U.S. Chipmaker Helps China Build Out the Surveillance State

Thanks to COVID-19, the Chinese government may have found a new tool to track and restrict the movement of its 1.4 billion citizens.

The New York Times reported Tuesday that Communist Party officials are now promoting a smartphone contact tracing application as a permanent health surveillance tool.

Privacy issues aside, there is an opportunity for American investors.

No country has moved faster than China to adopt digital surveillance tools. At the height of the COVID-19 outbreak in December 2019, the government mandated citizens download a smartphone app that collected personal and recent travel data. When combined with health information from the national database, the state had an accurate tally of infected persons, their whereabouts and the places they had been.

The app assigned healthy persons with a green code. Travelers to areas with infected people were given a yellow code, and a positive test garnered a red designation. Persons landing in the latter two categories were forced to quarantine until the app furnished a green code.

Travelling without a green code was impossible and non-negotiable. State workers posted outside of transit stations, office complexes and shopping malls acted as gatekeepers to the healthy. It was dystopian, yet extraordinarily effective.

Although China was the epicenter of the COVID-19 outbreak, surveillance and forced compliance squashed the outbreak within two months. Infections peaked at 81,000. Deaths, according to the latest data from John’s Hopkins University, have hovered near 4,600 since February.

Elsewhere in the world, the carnage has been overwhelming. Infections have reached 5.5 million. As of May 26, the death toll stood at a grisly 350,000. In the process, economies worldwide have been ruined.

The Chinese solution worked because for a decade, the country has been is building infrastructure for an unprecedented digital surveillance state. The government can quickly attach current faces to names in a database.

It started in 2005 with Skynet, an ambitious project to blanket every urban center with video surveillance cameras. Today, every man, woman and child is being recorded in Beijing, a sprawling city of 21 million residents.

Nationally, the number of cameras equipped with facial recognition software in 2020 is expected to reach 626 million, according to the Wall Street Journal.

Last June, the state quietly expedited the full national rollout of fifth-generation wireless. And 5G isn’t just the next generation of a wireless connectivity. It’s the foundation for the first generation of billions of truly smart networked devices.

During the COVID-19 crisis, for example, surveillance cameras were updated with artificial intelligence-enabled software to detect abnormal body temperature. This was only possible because of 5G.

And 5G is only possible because of one U.S.-based company: Ambarella (NASDAQ: AMBA, Rated “D”).

The company makes the silicon and the AI-enabled processing software used in next-generation surveillance cameras. It supplies computer vision technology to HikVision and Dahua, two of the leading Chinese camera makers. It’s also racking up contract wins from Samsung, Bosch and Hanwha Techwin, a Korean security camera maker.

This is a big business shift. Ambarella used to be best known for the video processing found in GoPros. However, in 2015 managers began moving the company away from expensive toys and toward automotive, robotics and surveillance applications.

In March, the company released fiscal 2020 financial results. Revenues reached $228 million with gross margins of 58.2%. Managers also announced plenty of interest from Asian device makers.

Over the past year, Ambarella’s stock price is up over 51%.

It’s odd that an American company might be playing a big role in Chinese mass surveillance. However, in a global economy, companies win contracts based on merit. Ambarella is building the best gear for customers to make smarter, networked devices.

Undoubtedly, some of those tools helped Chinese authorities to vanquish the COVID-19 pandemic in short order. Now, they’re headed toward becoming a permanent part of Chinese life.

It’s a big opportunity for cutting edge suppliers. And a big opportunity for Ambarella shareholders.

Best wishes,

Jon D. Markman