David Li said he was “shocked” last May when the Congressional Research Service accused his company, Hesai, the world’s largest maker of laser sensors for electric vehicles, of aiding the Chinese military.
The CRS report was the first public sign that Hesai would become the latest casualty in the U.S.-China tech war. And in January, Hesai received more bad news when the Pentagon added the Shanghai-based, New York Stock Exchange-listed group to a list of Chinese companies allegedly taking part in China’s military-civil fusion programs.
The Defense Department’s move to add Hexi to a list of about 40 “Chinese military companies” established in 2021 had no regulatory impact but created a perception of investment risks and triggered a sharp drop in Hexi’s share price.
Li, a University of Illinois at Urbana-Champaign graduate and CEO of Hesai, decided the company he co-founded had to fight back.
He began legal proceedings against the Pentagon in a U.S. court in May and sought summary judgment this month. The suit came just after Li returned from Washington after unsuccessfully trying to persuade U.S. officials.
“It’s becoming harder to clear my record without a lawsuit,” he told the Financial Times in an interview. “The goal is not to beat anybody up. The goal is … to have an open dialogue, because I think this is a really terrible mistake.”
Hexi is one of a growing number of Chinese groups targeted for suspected ties to the military amid growing concern in Washington about threats posed by Beijing to U.S. national security.
Congress is considering legislation that would ban the Defense Department from using Chinese-made lidar-equipped products, which use lasers to detect road conditions around vehicles for advanced driver assistance systems. Lidar is also used in advanced robotics products.
Hesai also represents a rare example of a Chinese group determined not to succumb to U.S. measures. ByteDance, the company behind video app TikTok, is also challenging a law that would ban the platform if it doesn’t sell its apps.
Hessai claims the Pentagon’s actions were “arbitrary and capricious” because it gave the company no prior notice or opportunity to respond, and that the Pentagon failed to explain its rationale, provide evidence, or consider information submitted by the company.
The Pentagon declined to comment on the lawsuit, but said Kasai falls under the definition of a “Chinese military company” under U.S. law that requires the Pentagon to compile the list. The Pentagon added that the term generally refers to companies that “own, control, are affiliated with, or contribute to the military modernization of the People’s Republic of China or the Chinese defense industrial base.”
Li denied any links between Hecai and the Chinese military and said it had not received “any investment” from the Chinese government or government-linked entities.
He says Hesai’s LIDAR sensors are controlled and operated by the customer, and the technology has no wireless connectivity or remote access, so the images produced by the LIDAR are not accessible.
“This is civilian technology and there are procedures in place to prevent it from being sold directly to any country’s military,” Li said.
Founded 10 years ago in Silicon Valley and now with main operations in Shanghai and Hangzhou, Hesai has just under 50% market share of LIDAR sales to the global automotive industry and partners with most of the major EV manufacturers in China.
Of the company’s 1.8 billion yuan ($250 million) sales in 2023, China will account for 55% and the United States for just over 40%, but Hesai expects the U.S. share to fall to less than 20% this year.
Hexi has also come under scrutiny from China experts in Washington, where James Mulvenon, chief information officer at Pamir Consulting, argued in a report on Hexi that the company appears to have a facility in or immediately adjacent to a designated military-civil fusion (MCF) area in Shanghai.
Mulvenon said Hexi appears to have supply chain ties to universities conducting cutting-edge research for the People’s Liberation Army. His report also alleges that Hexi technology was used in vehicles used in the oppression of Uighur Muslims in the Xinjiang Uighur Autonomous Region.
Hesai disputes Marvenon’s claims, saying it has no ties to any Chinese military organizations, does not have facilities in or adjacent to the MCF zone in Shanghai, and is not aware of any of its products being used in the alleged Xinjiang Uighur Autonomous Region.
The U.S. has also grown concerned that Chinese groups could use its technology to target Americans’ data, and the White House recently launched an investigation into whether Chinese vehicles that use lidar and other sensors and data-gathering technologies pose a risk to U.S. national security.
U.S. officials are also concerned about Chinese laws that would require domestic companies to provide data to the government.
In a preliminary prospectus filed with the Securities and Exchange Commission ahead of its New York listing early last year, Kasai itself said it faced risks associated with conducting most of its operations in China, including that Beijing “may influence or interfere in our operations at any time” and the possibility of scrutiny over “data security.”
Mulvenon said U.S. intelligence agencies are concerned about “telematics” – systems that allow data to be stored and transmitted wirelessly over long distances.
“Intelligence experts know that vehicle telematics data, such as lidar, is valuable, and we have no confidence that Chinese law would enable Hexi to protect U.S. vehicle data,” he said.
Hexi’s U.S. rival, Auster, has also urged lawmakers to take such risks more seriously before Chinese companies expand further in the United States.
According to S&P, global lidar market revenue is expected to surge from less than $2 billion in 2022 to about $14 billion next year and more than $45 billion by 2030. China is expected to account for about two-thirds of the market next year.
Although Kasai has offices in the United States and Germany and brands itself as a “global” brand, Li said the company benefits from being based in China at a time when China’s EV industry is booming.
“If you’re the best rider [company] “In China, we have a good chance of becoming number one in the world,” he said.
But he acknowledged there was uncertainty about Hesai’s overseas sales amid tensions between Washington and Beijing.
“I don’t like the way the geopolitical situation is going. There’s nothing I can do about it,” he said.
Additional reporting by Gloria Li in Hong Kong
