Less than nine months later, Hesai has become an example of how the U.S.-China battle over technology is roiling the business world. Its stock is down more than 50%, and the company is on the back foot, hiring lobbyists and defending its reputation.

Hesai is a dominant player in lidar—sensors that use lasers to give next-generation vehicles and weapons a 3-D view of the world. Lidar has emerged this year from a little-discussed industry to a focus of the latest U.S. efforts to control technology that could be used for spying and cyberattacks. Lidar is also key for autonomous vehicles, which are an increasingly important component of modern warfare.

Some in Washington are worried Hesai’s dominance in the technology threatens national security, arguing that China could use it to collect data or launch a cyberattack and that U.S. investors are funding the company’s development.

“Hesai lidars don’t—and indeed cannot—pose a national security or privacy threat,” Hesai Chief Executive David Li said in a written statement. “The concerns are fictions spread by competitors.”

Hesai’s sharp downgrade from Wall Street darling to geopolitical target is an example of how the rising tide of restrictions on technology can change a company’s trajectory.

The Biden and Trump administrations have been rewriting the rules for semiconductors, quantum computing, artificial intelligence and other technologies critical to national security. The pace and scope of the restrictions have increased.

The restrictions are changing how companies in these sectors make money and are managed, said Michael Wessel, a commissioner with the U.S.-China Economic and Security Review Commission, which advises Congress.

“The effect will be to significantly impact not only margins but the legal exposure of companies and potentially their leadership and boards,” he said.

Hesai’s $192 million initial public offering was the largest U.S. listing by a Chinese company since 2021. Hesai attracted investors because of its potential to become a staple in cars with features such as automated braking and parking. The IPO filing included a boilerplate warning about the risk of Chinese government interference.

The Chinese “government has significant oversight and discretion over the conduct of our business, and may intervene or influence our operations at any time,” the listing prospectus said.

Demand for lidar has surged with the use of robotaxis, assisted-driving features in cars and smart-city infrastructure. It is now around a $2 billion market, estimates Emergen Research. The U.S. military uses lidar on submarines, trucks, drones and weapons.

Hesai supplies 67% of the robotaxi industry, counting almost every American self-driving car and truck company as a customer, according to research firm Yole Group. RoboSense, another major Chinese lidar company, has about 3% of the market.

Tech industry representatives created a lobbying group in recent weeks to promote their view to policy makers and the public that China’s dominance in lidar is a national-security problem and there should be more support for U.S. lidar companies.

“Lidar should be subject to the same scrutiny” as other critical technology, said Angus Pacala, chief executive of San Francisco-based lidar company Ouster.

Ouster and Velodyne Lidar—which merged early this year—have each taken Hesai to court, claiming it stole their technology. In the Ouster case, the U.S. International Trade Commission sent the companies to arbitration this year. In 2020, Hesai agreed to pay millions of dollars to Velodyne for using its technology, according to a Velodyne securities filing. “Hesai has built their business on stolen IP,” said Pacala.

Hesai said the allegations it has stolen technology are baseless, and it didn’t admit wrongdoing in the settlement with Velodyne.

U.S. policy makers have put a spotlight on lidar this year. Members of Congress from both parties have complained in committee hearings and to cabinet officials about the national-security risk. A Congressional research arm published a report, singling out Hesai, saying China used questionable tactics to develop lidar and is funding its efforts using U.S. capital markets.

The Senate in July passed an amendment to the National Defense Authorization Act requiring U.S. investors to notify the government when they make certain large investments in lidar technology from China and other adversaries.

The NDAA requested an accounting of Chinese lidars used by the U.S. military and said Chinese lidars have taken over the market with help from U.S. investors who “unknowingly provide financial support.”

Kodiak Robotics, a Silicon Valley startup working with the Army to develop driverless vehicles, switched from using Hesai to a U.S. lidar maker for its defense work, said CEO Don Burnette, who added that the company still uses Hesai for its commercial freight-hauling business.

U.S. lidar options work fine for vehicles that travel at low speeds, but Hesai is the only option that meets specific safety requirements for driving at highway speeds, Burnette said, which is why most autonomous driving companies use Hesai.

Hesai has been pushing back against the China concerns with its own campaign. It says its lidars can’t capture facial features or biometric data, store images or transmit them. They aren’t connected to the internet, Hesai doesn’t control the data its lidars collect, and the Chinese government hasn’t intervened in Hesai’s operations, it says.

The company has commissioned third-party organizations to assess its technology and certify it is safe. It has hired Washington lobbying firms to combat what Li says are competitors exploiting Washington’s anti-China sentiment.

“We believe this is xenophobic fearmongering and nothing more,” Li said.

Meanwhile, there is a new risk to the company from its home market: China has threatened to restrict exports of Chinese lidar.

Hesai’s stock price on the Nasdaq has slid more than 50% since its public listing; the Nasdaq Composite Index is up more than 8% for the same period. The company’s worse-than-expected profit margins have disappointed investors. Hesai’s overall revenue is growing, but its share of sales from the U.S., Canada and parts of Europe slipped.

The other lidar companies listed in the U.S. have also seen their stocks slide this year as they are all losing money and optimism about their future earnings potential has faded.

Hesai has ambitious plans. Company executives said it started operations in recent months at a new factory in Hangzhou, China. The facility will automate almost all the production and could double Hesai’s output, and is so big some locals call it the aircraft carrier. The factory was paid for, in part, by the money from its IPO.

Write to Heather Somerville at [email protected]

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