China Is in the AI Game. How Tech Giants Will Have to Play by Beijing’s Rules.
What will artificial intelligence with Chinese characteristics look like? The past month or so has given us a better idea.
E-commerce giant Alibaba Group Holding (ticker: BABA) and facial-recognition pioneer SenseTime Group (0020.Hong Kong) joined search champion Baidu (BIDU) in releasing generative AI products, albeit in limited distribution. The Beijing government laid out draft regulations giving AI developers a green light, so long as their training data sets are “truthful, accurate, and objective”—quite a conundrum for the industry to bear in mind.
Investors aren’t looking for a Chinese equivalent to OpenAI, the proto-garage company that upended the U.S. tech establishment by unveiling ChatGPT half a year ago. In China, the establishment wins.
Retail investors have gone wild for domestically listed stocks with a whiff of AI, such as Cambricon Technologies (688256.China), whose shares have more than tripled this year.
The pros from abroad are staying away. “The current leading companies are the ones who can afford to be successful in AI,” says Sharukh Malik, a portfolio manager for Asian equities at Guinness Asset Management.
Markets were underwhelmed by Baidu’s Ernie bot. The company’s shares have slumped 6% since its March 6 release. Baidu nevertheless retains some first-mover advantage, says Charlie Chai, vice head of research at 86 Research in Shanghai. “Baidu has been investing in AI for the past decade, with hundreds of Ph.Ds,” he says.
Its in-house Kunlun semiconductors are also the best among China’s internet elite, which could be important as the U.S. squeezes chip exports to China.
The competition looks stiff, however. Tencent Holdings (700.Hong Kong), which dominates Chinese social media and online gaming, and TikTok parent ByteDance, are expected in the artificial intelligence ring soon, leveraging their enormous data troves and customer bases.
“All the first-tier players could end up as winners in their own focus area,” says Vivian Lin Thurston, an emerging markets portfolio manager at William Blair.
They’ll have to deal with the government first. Beijing’s AI push is a sort of ad hoc rehabilitation for China’s Big Tech, which was in the regulatory doghouse for the past two years. But the industry will have to leap forward Beijing’s way.
“The U.S. model is to learn from all the data sets, so the system can argue one way or another,” says Dylan Patel, chief analyst at SemiAnalysis.
That won’t be the Chinese model. The new regs make technology companies potentially liable if their bots produce answers that officials consider wrong, Chai says. “This will slow down releases as companies very carefully test their products,” he adds. No kidding.
Would-be Chinese AI champions need to keep an eye on Washington, too.
“The semis challenge is very real,” say AB Bernstein analysts, led by Robin Zhu. Advanced AI systems largely depend on microchips from a single U.S. designer, Nvidia (NVDA). Washington banned sales of that company’s A100 chip to China last year. Nvidia substituted the A800, which is one-third slower.
All these obstacles will slow, but not stop, Chinese companies’ march into AI. Patel estimates they are two years, at most, off OpenAI’s pace. “Baidu’s product is not as good as ChatGPT, but it’s pretty good,” he says.
Two years is too long, in tech time, to place bets on any horse race between the Chinese giants, Guinness’ Malik says. “I would give it a year to see who’s the most competent,” he says.
But the training laps will be worth watching. b