In today’s AI revolution, we believe the core technology comes down to Natural Language Processing (NLP), “the interpretation of human languages”, and Computer Vision, “the identification on images”. NLP is seeing broad adoption on both consumer and enterprise fronts, the best examples being Amazon’s smart speaker Alexa and Netflix’s superior recommendation systems. In China, tech giants Baidu, Tencent, and Alibaba (BAT) have been aggressively making acquisitions to roll out new innovations in the NLP field, such as Baidu’s DuerOS and Alibaba’s AliReader. Different from NLP, the Computer Vision sector in China, however, is around 70% dominated by four startups: SenseTime (商汤), Yitu (依图), Megvii (旷视) and CloudWalk (云从), according to IDC.

Among more than 5,000 AI companies in China, almost 90% of them are simply using the “AI concept” without creating value-added solutions for clients. Some startups did gain leading technologies in image and video recognition after years of research and development, but selling SDK alone doesn’t bolster their monetization capabilities; nor does it guarantee that they will beat the competition. SenseTime, Yitu, Megvvi and CloudWalk, on the contrary, have become unicorns with billion-dollar valuations. This has resulted not only from their technological advantages, but is driven by the end-to-end vertical solutions they can provide to businesses and governments.

Megvii is an early mover with globally recognized technology

As early as 2011, YIN Qi (印奇) was researching the topic of AI at Tsinghua University. He founded the company Face++ with his two college friends, focusing on facial recognition. While the move was ahead of BAT and its three competitors (SenseTime, Yitu, and CloudWalk), the founding team was stuck with how to offer meaningful real-world applications, so they made their API public. Shortly after, many companies including Meitu, a photo editing app, and Jiayuan.com, a matchmaking agency, connected to the API, giving ideas to the Face++ founding team. A more crucial inflection point occurred in 2014, when Alibaba searched for a facial recognition provider and finally selected Face++ to implement the “pay-with-your-face” feature in its Alipay product. Now, Face++ is widely recognized internationally and has repeatedly defeated Google, Facebook, and Microsoft in the global AI competition. It has ranked No. 1 on 17 technology evaluations worldwide and has been featured in MIT Technology Review three times.

Transforming traditional industries with Computer Vision

Today, Computer Vision technologies have been applied to multiple industry verticals: mobility (autonomous driving), healthcare (medical scans reading and disease detection), retail (facial recognition to implement personalized advertising), finance (anti-fraud, identity verification), logistics (production line monitoring), and public security (anti-terrorism, video surveillance), and so on.

Face++ will focus on three major sectors in the next three to five years: smart city, supply chain, and lifestyle. We believe the company is very strategic in choosing industry verticals that can be empowered by Computer Vision technology. The company changed its name to “Megvii” meaning mega vision, which symbolized a commitment to transit from a technology platform to a vertical solution provider that reshapes traditional industries with AIoT (AI + Internet of Things).

Servicing governments - “Smart city AIoT”

Evolution: Before the concept of “Smart City” kicked in, Megvii tapped the public security industry in 2014, as facial recognition was likely the “must-have” technology for the sector: security apparatuses often need to verify people’s identities without their cooperation. Traditional surveillance systems are cumbersome to install and relay low-definition imagery at a slow speed. Therefore, since the four Computer Vision unicorns started offering high-resolution cloud-based video surveillance systems with intelligent analytical capabilities, an increasing number of police departments have become their clients. According to the company, Megvii secured contracts with police in 32 cities in China and has assisted in over 5,000 arrests of wanted suspects in two years. Financially, the smart surveillance business contributed around 70% of total revenues and grew nearly 50 times in 2018.

Public security industry: The Chinese government has plans to build a closed-circuit television (CCTV) surveillance network for public security purpose, with 170 million security cameras in use and another 400 million being installed. While the controversy on potential privacy invasion is not within the purview of this report, we believe the government decisions make China the largest market in video surveillance.The US market, worth an estimated USD 2.9 billion and growing at 0.7% a year, pales in comparison to the market size in China, which reached USD 6.4 billion in 2016 with an annual growth rate of 12.4%, as reported by HIS Markit.Since traditional surveillance producers still take over 90% of the market share, we anticipate boundless growth opportunity for Megvii.

Current challenges: While the system recognizes real-time unlawful activities, it cannot act in a timely fashion to stop such activities, making the AI technology less “intelligent” than expected. Moreover, since there are only two engineers with more than 10 years of experience in the security field at Megvii, the company is still in dire need of industry expertise at this point.

Going beyond defense: In addition to aiding criminal investigations, Megvii eyes the opportunity to build “City Brain”, acquiring larger data sets and empowering entire cities with the Computer Vision technology, specifically regarding urban planning, traffic, and large-scale events. The company produces hardware including the smart portrait capture machine MegEye-C3S, the face recognition terminal MegBox B1R, portable devices, and card readers, to capture not only individuals, but also roads, automobiles, buildings, and so on. Its software then extracts actionable information from the images/videos and delivers analytical results. Currently, the company is solving issues of randomly parked bicycles in Luohu District, Shenzhen and providing AI solutions to the World Internet Conference held in Wuzhen annually. Global expansion is also on the cards: In 2018, the company sold its Smart City solutions to over 20 countries on four continents and undertook multiple projects in Middle Eastern countries.

Servicing businesses - “Supply chain AIoT”

Compared to the smart surveillance business, the supply chain AioT is still at an early development phase in which Megvii is testing and creating market demands. In 2018, the company launched its Supply Chain solutions and claimed it was the primary focus.

Linking logistics with Computer Vision: Though logistics seems irrelevant to Computer Vision, Megvii hopes to transform the sector with its Robotic Network Operating System, Hetu, to automate most logistics work. For example, it has helped Tmall Supermarket’s warehouses boost efficiency by almost 40% and shorten the duration from receiving orders to making ready-to-ship goods to below one hour. Last year, it acquired Ares Robot (艾瑞思机器人), a producer of robots that replace humans in picking and sorting packages in factories as well as offers cloud-based warehouse management system.

Moving downstream to retail: With solutions to optimize the supply chains, it is natural for Megvii to move a little downstream to the retail sector. Currently, KFC, Tao Café, Raffles City (来福士), EATOWN (怡食) and other retail businesses are using Megvii’s retail solutions to digitalize their offline stores and transform themselves to New Retail. When the consumer walks into the store, Megvii’s smart terminal will identify his or her age, gender, and other dimensions, whereupon the shelf sensors will track their purchasing behaviors. Combined with existing ERP/CRM, Megvii’s retail solutions allow store owners to understand what goods should be purchased and when to put them on the shelves and help them design precision marketing. Such solutions have already made impacts on Good Neighbor, a well-known supermarket chain in China, by increasing its inventory turnover and weekly repurchase rate by around 100% each.

Servicing consumers - “Lifestyle AIoT”

Megvii’s facial technology is already ubiquitous in consumers’ lives, from social media to mobile payments. For instance, it offers face unlocking, image beautifying, location optimization, and other services to Xiaomi, Oppo and Vivo as well as secure payment and remote account opening services to CITIC Bank and Ant Financial.

Valued at USD 4 billion ahead of its upcoming IPO

Last week, Megvii announced that it had raised USD 750 million from its Series D funding round, giving the company a valuation of USD 4 billion. Likely due to the sensitive nature of its business, the majority of investors are state-owned organizations like Bank of China Group Investment, ICBC Asset Management Co., and a subsidiary of Abu Dhabi Investment Authority. Other investors included Macquarie Group and Alibaba. The company is planning to file for an IPO on the Hong Kong Stock Exchange later this year. Looking forward, we are optimistic about the company’s potential to reshape multiple industries in China, given its advanced technologies, clear commercialization path and top-tier management team with vision and execution ability.