2023-06-29 16:06:41 ET
Summary
- Baidu and many of its peers have looked like a million dollars in the last two years from a valuation perspective, but the market performance has been lackluster.
- Baidu stock has climbed almost 20% this year aided by its generative AI plans and the improving regulatory outlook.
- Baidu's AI ambitions go back more than a decade.
- Baidu may have a regulatory advantage that is not enjoyed by its closest rivals.
So far, 2023 has been a good year for many Chinese stocks listed on U.S. exchanges. Baidu, Inc. ( BIDU ), after suffering from China’s regulatory crackdown on tech companies, has made a strong comeback this year with its stock rising 19% YTD aided by the regulatory improvements and the reopening of the Chinese economy. Baidu’s better market performance compared to Alibaba Group Holding Limited ( BABA ) this year largely comes down to the company's progress with its generative AI efforts. Baidu and many of its peers have looked like a million dollars in the last two years from a valuation perspective, but Mr. Market has not been willing to reward these Chinese Internet companies because of the uncertainties surrounding the Chinese government’s policies and the deteriorating relationship between the U.S. and China. This analysis aims to dive deep into Baidu’s AI strategy to understand whether the company is well-positioned to thrive as an AI-oriented tech giant in the future.
Baidu Enjoys First-Mover Advantages In China
The rise of AI caught the attention of investors late last year with the launch of ChatGPT. However, behind the scenes, many global companies have invested in AI technologies for well over a decade. Baidu is one such company that has been aggressively investing in AI. The company has been investing in AI since 2010. Even compared to American companies, Baidu seems to have had a head start when it comes to AI plans.
Exhibit 1: AI-related terms used in earnings calls from 2010 to 2018
Not just Alphabet Inc. ( GOOG ), Baidu was way ahead of its Chinese tech counterparts in terms of recognizing the importance of AI as well.
Exhibit 2: AI-related terms used by Chinese companies during earnings calls
Baidu’s strategic investments going back more than a decade have helped the company develop Baidu Brain, a core AI technology engine that supports the development of new AI use cases. The company’s AI infrastructure consists of deep learning capabilities, natural language processing, augmented reality, and an open AI platform. Ernie, Baidu’s now popular chatbot, was the first AI model in the world to score more than 90 marks on the GLUE benchmark, which is widely used to evaluate the ability of an AI model to surpass human performance. Baidu was also one of the first companies in both the United States and China to receive government approval to develop driverless technologies, which is a testament to how the company has made steady progress with its AI investments in recent years.
Baidu’s AI strategy goes beyond investing in new products and services. PaddlePaddle, a developer community launched by Baidu, now has over four million users, and this platform has emerged as a network of highly skilled AI developers who are researching new product ideas. Baidu’s AI capabilities are likely to get a boost from the growth of this network as it allows the company to closely monitor real-world applications developed by the community to make strategic investment decisions that could unlock value in the long term.
China’s AI Supremacy Is Tilting In Baidu’s Favor
Yesterday, Baidu claimed that Ernie 3.5 surpassed ChatGPT on several measures. I will take such claims with a grain of salt considering that Baidu CEO Robin Li himself claimed in an interview with Chinese news outlet 36Kr in March that Ernie was at least two months behind ChatGPT. In the foreseeable future, I believe ChatGPT will continue to dominate the global generative AI landscape. This, however, does not mean that I am ready to ignore the progress Chinese tech companies have made in the recent past.
A series of tests conducted by Xinhua Institute, a Chinese think tank, concluded on June 12 that Baidu’s Ernie outperformed Alibaba’s Tongyi Qianwen, iFlytek’s SparkDesk, and SenseTime’s SenseChat. Consequently, Xinhua Institute ranked Ernie as the best-performing generative AI chatbot in China. However, the test results conclusively showed that ChatGPT-3.5 and ChatGPT-4 were still ahead of Ernie and all other large language models developed by Chinese tech companies.
Baidu Continues To Invest In AI
During the first-quarter earnings call , Baidu CEO Robin Li emphasized the company’s continued commitment to investing in its AI capabilities. The company is trying to maximize the opportunities available for not just improving its search engine capabilities with AI but also the cloud business. Over the last few years, Baidu has invested aggressively in startups focused on AI and has completed several acquisitions to fuel its growth in the AI field. Some of these acquisitions include Raven Tech which specializes in AI voice technology, xPerception which specializes in 3D mapping, and Kitt.ai which specializes in natural language processing.
Baidu continues to invest in its autonomous driving arm Apollo, and the company has already secured the necessary licenses in Beijing to operate a robotaxi service. A national rollout of this platform is likely in the coming years if the company showcases its ability to meet the safety standards required by regulators and passengers.
In May, Baidu launched a $145 million venture capital fund to invest in startups focused on creating content using AI technology. The launch of this fund highlights the company’s commitment to focusing on a future powered by AI.
Baidu’s Regulatory Advantage
The growth of AI does not come without caveats. The rise of AI since the launch of ChatGPT has already sparked concerns among policymakers, and China, not surprisingly, will not hesitate to take bold actions to nullify the threats posed by AI technology to the Communist Party or its governing principles. On April 11, the Cyberspace Administration of China published draft rules that need to be adhered to when using generative AI to create content. As stated in this document, the objective of these rules is to:
Reflect the core values of socialism, and must not contain subversion of state power, overthrow of the socialist system, incitement to split the country.
As expected, any content that promotes terrorism, extremism, and discrimination will be penalized. What is important to note is that generative AI service providers will be held accountable for implementing these rules. In other words, if a user creates any type of prohibited content with the use of generative AI technology, the service provider will have to face the consequences in addition to any punishment that may be given to the offender. These rules, therefore, require tech companies to take every precaution possible to avoid being penalized. This is where I think Baidu will have a massive advantage over its closest rivals.
Baidu operates the most popular search engine platform in China, and the company has closely worked with regulators since 2000 to develop a framework to censor inappropriate content while offering its users a high-quality experience. The company has collected invaluable data from its search engine operations that can be used to train its algorithms to avoid potential conflicts with regulators. This expertise – although intangible – will play a massive role in helping Baidu emerge as the top generative AI solutions provider in China, in my opinion.
Takeaway
Baidu is leading the charge in China’s AI revolution. The company, aided by first-mover advantages, strategic investments spanning more than a decade, and expertise in dealing with regulatory hurdles, is well-positioned to make the most of the growing popularity of AI technology. However, before reaching an investment decision, investors will have to get a deeper understanding of the regulatory landscape for tech companies in China, the outlook for China’s Internet sector, and Baidu’s current valuation. Stay tuned for my next Baidu article for a discussion of these factors.
For further details see:
Baidu And AI: History, Investments, And Regulation