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From state to BAT, China backs startups for global AI dominance

China · Jul 12, 2018 · By Wang Xiao'e

Finance, automobile, retail and healthcare seen to lead China’s advances and gains in AI, as part of a RMB 10 trillion economy by 2030

The world’s most populous nation is in the race to also become its “smartest.” 

A huge population; top-notch IT talent; diverse industries; and a thriving mix of e-commerce, mobile payments and social networks all feed into a massive pool of data for China to become an AI heavyweight. Such deep resources make it easy for China-based AI companies to invent and test new concepts and products.

China expects innovation in artificial intelligence to transform local industries worth a total of RMB 10 trillion (US$1.5 trillion) by 2030, according to the 2017 report China AI Innovation and Application. Among them, finance, automobile, retail and healthcare would lead the growth, enjoying forecast profits of around RMB 600 billion, 500 billion, 420 billion and 400 billion, respectively, through reduced costs and increased benefits from AI adoption.

Such prospects are reflected in the levels of investment achieved so far in 2018, a record-breaking year. In May, Ubtech raked in US$820 million in Series C funding led by Tencent. Ubtech, with a valuation of US$5 billion, is now the highest-valued AI startup in the world, breaking the record set by another Chinese firm SenseTime (worth US$4.5 billion) – just a month prior.  

President Xi Jinping has made ending poverty in China by 2020 one of the key government goals, and tech has proven to be a job creator. While many are decrying the jobs AI will likely take away – e.g., service positions in the food and retail industries – it has yet to be seen what jobs AI can create, directly or indirectly through boosting the economy.

PWC has forecast AI will lift global GDP by about US$15.7 trillion in 2030, or 14% from 2017. The consultancy also expects China to lead the world in productivity gains from AI, adding 26% to GDP in 2030.

BAT leading the way

Domestic tech giants like Baidu, Alibaba, and Tencent (collectively known as BAT) have been accelerating AI deployment in their business empires. Before Tencent invested in Ubtech, e-commerce giant Alibaba injected billions of renminbi into facial recognition startups SenseTime and Megvii.

“Our business at Alibaba is already seeing discernible benefits from our investments in AI, and we are committed to further spending," said Joe Tsai, Executive Vice Chairman of Alibaba Group. In 2017, Baidu announced the creation of an RMB 10 billion fund to invest in autonomous driving projects over the coming three years.

According to a report by Tencent Research Institute, Chinese AI startups are primarily focused on computer vision and graphics (146 companies), intelligent robots (125 companies) and natural language processing (92 companies). In total, these companies make up 55% of all Chinese AI startups, 80% of which are housed in Beijing, Shanghai and Shenzhen. 

Global leadership won’t come easy

Despite the AI boom, Kai-Fu Lee, investor and founder of Sinovation Ventures, has warned that, by the end of 2018, a number of AI startups might end up bankrupt or run out of money before they have the chance to produce products worthy of commercial application.

Especially for AI startups, money plays a critical role in the startup’s ability to survive and thrive because it takes a great deal of time, effort and investment to achieve a real technological breakthrough. If an AI startup cannot prove the value of its innovations to enough users quickly, it could fail to secure future funding and, ultimately, go bankrupt.

A good example is AI-based service robots. The majority of robot-themed restaurants closed within five years, after the first robot restaurant opened in 2010 in Jinan, Shandong province. Most service robots failed to deliver satisfactory service to customers. The robots were touted as an advanced alternative to save on labor costs, but could not match the quality of service offered by human workers.

Another obstacle to the growth of the AI market is a dearth of appropriately skilled workers. China’s state media’s People’s Daily reported that the country is facing a shortage of 5 million AI talents. The increasing demand and lack of supply has sent AI engineer salaries skyrocketing in China, a heavy burden for early-stage firms.

The government is all in

The Chinese government has taken notice of these issues. AI made its way into China’s 2017 Government Work Report for the first time ever, a sign of the importance the government has attached to AI development. Meanwhile, the July 2017 Next-generation AI Development Plan set the goal of gaining global AI supremacy and building a domestic AI industry worth at least RMB 1 trillion by 2030.

Since then, capital and policy support have come in an endless stream from both central and local governments. For example, in January 2018, Beijing announced plans to spend RMB 13.8 billion on a giant AI industrial park in its suburban Mentougou district. The park is expected to house around 400 companies with an annual output of RMB 50 billion. Companies at the industrial park will work with renowned universities, research institutes and leading enterprises like BAT to build national AI labs, institutions and technical platforms.

In addition, the government has invested heavily in private enterprises to advance AI research. State-backed funds have supported an increasing number of AI startups, including AI neural network chipmaker Cambricon Technologies and computer vision firm SenseTime, as the government seeks to achieve breakthroughs in those fields by 2020.

The Ministry of Education has also launched the world’s largest AI talent training program, set to train at least 100 teachers and 600 students graduating yearly. This initiative, while presently a drop in the pond, could eventually go a long way toward bridging the talent gap in the Chinese AI industry.

Disrupting traditional industries

The current advances are outstanding, but China’s greatest gains from AI would come from revolutionizing its traditional industries. While delving into existing verticals, AI startups could explore new opportunities as well. For instance, there are still no dominant AI players working in the industrial production and agricultural sectors.

According to a McKinsey survey, AI is not yet a strategic priority for more than 40% of companies in traditional industries in China. Startups might find points of market entry there.

Edited by Wang Xinlei