August 29, 2019 / 2:21 AM / 2 months ago

Hikvision, a surveillance powerhouse, walks U.S.-China tightrope

BEIJING (Reuters) - For China’s Hikvision, the world’s largest purveyor of video surveillance systems and a vendor to Xinjiang police agencies, a moment of reckoning may be at hand.

FILE PHOTO: People visit a Hikvision booth at a security exhibition in Shanghai, China May 24, 2019. REUTERS/Aly Song/File Photo

Since Aug. 13, Hikvision has not been allowed to sell to U.S. federal government agencies, thanks to a law passed last year that blocked five Chinese firms as possible security threats because their products could allow access to sensitive systems.

That has forced the company - which pulls nearly 30% of its 50 billion yuan ($7.12 billion) in revenue from overseas - onto a tightrope: it must assuage security and human rights concerns in the West without angering the Chinese government, a major customer and an all-powerful regulator.

The company, known as Hangzhou Hikvision Digital Technology Co Ltd, is publicly trying to distance itself from Xinjiang as it lobbies to ease U.S. restrictions.

Hikvision signed 1.9 billion yuan worth of public-private partnership contracts - worth an average of 370 million yuan each - with the police in Xinjiang between 2016 and 2017, the procurement documents show.

Although the Xinjiang deals have gotten smaller since the U.S. Congress passed the ban last year, previously unreported provincial government procurement documents reviewed by Reuters show that Hikvision surveillance equipment was named in more than 110 million yuan worth of contracts with Chinese police, military and courts there.

The United Nations says that there are credible estimates of roughly a million people, mostly from the Muslim Uighur minority, having been detained in Xinjiang without formal charges.

A Hikvision representative said the company “takes global human rights very seriously” and noted that its technology also was used in shops, traffic control and commercial buildings.

“We don’t know where and how our products being sold or being used,” the representative said of Xinjiang. “But all our business is required to align with the company’s compliance policy.”

Hikvision declined to say what its compliance policy was, but said it was in line with local laws.

China’s Public Security Bureau and the Public Security Bureau of the Xinjiang Uighur Autonomous Region, where the tendered projects are located, did not respond to faxed requests for comment.

Foreign investors who once piled into the company, including UBS AG, have dumped at least 300 million shares of its stock in the last five months, shareholder data shows, with some citing concerns about its involvement in China’s expanding surveillance state in the Xinjiang region.

“Hikvision needs to decide whether it wants to be a global company or ... just be a China-based business,” said one former top investor in Hikvision who sold his stake over human rights concerns. He spoke on condition of anonymity because he was not authorized to speak to the media.

XINJIANG CONTRACTS

The core of Hikvision’s business is surveillance cameras, which have become ubiquitous in many parts of the world. It also sells much more elaborate integrated systems, often including facial recognition technology, as well as providing hardware to other security vendors.

The projects in 2016-17 include facial recognition and surveillance systems for mosques, the documents and Hikvision said. Human rights groups say such cutting-edge mass surveillance is at the heart of a campaign of repression.

Documents also listed such systems for a “training center” - the phrase used by Chinese authorities to describe what outside researchers say are internment camps. Hikvision confirmed its involvement in that project.

Since the U.S. procurement ban in August 2018, Hikvision technology was mentioned in at least 27 state-issued tenders in Xinjiang’s Uighur Autonomous Region, including contracts to supply surveillance equipment to the police, the military and the courts.

Collectively they were worth at least 110.5 million yuan, the procurement documents show.

Many of the tenders are heavily redacted to remove project specifics, total budgets and itemized costs. But a review of 6 million yuan worth of Hikvision technology in the tenders shows thousands of the company’s surveillance cameras as well as technology to store and transmit data.

One project from the Xinjiang Uighur Autonomous Region Public Security Department dated Sept. 28, 2018 calls for 50 Hikvision camera units worth a total of 425,000 yuan. Another project, surveillance upgrades for a military Communist Party committee in Urumqi worth 510,000 yuan, listed Hikvision as the “main” equipment supplier in a procurement tender dated April 10, 2018.

The company’s technology has also been used in at least 180 million yuan worth of smaller contracts since the beginning of 2018, including commercial, military and police projects.

The Hikvision representative said the company does not always know where its technology is sold through third parties.

China’s Public Security Bureau and the Public Security Bureau of the Xinjiang Uighur Autonomous Region, did not respond to faxed requests for comment.

Kevin Manning, a Commerce Department spokesman, declined to comment on Hikvision and whether the agency would add it to the Entity List, citing a policy that the agency does not comment on potential additions to the list.

Reuters reported in May the administration was considering Huawei-like sanctions on Hikvision over China’s treatment of the Uighurs.

And fears of China’s high-tech surveillance programs have spurred protester backlash in Hong Kong, which uses equipment from Hikvision and other Chinese surveillance companies.

INVESTOR EXODUS

Despite the selloff by foreign investors, Hikvision has continued to grow. Revenues for the first half of 2019 were up 14.6% over the previous years to 23.9 billion yuan in the first-half. 29% of sales came from overseas markets, compared with 30% a year ago, and nearly half the revenue came from “front-end products” such as cameras.

Hikvision is 42% owned by Chinese state investors and its two key founders.

As of Aug 6, investors using the Shenzhen-Hong Kong Stock Connect, which allows international investors to trade Hikvision’s Chinese-listed stock, held a total of 582 million shares in the company, down 34 percent from 879.5 million shares at the end of March, according to HKEX data.

Its stock has fallen 4.2% during the last year. The company’s only direct institutional foreign investor, UBS AG, which was Hikvision’s ninth-largest shareholder in March 2019, has since dropped out of the company’s top 10 investors, company data showed.

UBS declined to comment.

Hikvision has begun lobbying efforts in the U.S. amid concerns about how its surveillance tech is used.

Hikvision’s U.S. subsidiary paid two lobbying organizations, the Glover Park Group and Sidley Austin, about $1.63 million in fees since June 2018 for work related to the NDAA, according to public filings. Neither company responded to requests for comment.

The company’s efforts to burnish its image also include the public release of a 99-page environmental, social and governance report in April, which made no mention of Xinjiang.

The report said the company had hired U.S. law firm Arent Fox LLP in the past year to conduct an internal review to “better protect” human rights.

Slideshow (2 Images)

The review, overseen by Arent Fox partner Pierre-Richard Prosper, a former U.S. Ambassador-at-Large for War Crimes Issues, included at least two trips to China, the report said.

Hikvision confirmed the trips included Xinjiang, but said the firm had not yet compiled a report of the trips’ findings.

Arent Fox and Prosper did not respond to requests for comment.

Reporting by Cate Cadell. Additional reporting by Sijia Jiang, Brenda Goh and Sumeet Chatterjee in Hong Kong; Simon Jessop in London; and Luoyan Liu in Shanghai. Editing by Jonathan Weber and Gerry Doyle.

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