Written by 5:40 pm AI, Discussions

### US Dominance Evident as Baidu’s AI Share Plummets

The local tech sector may struggle to perform as long as geopolitical uncertainty remains high

Roula Khalaf, the Editor of the FT, shares her preferred articles in the weekly newsletter.

In this edition, the spotlight falls on China’s equivalent to ChatGPT, Ernie Bot, renowned for its ability to tackle complex user queries. For investors, Ernie Bot signifies a solution to the decelerating growth that Baidu, its creator, has encountered. However, a sharp decline in the stock value of the Chinese search behemoth on Monday underscores the fragility of the domestic tech industry.

Baidu witnessed a significant 12% drop, the largest in over a year, following a report linking its Ernie artificial intelligence platform to crucial Chinese military research. The report suggested that an institute associated with a division of the People’s Liberation Army, responsible for cyberwarfare, had tested its AI system on Ernie. Baidu refuted any ties or collaborations with the institute, asserting ignorance of the research project.

Despite the disavowal, the substantial sell-off highlights two primary concerns. Firstly, the pivotal role that Baidu’s chatbot plays in its future revenue streams. Secondly, the extent to which its earnings projections are susceptible to U.S. influence.

Recent months have seen Baidu emerge as China’s premier AI innovator with the introduction of Ernie Bot. Positioned as China’s initial response to OpenAI’s ChatGPT, this chatbot grants Baidu a competitive edge over formidable tech counterparts like Tencent.

By the conclusion of 2023, Ernie Bot had amassed over 100 million users since its public debut in August. Baidu’s sales for the launch quarter surpassed expectations, with anticipated growth in advertising revenue from the chatbot in the final quarter of the previous year.

This presents a rare opportunity for Baidu to stage a recovery following years of intense competition for advertising revenue. The dominance of China’s prominent short-video platforms has dented sales in Baidu’s core sector, online marketing, which has been experiencing decelerated growth for over a decade.

The strong demand for Ernie Bot and associated services is poised to bolster Baidu’s other ventures, including cloud services and smart vehicles.

However, this growth trajectory heavily hinges on funding and access to cutting-edge technology. The U.S. has already imposed investment restrictions in certain segments of China’s high-tech industries, including AI. The more significant setback arises from the impediments in accessing chips. Stringent export regulations on advanced chips essential for AI advancements, along with the requisite manufacturing equipment, pose formidable challenges. The Monday report reignited apprehensions regarding potential escalations in sanctions from Washington.

Over the past year, Baidu’s shares have plummeted by a quarter and are currently trading at a forward earnings multiple of merely 10 times, less than half the valuation of international counterparts like Google. The prospects of China’s AI aspirants may encounter hurdles as long as geopolitical uncertainties persist.

Lex, the FT’s succinct daily investment column, features expert analysts from four major financial hubs offering astute perspectives on market trends and corporate developments. Explore more insights [ppp1:here].

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Tags: , Last modified: March 13, 2024
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