China’s fascination with generative artificial intelligence has sparked a flurry of product announcements from both startups and tech giants on an almost daily basis. However, investors are now warning of an imminent shakeout as cost and profit pressures mount.
The initial excitement in China was ignited by the success of OpenAI’s ChatGPT nearly a year ago. This has led to what a senior Tencent executive referred to this month as the “war of a hundred models.” Tech giants such as Baidu, Alibaba, and Huawei, along with many others, have been actively promoting their AI offerings in this competitive landscape.
As of now, China boasts at least 130 large language models (LLMs), constituting 40% of the global total and trailing just behind the United States’ 50% share, according to brokerage CLSA. Additionally, companies have also unveiled numerous “industry-specific LLMs” that are integrated with their core models.
However, investors and analysts are cautioning that most of these AI models are yet to discover viable business models, share striking similarities with one another, and are grappling with soaring operational costs.
Tensions between Beijing and Washington have also cast a shadow over the sector. The hesitance of U.S. dollar funds to invest in early-stage AI projects and difficulties in acquiring AI chips from manufacturers like Nvidia are beginning to impact the industry.
Esme Pau, Head of China Internet and Digital Asset Research at Macquarie Group, states, “Only those with the strongest capabilities will survive.” She predicts that consolidation and a price war will ensue as these AI players compete for users. Pau also notes that several leading companies have already signaled their intent to engage in a price war to gain a larger market share, mirroring the strategies employed by cloud service providers like Alibaba and Tencent.
Pau further predicts, “In the next six to twelve months, LLMs with lower capacities will gradually be eliminated due to chip restrictions, high costs, and intensifying competition.”
Founders and incumbents in the AI landscape have differing opinions on which firms will stand the test of time. Yuan Hongwei, Chair of Shenzhen-based venture capital firm Z&Y Capital, believes that only two to three general-purpose LLMs will ultimately dominate the market. This perspective has influenced her firm’s investment decisions, prioritizing experienced founders.
Z&Y Capital, renowned for past investments in companies like drone maker DJI and autonomous driving startup Pony.ai, has recently backed Baichuan Intelligence. This five-month-old firm aims to build an open-source AI model to rival Meta Platform’s Llama 2. Wang Xiaochuan, the founder of China’s second-largest internet search engine, Sogou Inc., initiated Baichuan Intelligence. The company received Beijing’s approval to release a public chatbot in late August and is set to secure a second round of funding that will value it at $1 billion.
Yuan expressed her optimism by stating, “We see an opportunity here. Wang himself is leading this project. Given his understanding of the digital business, his success with Sogou, and how he commands attention industry-wide, we think it is our best bet.”
Notably, several other prominent entrepreneurs and tech executives in China are at the helm of new AI startups, including former Google China Chief Kai-Fu Lee and Yan Juejie, a former vice-president of SenseTime.
Meanwhile, some industry experts believe that China’s largest tech companies, Alibaba, Tencent, and Baidu, are in the best position to succeed. These giants possess extensive user bases and offer a wide range of services, allowing them to seamlessly integrate generative AI services for their cloud users.
Tony Tung, Managing Director at Gobi Partners GBA, stated, “The incumbent tech giants have inherited an unfair advantage of a majority of low-hanging fruit business scenarios from their established ecosystems.”
The competitive landscape of China’s AI industry is undergoing significant shifts, and only time will reveal which companies will emerge as the dominant forces in this dynamic arena.