Hikvision Embraces Its Record Decline in Business After US Sanctions

Picture of Hikvision cameras in an electronics mall in Beijing on May 24, 2019. (Fred Dufour/AFP via Getty Images)

Impacted by the U.S. sanctions, Chinese surveillance tech giant Hikvision recently reported the worst performance in its 20-year history, with revenue and net profits dwindling.

Hikvision admitted in its 2022 annual report (pdf) released on April 15 that the company had experienced negative profit growth, something it had never seen in the 21 years since its inception. Net profit fell for four consecutive quarters since the second quarter of 2022 when it was already down by 19.40 percent. That year, net profit plummeted 23.59 percent, while revenue was 83.166 billion yuan (about $12.5 billion), a slight increase of 2.14 percent.

The situation deteriorated into the first quarter of 2023, with revenue declining by 1.9 percent year-over-year and net income dropping by 20.7 percent, the Hikvision report indicated.

On April 21, Hikvision closed at 39.72 yuan (about $6.0), shrinking about 11 percent from its closing price of 44.56 yuan (about $6.7) a week prior (April 14.)

Hikvision’s slump in business is linked to U.S. sanctions. “The impact of the U.S. sanctions on Chinese technology companies is much more significant than people expected,” said Tokumori, president of the Japanese high-tech company who reveals only his surname for security reasons.

In May 2022, the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) added Hikvision to the Specially Designated Nationals and Blocked Persons (SDN) list, thus affecting more than 180 countries and territories that use Hikvision products.

The Hikvision headquarters in Hangzhou, in east China's Zhejiang province, on May 22, 2019. (STR/AFP via Getty Images)

Sanctions on the supply chain of chip materials have limited the capacity of Chinese technology firms. “Yet, the more far-reaching impact is that the U.S. sanctions have made technology companies in Europe and the U.S. realize the risks of working with Chinese technology companies and exclude them from their supply chains,” Tokumori told The Epoch Times on April 22.

“At the same time, Hikvision also faces the problem of saturated domestic business, low profits, and slow remittances. Once the overseas business slides sharply, it will inevitably step in negative profit growth,” Tokumori added.

Hikvision is one of many companies showing poor business performance after the U.S. sanctions were implemented.

Sense Time is a facial recognition intelligence company sanctioned by the United States multiple times. It is listed in the Non-SDN Chinese Military-Industrial Complex Companies (NS-CMIC) along with Hikvision.

Sense Time’s 2022 annual report (pdf) showed a 22.4 percent year-over-year downturn in gross profit and a 64.5 percent loss for the year.

Close Ties With CCP Military

Of Hikvision’s ten major shareholders, four are state-owned legal entities: CETHIK Group (holds 36.09 percent of shares), CETC Investment Holdings (2.46 percent), CETC’s 52nd Research Institute (1.92 percent), and Central Huijin Investment (0.69 percent).

People's Liberation Army (PLA) soldiers undergoing meteorological observation training on May 29, 2016, in Jinan, Shandong Province, China. (Getty Images)

CETC (China Electronic Technology Group Corporation), established in March 2002, comprises 66 units, eight listed companies, 42 subsidiaries, and over 40 offices outside China, according to its official site.

Founded in 1962, CETC’s 52nd Research Institute (from now on, CETC52) is a top-notch research institute catering to the Communist Party military. Hikvision Group is one of CETC52’s “economy entities.”

CETC52 aims to “become a professional technology leader in the field of national defense technology and an important military product supplier,” as described by China’s largest search engine Baidu.

Gong Hongjia, a permanent resident of Hong Kong, is the second largest shareholder of Hikvision, holding 10.21 percent of the shares. When Gong founded Hikvision in 2001, his college classmates Chen Zongnian and Hu Yangzhong were working at CETC52. CETC52 provided Hikvision with digital video compression board technology and 28 engineers. Gong, at that time, invested 2.45 million yuan (about $370,000), for 49 percent of the shares, while the rest were state-owned.

Chen Zongnian, who has served as the assistant director, deputy director, and director of CETC52, is the chairman of the board of directors of CETHIK Group and Hikvision. Hu Yangzhong, an engineer at the 52nd Institute, has been the director and general manager of Hikvision since December 2021, according to the Chinese portal Sina.

Tightening Sanctions

As a result of Hikvision’s supplying surveillance equipment to the CCP that is used in the suppression of Xinjiang Uighur and other minorities, the U.S. Department of Commerce’s Bureau of Industry and Security (BIS) placed Hikvision on the entity list in October 2019, which requires companies to get a license from BIS to purchase U.S. products, technology, or services.

In June 2020, the U.S. Department of Defense categorized 20 Chinese technology companies and organizations, including Hikvision and Huawei, into a list of “Chinese military companies operating in the United States, including those ‘owned or controlled’ by the People’s Liberation Army that provide commercial services, manufacture, produce or export,” Reuters reported.

In March 2021, the Federal Communications Commission (FCC) determined that five technology companies, including Hikvision and Huawei, threatened U.S. national security. In June of the same year, OFAC listed Hikvision on the list of Chinese military-related companies, prohibiting U.S. persons and companies from trading and investing in related securities of Chinese military-related companies.

Under the tightening of U.S. sanctions, Hikvision’s stock price steeply tumbled by more than 40 percent in 2022. As a self-save move, Hikvision initiated its first large-scale buyback program.

On Sept. 15, 2022, Hikvision announced repurchases totaling 2 billion yuan to 2.5 billion yuan (about $300 million to $375 million) to address the crisis. But “it is ineffective” for Hikvision as the Hangzhou-based digital technology company’s market value has evaporated 300 billion yuan (about $45 billion) in one year, said a Chinese financial media Eastmoney.com report on Oct.9, 2022.

Domestic Competitive Pressures

A sign advertising Chinese telecoms equipment manufacturer Huawei stands on an apartment building on Oct. 11, 2019, in Warsaw, Poland. (Sean Gallup/Getty Images)

In addition to pressures from the U.S. sanction, Hikvision experienced fierce competition from domestic peers, such as internet giants represented by Alibaba, Tencent, and Baidu, and artificial intelligence (AI) developers led by Huawei and Xiaomi.

As part of Hikvision’s core strengths, intelligent IoT (Internet of Things) relies heavily on perception technology, AI technology, and big data technology.

IoT devices have become ubiquitous, with more public services, companies, and homes being equipped with things like connected sensors, security devices, and cameras. According to IoT Analytics, the global IoT market size is expected to grow 19 percent in 2023, at a Compound Annual Growth Rate (CAGR) of 19.4 percent, or $483 billion, from 2022 to 2027.

While the total IoT market in China seems large, thousands of small enterprises need to come up with different solutions. This means that there will be space for competitors like Hikvision to vie for market share, Tokumori said.

Hikvision also said in its 2022 report (pdf) that “IoT will continue to be driven by the personalized needs of users for quite a long time.”

Therefore, “Hikvision would further compress its profit margin and relax the payback time for customers in a bid to retain the market, making its operating status even more fatiguing,” Tokumori said.