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  Title	LiDAR Battle: US Proposals Strengthen Ouster But Leave Consumer Sectors Exposed To Chinese Competition
  ID	2867845
  External ID	7175888587
  Author	Robert Dydo
  Published Date	Oct. 1, 2024, 8:25 a.m.
  Summary	Oct. 01, 2024 9:15 AM ET Ouster, Inc. (OUST) Stock HSAI INVZ LAZR MVIS Robert Dydo 1.47K Follower s Follow Play 14min Summary The House China Select Committee and Department of Commerce
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  URL	https://seekingalpha.com/article/4724438-lidar-battle-us-proposals-strengthen-ouster-but-leave-consumer-sectors-exposed-to-chinese-competition
  Sentiment	Negative: 0.12606    Neutral: 0.78081    Positive: 0.09313
  Relevance	0.02555

• Content Details

  Content ID	1372828
  Key	5e181f4b-2712-438c-944e-5a61f51ef59e
  Content	Oct. 01, 2024 9:15 AM ET Ouster, Inc. (OUST) Stock HSAI INVZ LAZR MVIS Robert Dydo 1.47K Follower s Follow Play 14min Summary The House China Select Committee and Department of Commerce propose bans on Chinese LiDAR and connected vehicle technology, posing challenges and opportunities for Western companies like Ouster. Ouster could benefit from the U.S. Department of Transportation's infrastructure bill, leveraging its Blue City platform and digital flash sensor technology. Chinese companies like Hesai and Robosense dominate the LiDAR market, threatening Western firms' competitiveness and raising national security concerns. Ouster remains a compelling investment, potentially emerging as the "First Solar" of LiDAR, despite market turmoil and geopolitical tensions. da-kuk Background The concept of "survival of the fittest" is a core principle of capitalism, wherein in free-market economies, the best solutions tend to produce the most significant financial benefits. However, additional complexities arise when facing geopolitical adversaries in the global economy. According to the Selective Committee on the Strategic Competition Between The United States and the Communist Chinese Party: The PRC uses an intricate web of industrial policies, including subsidies, forced technology transfer, and market access restrictions, to distort market behavior, achieve dominance in global markets, and increase U.S. dependency on PRC imports. The widespread adoption of certain PRC-developed technologies in the United States poses a significant risk to U.S. national security and data protection concerns and threatens long-term U.S. technological competitiveness. The PRC exploits the openness of the U.S. research environment to steal U.S. intellectual property ( IP ) and transfer technology to advance its economic and security interests to the detriment of the United States. The U.S. legislative bodies—including Congress, the President, and various government departments—are among the institutions capable of protecting the nation's infrastructure, citizens, and military from such threats. These actions might appear overly protective and resistant to free-market ideals but are rooted in struggles defined by the strategic competition between the U.S. and CCP. Given those conditions, those invested in LiDAR technology should not be surprised that, like in many past conflicts, the governments of each country are now wrestling over the future of this industry. I have written a chapter on Hesai ( HSAI ) and Ouster ( NYSE: OUST ), examining the legal outcomes of the ITC's decision concerning the Chinese company's alleged infringement. The ruling sent both parties to arbitration in the U.K. under a JAMS, a private organization with no jurisdiction in the U.S. or China. The issues will be addressed on a voluntary reconciliation basis, with the first hearing scheduled for November this year. Although Hesai declared victory, its interpretation of the ITC decision diverged significantly from what the ITC intended; the company portrayed the outcome as having been cleared of infringement allegations. However, the crux of the matter lies in an agreement between Hesai and Velodyne (acquired by Ouster in a merger). This agreement included an arbitration clause that placed Ouster's patents under the same jurisdiction as Velodyne's, as per the decision, thus concluding the ITC investigation on a technical rule. Despite the push for reconciliation through arbitration, Hesai took another step by challenging five of Ouster's patents via the PTAB (Patent Trial and Appeal Board), an administrative body of the USPTO (United States Patent and Trademark Office). This move aimed to invalidate Ouster's patents and eliminate infringement claims based on them. To initiate those actions, Hesai clearly recognized Ouster's patents as entirely separate from the agreement with Velodyne. While American legal teams representing both sides—Hesai, a Chinese company based in the Cayman Islands, and Ouster—continue to dispute the patents' validity, Ouster has notably refrained from pursuing legal action in China. Instead, Ouster attempted to lobby Congress against the Chinese ties company, emphasizing their ties to the PLA and CCP. Hesai has called those to be baseless political lobbying: Ouster lobbyists are making the rounds in the media and in Washington, DC, falsely alleging that Hesai lidars potentially pose a data security and privacy risk, are a national security risk to the US, and that Hesai is controlled by the Chinese government. These baseless allegations are patently false. These efforts have allegedly resulted in Hesai being added to the Pentagon's list of companies barred from selling equipment to the U.S. military—a military connection to PLA was denied by Hesai, despite numerous images of Hesai sensors being used on Chinese military equipment and in defense contracts won by Kodiak Robotics (linked in my mentioned Hesai article). Since then, Kodiak has shifted its defense-related business to Ouster sensors, which are prominently featured in new company postings. In the aftermath, Hesai threatened legal action against the U.S. government, and in July, an article in the Financial Times reported that Hesai had been removed from the list. However, the credibility of this claim was questioned, as there was no official confirmation of Hesai's removal by the company or the Pentagon. New Proposals Two new legal proposals that impact LiDAR and lidar companies have recently been published. One is the bipartisan bill introduced in the U.S. House of Representatives to prevent the U.S. Department of Transportation (DOT) from engaging with LiDAR technology affiliated with the Chinese Government. Expressly, the "Securing Infrastructure from Adversaries Act" would prohibit the DOT from Procuring LiDAR from a covered company, contracting with entities using LiDAR from a covered company, or providing loans or grants to entities using LiDAR from a covered company, where the covered company means any Chinese military company operating directly or indirectly in the U.S. or as identified by the Department of Defense. Any entity domiciled or subject to unmitigated foreign ownership by the PRC, Iran, North Korea, or Russia. The bill's introduction was spurred by concern that the Chinese government could exploit LiDAR technology to collect significant data on America, especially regarding environmental mapping. The second law proposal, announced on Sept. 23 by the Department of Commerce, proposed a ban on connected vehicles, mainly from China, citing a national security threat. The concern is that a foreign adversary could remotely control or use these vehicles for surveillance and data collection. The proposal is to ban vehicle connectivity systems' hardware, VCS, and ADS or automated driving systems with some exceptions and time-stamped enforcement. In the notice of proposed rulemaking (NPRM), the Department of Commerce's Bureau of Industry and Security (BiS) looked at the LIDAR but decided that ADS controls the car and sensors; hence, LIDAR was excluded from the proposal. I cannot understand how LIDAR in the infrastructure in an immobility state creates more risk than one being mobile just because the car's automated system controls limit that risk. The CEO of Ouster, Angus Pacala, points out in this article that LiDAR sensors alone are a clear risk. “LiDAR sensors are inherently networked devices, capturing and transmitting a continuous stream of data, typically ranging from 100 to 1,000 megabytes per second, according to Ouster. The LiDAR data is transmitted via an ethernet port to a system or device, often connected to the internet.” Why would the U.S. government be concerned with DoT and LiDAR use in the U.S. military but not about using LiDAR in consumer cars and trucks? I assume the sensors will act and behave as expected because the software controls it and is not Chinese. But that would be the case for the military and infrastructure as well. Still, in case of misbehavior, they will be considered malfunctioning, and since the redundancy of cameras and radar surrounds them, they will be rendered unreliable. According to BiS, hundreds of millions of cars with Chinese parts, including LiDAR, on U.S. roads would be less risky than 150K intersections equipped with it or hundreds or some thousands of military vehicles. It appears democratic institutions, unlike centralized governments, often do not talk to each other to make better sense and coordinate. A proposal has a feedback period, so I hope LiDAR experts eliminate the gap in logic here. The purpose of this article is not to resolve the apparent logical conflicts in the proposals but to examine their implications. The ban excluding LiDAR poses a significant threat to Western-based companies focused on the consumer auto ADAS and autonomous trucking industries in the U.S. and globally. However, the bill managing DoT actions particularly favors Ouster. The Negative Impact The entry of Chinese corporations into various industries has often resulted in significant upheaval, as seen in the solar industry. In this industry, the West faced near destruction except for a single company with unique technology that was difficult to infringe upon—First Solar ( FSLR . This company was ultimately saved by tariffs some years ago, but according to the CEO, Mark Widmar, the thread is not over, and the industry's struggles continue. In LiDAR, Hesai and Robosense are already selling thousands of sensors for production vehicles in China, with Hesai notably securing deals with Western OEMs. For the six months of 2024, Robosense sold 243,400 sensors, 8,900 for non-ADAS applications. Hesai sold 133,235 ADAS sensors and 12,392 non-ADAS applications for the same period . The only Western company providing a volume of sensors for sale is Ouster, which sold 8,000 sensors in the first half of 2024. No other company discloses this metric as it is currently negligible. As a result, the proposed ban could facilitate Hesai's global expansion as competitors like Luminar ( LAZR ), Innoviz ( INVZ ), and Microvision ( MVIS ) struggle to match the technological advancements and are outrun financially. Luminar, for instance, is grappling with financial challenges even though it has a production deal with Volvo, which is partially owned by the Chinese company Geely. While Luminar currently is the only Western company with production deals in motion, its long-term success remains uncertain, and compared to cost and mass production, it pales to Chinese competitors. Innoviz and Microvision lack the capacity, financial strength, and technology to compete effectively with Chinese firms. At best, the sensors are the same hybrid technology combining polygon mirrors with scanning lasers or MEMS mirrors widely offered by Chinese companies. To compare scale, Hesai operates with 1000 staff in the R&D department, which is more significant than the total human capital of all Western companies combined. The Positive Impact Contrary to others' conditions, Ouster could benefit from the U.S. Department of Transportation's infrastructure bill. With its software platform, Blue City's established sensor installations, and visibility in White House discussions , Ouster appears well-positioned to take advantage of this bill when it becomes law, including new certification for safe traffic control. Ouster sensors are best suited to fulfill the mandate required by DoT. Moreover, Ouster may differentiate itself through the digital flash sensor D.F., although Chinese companies also offer similar technology, likely based on products from Ibeo (now owned by Microvision). While Ouster has moved away from that architecture, the D.F. is not yet available, and its future remains uncertain. However, DF is the only technology the Chinese have not shown, and Ouster made it very clear to guard it with international and domestic patents. Given these developments, Ouster remains a compelling investment opportunity, especially after a massive selloff following Q2 results. I analyzed the second-quarter results in my article published in August. The company's share price has been unable to recover from the selloff, which has recently intensified. My take on Ouster has not changed. In light of these recent events and my already established concern over the LiDAR companies that solely dedicated themselves to consumer auto ADAS, the thesis of investment in Ouster got an additional boost and became a confirmation of the only choice of investment. While no outcome can be guaranteed, Ouster appears to be better prepared than others to survive an intervention from the government on the scene. In my view, Ouster has a real potential to emerge as the "First Solar" of the LiDAR industry, operating as a sole American entity alongside Chinese competitors across various verticals and potentially making inroads into the consumer automotive sector while already having a presence in mid-range and short-range sensors for automated trucking. I rate Ouster as a strong buy with a target price of $23 per share based on financial delivery of $156M in revenue, with a gross margin of 37.5% in the 2025 fiscal year. While I hope legislators recognize the seriousness of this situation and include LiDAR in the proposed ban to protect the domestic industry, there is undeniable turmoil ahead. I plan to cover the Q3 results in November and review Mobileye's ( MBLY ) decision to move away from the development of LiDAR on the technology involved. Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks. This article was written by Robert Dydo 1.47K Follower s Follow In the past, I evaluated solar manufacturers and renewable yieldcos based on their operational, financial, and growth factors. Currently, I am interested in lidar companies' technology, adoption, and revenue growth.. Show more Show more Analyst's Disclosure: I/we have a beneficial long position in the shares of OUST either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body. Like Share Print Comment Recommended For You Comments Recommended For You
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