Western Digital (NASDAQ:WDC)
Historical Stock Chart
6 Months : From Oct 2019 to Apr 2020
By Liza Lin and Josh Chin
Critical pieces of China's cutting-edge surveillance state share a connection. They came from America.
Some of the biggest names in U.S. technology have provided components, financing and know-how to China's multibillion-dollar surveillance industry. The country's authoritarian government uses those tools to track ethnic minorities, political dissidents and others it sees as a threat to its power -- including in Xinjiang, where authorities are creating an all-seeing digital monitoring system that feeds into a network of detention camps for the area's Muslims.
U.S. companies, including Seagate Technology PLC, Western Digital Corp., Intel Corp. and Hewlett Packard Enterprise Co., have nurtured, courted and profited from China's surveillance industry. Several have been involved since the industry's infancy.
The U.S. connections came under scrutiny in October, when the Trump administration added eight Chinese surveillance companies to an export blacklist, as part of a wider push to keep American technology out of China's hands. The Chinese companies played a role in human-rights abuses in "China's campaign of repression" in Xinjiang, the Commerce Department said.
The Communist Party's data-driven crackdown in Xinjiang, aimed at suppressing Muslim identity in the region, has been condemned by Western governments and United Nations experts. In an era of increased scrutiny of corporate behavior, the U.S. companies could face reputational damage if they are seen as enabling a human-rights crisis described by Secretary of State Mike Pompeo as "the stain of the century." The companies also risk losing significant business if the Trump administration decides to take stronger steps to sanction China's surveillance industry.
For their part, the companies say that their products can be used in any number of ways, and that convoluted supply chains limit their understanding and control over how their goods are put to use.
Participation in China's surveillance market offers companies and investors an opportunity to grab a piece of a booming new field and improve their products. China's video surveillance market reached $10.6 billion in 2018, with the government accounting for about half of those purchases, according to industry analyst IDC.
Of 37 Chinese firms singled out last November by the Beijing-backed China Security and Protection Industry Association for outstanding contributions to the country's surveillance industry, 17 have publicly disclosed financing, commercial or supply-chain relationships with U.S. technology companies. Several had multiple connections.
Hewlett Packard Enterprise owns 49% of New H3C Technologies Co. Ltd., which provides switches, surveillance network-control systems and cloud computing to Chinese law enforcement. According to company marketing materials, one end customer for its switches is Aksu, a Xinjiang city that conducts broad surveillance of residents in public spaces. Satellite images suggest the city is home to multiple internment camps.
Hewlett Packard Enterprise had sold a controlling stake in the company in 2015 to Beijing-based Tsinghua Holdings, which has government backing, giving H3C better access to China's restrictive market for government sales.
A spokesman for Hewlett Packard Enterprise said H3C confirmed that multipurpose equipment had been sold to government authorities in Xinjiang, but that the company wasn't involved in the deployment of this technology there. The company is looking into these sales, he said.
The Aksu government denied the presence of internment camps in the city, calling it rumor and slander. The government said Aksu has an education center for schooling purposes, teaching Mandarin, legal knowledge and career skills to clamp down on terrorism and extremism in Xinjiang.
Surveillance in Xinjiang incorporates a web of facial-recognition cameras, identity card scanners, smartphone readers and other tools used to track Muslims, particularly the region's 12 million Uighurs. The Xinjiang government said in a written statement that monitoring public spaces for safety "is accepted current international practice." It said localities decide what products to use based on their needs.
Leaked internal government documents from Xinjiang released on Sunday by the International Consortium of Investigative Journalists, a Washington-based nonprofit, revealed new details about the operations of the regional surveillance system. One of the documents, a classified intelligence briefing dated June 2017, said the region's centralized surveillance platform had identified more than 24,000 "suspicious persons" during a one-week period that month, with more than 15,500 later sent to internment camps. Separately, the New York Times reported on 403 pages of internal government documents leaked to the Times detailing the roundups; based on another leak, China researcher Adrian Zenz calculated that as many as 1.8 million people have been detained since early 2017.
None of the American companies involved in China's surveillance industry appear to have directly done business in Xinjiang since surveillance there began ramping up three years ago. Many U.S. hardware manufacturers sell in China through contractors or middlemen and said they do not know the details of every project that incorporates their products.
In its wider campaign against Chinese tech companies, the Trump administration alleges the Chinese companies abet espionage by China's government. Under a U.S. order, American companies must get permission to provide U.S. goods and services to Huawei Technologies Co., the networking gear giant that is also a major exporter of Chinese surveillance systems.
U.S. companies have found ways to continue selling products to Huawei since it was put on the entity list in May, including by shipping products to China made outside the U.S. The regulations allow shipments of parts made in other countries as long as U.S.-originated controlled components form less than 25% of the value of the product.
The Commerce Department added camera makers and several prominent Chinese AI surveillance startups to its "entity list" in October, which places restrictions on some U.S. technology exports. Those Chinese companies, too, will only be able to purchase banned U.S.-made technology from suppliers that have acquired special exemptions.
One of the companies is Hangzhou Hikvision Digital Technology Co. Ltd., the world's largest maker of surveillance cameras. The company has won contracts worth more than 1.8 billion yuan ($256 million) to build surveillance systems in Xinjiang since 2016, including in a detention camp, according to public procurement documents and the company's website. A Hikvision spokeswoman confirmed the company has done projects in Xinjiang, including one "education and training center."
Hikvision's placement on the U.S. blacklist could jeopardize business deals with U.S. tech suppliers worth close to a $1 billion a year, according to a person familiar with the company.
Seagate and Western Digital have traditionally sold hard-disk drives directly to Hikvision to be packaged with the Chinese companies' surveillance products. Hikvision sells surveillance products for a variety of uses, including monitoring of commercial areas like shopping malls, though police and other Chinese government agencies are the dominant domestic buyers of its more sophisticated systems. Many of the hard disk drives from American companies used in China are produced outside the U.S. and don't have the more advanced technology restricted by the entity list, according to Bernstein Research.
In September, the Senate voted in favor of a bill that encourages the Commerce Department to impose a more stringent ban on sales of U.S. technology to the authorities in Xinjiang. The House of Representatives is considering a similar bill.
Western Digital and Seagate said they comply with all laws and are closely watching Xinjiang. "We recognize the gravity of the allegations related to surveillance in the Xinjiang Province," said Western Digital, which added in a written statement it doesn't sell products directly to the Chinese government.
Hikvision said that it respects human rights and strongly opposed the Commerce Department's decision. The company noted it had hired a former U.S. diplomat as an adviser on human-rights compliance. It primarily packages Seagate and Western Digital hard disk drives with all of its surveillance systems, not just those used by police, the spokeswoman said.
Hikvision uses programmable chips from San Jose, Calif.-based Xilinx Inc., purchased through resellers. A Xilinx spokeswoman said the company doesn't control the way customers use or sell its products. Xilinx takes human-rights issues seriously, she said, and complies with all government requirements in the places it does business.
Until it was put on the entity list, Hikvision had bought chips from Nvidia Corp., based in Santa Clara, Calif., for training its own algorithms and for use in its artificial intelligence cameras and servers. An Nvidia spokesman said the company complies with all U.S. government export rules.
Seagate, based in Cupertino, Calif., has worked with Hikvision going back to 2005, when they worked together to develop what Seagate said was the world's first hard disk drive designed specifically for surveillance.
Hard disk drives at the time weren't designed to handle large volumes of video footage running around the clock, so Seagate dispatched a dedicated engineering team to China to tailor-make one, the company said in a post on its website that was taken down in May. Seagate declined to comment.
These hard disk drives sit at the foundation of the surveillance systems used by police departments in China. They offer storage at a low enough price to purchase in the large amounts needed to store and analyze video, and China has no manufacturers of comparable products, says Kevin Cassidy, an independent semiconductor analyst in Oakton, Va.
In October 2018, Seagate sponsored an award ceremony for firms including Hikvision and Huawei at the country's largest public-safety exhibition in Beijing. Seagate also marketed its surveillance hard-drive products at the expo in a large booth.
Sales to China now account for about 12% of Seagate's annual global sales of $11.2 billion and about a fifth of Western Digital's overall annual revenue of $16.6 billion, says Mr. Cassidy.
Chinese company SenseTime Group Ltd., one of the world's biggest AI startups, with a valuation of more than $7.5 billion, benefited early on from an investment by San Diego, Calif., chip giant Qualcomm. Qualcomm still owns an undisclosed stake in the 5-year-old company.
SenseTime was also added to the entity list in October. The company said in a statement it was disappointed in the decision, adding that it is developing a code of ethics to ensure its products are used responsibly.
Qualcomm didn't reply to requests for comment.
Intel, based in Santa Clara, Calif., provided seed money, as well as chips and technical solutions, to China's NetPosa Technologies Ltd., which serves the police departments of Beijing, Shanghai and around 60 other cities, as well as the Ministry of Public Security. NetPosa is embedded in Xinjiang, providing cloud-based video management systems and surveillance vans to police, according to the company website. NetPosa isn't on the U.S. entity list.
Intel Capital, the venture arm of the American semiconductor giant, had become NetPosa's fifth-largest corporate shareholder in 2010. By the time Intel sold its stake in early 2016, two years after the Chinese company went public, NetPosa's value had grown at least sixfold.
The American chip maker continues to supply NetPosa with advanced chips that the Chinese company uses to power AI video surveillance platforms it markets to police.
NetPosa declined to comment. Intel said that its products are used by customers world-wide for a variety of applications.
For a 238 million yuan ($34 million) project in a Xinjiang county, featuring blanket surveillance, a contractor opted for products made by Seagate and Western Digital, according to an employee on the contractor's engineering team.
The Western products would help store and process the flood of video footage. The contractor is a local subsidiary of China-based PCI-Suntek Technology Co Ltd., which supplies facial recognition and other surveillance tools. "For the most part it's Seagate or Western Digital. We don't buy domestic," said the employee. PCI-Suntek declined to comment.
Chengdu Xiwu Xinan Co. Ltd., a contractor building a 182 million yuan "safe city" project in Tacheng, in northern Xinjiang, relies exclusively on Seagate and Western Digital drives, according to an employee in the company's purchasing department. Safe cities is the marketing term Chinese surveillance companies use to describe centralized, citywide surveillance systems for policing and security that rely on facial-recognition and other advanced technologies.
Government bid documents for the project seek about 1,700 hard disk drives for use with more than 3,400 high-definition video cameras and facial-recognition technology, with each able to check in real-time the faces of 24 passersby across a database of half a million faces.
"We chose them because of their quality, and sometimes the brands are requested by the buyer themselves," he said. Chengdu Xiwu didn't respond to requests for comment.
--Fanfan Wang contributed to this article.
Write to Liza Lin at Liza.Lin@wsj.com and Josh Chin at email@example.com
(END) Dow Jones Newswires
November 26, 2019 12:02 ET (17:02 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.