

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“As a society, we have experienced three distinct industrial revolutions: steam power, electricity, and information technology. I believe artificial intelligence (AI) is the engine fueling the fourth industrial revolution globally, digitizing and automating everywhere,” says Kai-Fu Lee, chairman and CEO of Sinovation Ventures and author of ‘AI 2041: Ten Visions for Our Future’. “China is at the forefront in manifesting this unprecedented change.”

The evidence suggesting China is leading the race to AI supremacy is growing. Last year China overtook the US in terms of AI-related academic citations for the first time, representing 20.7% of the total, against 19.8% for the U.S., according to a report from Stanford University. At the last Conference on Neural Information Processing Systems, a leading international conference on AI, researchers from China accounted for the largest share (29%) of the presentations, with the US in second (20%). While in the smart buildings sector, Chinese AI startups are far ahead in terms of funding and growth.

“For AI & ML Startups involved in the Smart Buildings market, our analysis of total funding received since 2010 indicates that Chinese firms are in receipt of the largest amount of total funding, with over $6.3 billion, compared to $3.9 billion for US firms,” states our AI in Smart Commercial Buildings report. “There are some further nuances hiding in this trend, however, as China has generated the largest total in terms of private funding, these investments are being funneled into a much smaller range of startups.”

In the past year, China’s big four AI startups, nicknamed the “four little AI dragons”, all announced intentions for initial public offerings (IPO) on the various Chinese stock exchanges. Yitu Technology made it’s IPO announcement at the end of 2020, but in March 2021 they withdrew the application. Then was Cloudwalk, who could be the first of the ‘AI dragons’ to go public after its IPO was accepted in July. Another, SenseTime, submitted an IPO application on August 27 this year, and the final dragon, Megvii, received its IPO approval last week, on September 9th, after applying in January.

Founded in 2011, Megvii is the oldest of the AI dragons. The three founders, Yin Qi, Tang Wenbin, and Yang Mu, were all computing protegees at the highly selective experimental computer science program at Tsinghua University. The company went on to create the world's largest open-source computer vision platform, the Face++ facial recognition software, and in 2020, it launched Brain++, an AI productivity platform.

Megvii's annual revenue in 2019 reached $193.6 million, quadrupling its 2017 revenue, and it has continued strong growth through the pandemic, recording an operating income of $104 million in the first half of this year. However, the company’s net losses over that time have been staggering, in consecutive years from 2018 to 2020 Megvii’s net losses were $435 million, $1 billion, and $517 million respectively, while losses in the first half of 2021 totaled $289 million. Like all the AI dragons, Megvii has poured huge funding into research and development (R&D) —in 2017, 66.5% of the firm’s operating revenue went to R&D and that share has increased year-over-year since, reaching 82.2% in 2019 and over 100% by 2020.

Megvii's IPO is expected to raise approximately $935 million. The company has announced that it plans to invest $342 million of that in a basic R&D center construction project, and $170 million for an AI vision IoT solution and a product upgrade development project. The firm also plans to invest $90 million for an intelligent robot research project, $133 millon for a sensor research and design project, and $200 million for supplementing working capital. The other AI dragons are likely to present a comparable spending plan as each inevitably completes their IPOs in the coming years, and as China strides on to lead the world in AI development. 

“In the story of how China managed to catch up, the [catch-up cycles] framework highlights a few important factors,” say Daitian Li, Tony W. Tong, and Yangao Xiao, in an HBR article. “How the [open] nature of AI research means that leaders’ technological advantages aren’t particularly robust; how China’s huge market is particularly conducive to improving AI; and how the country’s friendly regulatory environment is especially encouraging to AI investment and adoption.”

China has a vibrant market that is very receptive to new technology, Chinese firms are fast in bringing products and services to the market, and relatively weak privacy regulations allow for a broader range of applications to hit the market quicker. In addition, the sheer scale of the country itself supports AI market growth — more people means more data, more data means faster AI development. The Chinese government views AI as the best way to make up for future labor shortages in anticipation of an aging  population according to Weilin Zhao, a senior researcher at Itochu Research Institute, putting a determined long-term government behind these rapidly growing AI dragons.

China is the world’s biggest AI market but it is not accessible to overseas manufacturers, allowing local firms to rise to meet the demand. The Chinese government itself is the world’s biggest customer for AI products and services, the demand for their major public initiatives like the ‘Sharp Eyes’ surveillance project, for example, far surpasses anything else in the physical security market. The closed market has caused tension between China and the US, leading to a growing number of Chinese firms being blacklisted in the states. Megvii was cut off from US suppliers in 2019 for its alleged role in mass surveillance of Muslim minority groups in Xinjiang, other major Chinese players including SenseTime, Yitu, Huawei, and CloudWalk have also been added to the list over security and IP protection concerns.

“The US government’s sanctioning of this long list of major Chinese tech players will curtail their international expansion and potentially stifle innovation for the Chinese AI sector as a whole,” explains our AI in commercial buildings report. “The Communist Party has responded by declaring that accelerating efforts to transform China into a self-reliant “technology power” will be this year’s top economic priority. By contrast, this state of affairs should assist non-Chinese manufacturers in terms of positioning and future revenue generation opportunities in European and North American markets.”

China’s rapid growth in the AI market may end up being the key reason for its future slowdown if Western markets continue to impede Chinese firms. There is still plenty of space for growth in the Chinese market, of course, but that narrow market drives firms towards applied AI research for quick cash rather than core AI research for longer-term ambitions. Furthermore, as long as China maintains such contrasting privacy regulations to the West, there will always be suspicion surrounding Chinese firms’ international operations.

The role of the four little AI dragons on the world stage might be limited for the foreseeable future, but China is probably still a big enough den for them all to grow into leaders of the upcoming AI-enabled industrial revolution.

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