A warehouse in an industrial park about an hour’s drive north of downtown Beijing offers a paradoxical picture of China’s much-hyped, and increasingly controversial, artificial intelligence boom.

Inside the building, a handful of squat cylindrical robots scuttle about, following an intricate and invisible pattern. Occasionally, one zips beneath a stack of shelves, raises it gently off the ground, then brings it to a station where a human worker can grab items for packing. A handful of engineers stare intently at code running on a bank of computers.

The robots and the AI behind them were developed by Megvii, one of China’s vaunted AI unicorns. The impressive demo might seem like further evidence of China’s AI prowess—perhaps even proof that the country is poised to eclipse the US in this critical area. But the warehouse also points to a fundamental weakness with China’s AI. Amazon has been using similar technology in US fulfillment centers for several years.

China’s AI champions have spun AI algorithms into gold in recent years, but that may become more difficult as the technology becomes more widely available. Megvii, a private company that CB Insights says is valued at around $4 billion, hopes to convince customers to buy its warehouse and manufacturing AI technology as it looks to move beyond a business built largely around facial-recognition technology. The trouble is, AI is not yet proven as a general-purpose technology that can easily be applied to different industries. Broader challenges, including newly imposed US trade restrictions, will make things even more difficult.

“These companies are not going to be big companies, like Alibaba or Tencent,” predicts Nina Xiang, a business journalist in Hong Kong and author of Red AI, a recent book about China’s AI boom. “They will remain small operators, and some valuations will have to be corrected.”

In October, Megvii and five other AI-focused Chinese companies were added to a US export blacklist, because Chinese authorities allegedly use their technology to monitor and control Muslim minorities in Xinjiang, a province in western China. The blockade means these companies can no longer buy crucial components such as advanced microchips from US firms.

China’s AI boom has produced more than a dozen unicorns, private companies valued at more than $1 billion. These include SenseTime, valued at $7.5 billion, the company’s CEO told Bloomberg earlier this year, and Yitu and CloudWalk, both valued above $2 billion. Another prominent AI company, iFlytek, has been around longer, having started out making speech-recognition tech, and it carries a market capitalization of $10 billion on the Shenzhen stock exchange.

“The largest problem these companies face may be the dawning realization on investors that, although it seems promising, in most areas AI just isn't ready for the big time.” Helen Toner, Georgetown University

Megvii, which filed to go public on the Hong Kong stock exchange in September, has genuinely impressive AI expertise, having developed core algorithms and software. It was founded by several graduates of a renowned AI program at Tsinghua University in Beijing. The company’s IPO filing offers a rare insight into the finances of a Chinese AI giant, and highlights just how dependent the company seems to be on face recognition and surveillance for now. Revenue grew four-fold last year to $200 million, compared with 2017; but its “City IoT” segment, which encompasses surveillance and security systems, accounts for nearly three-quarters of that revenue.

State-led development may be both a blessing and a curse for China’s AI enterprises. When the government announced a grand national AI plan in July 2017, it served as a signal for Chinese cities and provinces to pour money into AI projects. Xiang says Megvii and other Chinese AI unicorns seem to be heavily reliant on government contracts, subsidies, and other forms of strategic support. “On average, we can say a significant share of these companies’ revenues is government-reliant,” she says.

The Chinese AI companies have made efforts to move into new areas over the past few years. Besides Megvii’s move into logistics and manufacturing, Yitu touts its work in medical imaging and document analysis, SenseTime is investing in autonomous driving, and iFlytek often demos tools for analyzing legal documents. The catch is that AI is relatively unproven in such areas, and it’s unclear how much revenue the companies have generated from these ventures.