China’s once-hot
artificial intelligence sector is in a funk: spurned by investors,
failing to deliver on cutting-edge technology and struggling to
generate returns. It is a far cry from last year, when Beijing issued
plans to lead the world in AI by 2030, venture capital investors were
pumping up valuations and China’s big tech groups peppered their
earnings callsliberallywiththeirAIambitions. Disillusionment with the
progress of AI is not unique to China. In the US,IBM laid off
engineers at its flagship AI IBM Watson in the summer. Earlier Gary
Marcus, a psychology professor at New York University and longtime
sceptic, lamented that “six decades into the history of AI, our
bots do little more than play music, sweep floors and bid on
advertisements”. But in China, where the hype — and funding —
went into overdrive last year, the reversal has cut more deeply.
China last year overtook the US in terms of private sector
investment, pulling in just shy of $5bn, but the $1.6bn invested in
the first six months of this year is less than one-third of US
levels, according to ABIResearch. “[We’re] at a juncture where
the generic use cases have been addressed,” said Lian Jye Su,
principle analyst at the consultancy. “And building generic general
purpose chatbots is much easier than specific algorithms for
industries like banking, construction, or mining because you need
industry knowledge andbuy-infromtheindustry.” That inflection point
has combined withashortageofcomputingcapacityto power algorithms and
machine learning. What is left is familiar ground for
techinvestors:inflatedvaluations,overhyped pitches and threadbare
monetisationmodels. “We feel it’s a little bit over-invested,”
said Nisa Leung, managing partner at Qiming Venture Partners, a big
investor in China tech. “Many companies are unable to ramp up their
monetisation or they are over-promising their ability.” Venture
capital appetite has waned as valuations have soared, a trend boosted
bythedryingupofrenminbifunding. “If you had five engineers
fromBaidu or Google starting with nothing — that company today may
be valued at $60m to $80m. Nine months ago it would have been $110m,”
said Kai-Fu Lee, who headed Google’s operations in China at and now
runs Sinovation Ventures, a venturecapitalfirm. He anticipated
further falls: “It probablyshouldbebelow$50m.” For ZhenFund, an
early stage investor, the high point for machine learning and other
AI investments was around 2012-15. “I don’t see too many
innovative new AI start-ups at the moment,” said Anna Fang, chief
executive and partner. While many see industry specific applications
as the next big leap forward, there are still opportunities in what
Wei Zhou, who led the investments in China tech at Kleiner Perkins
Caufield & Byers before setting up China Creation Ventures,
called “good enough”technology. “US investors always want to
invest in cutting edge technology, so for them they are always
thinking of advanced AI,” he said. “But for us, we are looking
for these kinds of ‘good enough’ AI to makeadifference.” As a
case in point he cited a recent investment in an online English
learning company that falls short of one-onone conversations with
students but customises sufficient scenarios depending on the
student’s response — wrong answer, correct answer — to make the
userfeeltheyhavearealteacher. “It’snotmagical,”hesaid,butitbrings
the cost of tuition own to under $1, he said. Such applications have
the advantage of addressing China-specific problems, such as a dearth
of Englishlanguage teachers, without requiring cutting edge
technology or significant computingpower.
Thelatterisperhapsthebiggestgapin China’s AI arsenal, and explains
this year’s move by the big Chinese tech companies into hardware.
Baidu, Huawei andAlibaba are among those working on building their
own AI chipsets, and the ecommerce group is also spearheading a drive
into quantum computing. Alibaba wants to have its first AI chips on
the market next year, although there is some scepticism about the
ability of Chinese companies to accelerate developmentinthefield. For
now, the chips driving much of China’s AI are from US manufacturers
such as Qualcomm or Nvidia, and the
softwareisalsolargelyfromoverseas. “The simple fact is most of the
large players in China use the US platforms and software tools such
as TensorFlow,” wrote UBS analysts in a recent report, drawing an
analogy to mobile phones, where popular Chinese apps sit atop
AppleandGoogleoperatingsystems. China has been made starkly aware of
this weakness. A US ban, since rescinded, on selling parts to handset
maker ZTE as punishment for ignoring penalties meted out for
sanction-busting sales to Iran, was a wake-up call for many China
tech players. Building the chips and computing capacity also sits
with Beijing’s aims, outlined in the Made in China 2025 industrial
policy, to enhanceselfsufficiency. But there are large hurdles that
China’s AI sector has yet to jump. Industries need to work together
with tech companies to develop specialised AI, while tech companies
need to increase their processing power and start-ups to
bemorerealistic,saidMrSu. Even then, he warned: “It will be slower.
Returns on investment will be lower.Itwilltakealongertimetorecoup
investments.”
LOUISE LUCAS —
SHENZHEN Pinduoduo, theTencent-backed ecommerce company that reached
a peak valuation of $33bn after listing in July, has been accused of
inflating revenues and falsely trimming losses in a scathing attack
by the Texas-based activist fundBlueOrca. Shanghai-based Pinduoduo
(PDD) is one of 30-odd Chinese tech companies that headed to the
public markets this year. A wave of enthusiasm for the sector boosted
valuations but a subsequent souring means that virtually all are now
belowtheirlistingprices. Shares in Pinduoduo, which were
pricedat$19initsUSinitialpublicoffering, closed on Wednesday slightly
above that level. In a 42-page report, Blue Orca alleged Pinduoduo,
founded by exGoogle engineer Colin Huang, made net losses last year
that were 65 per cent greater than the amount disclosed to US
investors. “PDD notes the Blue Orca report, which contains a series
of incorrect suppositions,” said the company. “PDD is announcing
its quarterly results on Tuesday 20 November and we will
addresstheissuesraisedatthattime.”
BlueOrcaisashort-sellerthatnotesin its report that “we will make
money if thepriceofPDDstockdeclines”. “I have heard Pinduoduo was
cooking its numbers before they were listed,” said one Hong
Kong-based analyst. “I findthisclaimtobeincredible,asyou’ve got
Tencent, Sequoia, and some of the world’s best minds looking at it,
so I’m sure they’ve conducted due diligence for rudimentary
stuff, such as revenue recognition.” The group’s shares rose 11.7
per cent inNasdaqtradingonWednesday. The company has been hit by a
probe and a lawsuit in recent months. In August, China’s market
regulator announced aninvestigationinto reports of counterfeit goods
sold on the site. The same month diaper brand Daddy’s Choice
alleged in a court filing in New York that products sold on the site
infringeditsintellectualproperty. A class-action lawsuit filed in New
York accused the group’s listing prospectus of containing false and
misleading statements, including a failure to
stopmerchantssellingfakegoods. Blue Orca, whose probe into Samsonite
earlier this year ousted the chief executive of the luggage maker,
alleged discrepancies between Pinduoduo’s
regulatoryfilingsintheUSandChina. Numbers reported to China’s State
Administration for Industry and Commerce often conflict with US
regulatory filings, partly — say analysts — due to company
efforts to downplay earnings for tax reasons. But SAIC filings have
also been used to shine a light on inflated numbers — of everything
from earnings to staff—at US-listed Chinese companies that have
subsequently seen theirsharepricestumble. Blue Orca also alleges the
ecommerce company used an undisclosed company related to the chairman
to hire staff — and that its headcount, as stated on the website,
is 4.3 times that stated in its filings to the Securities Exchange
Commission. Additional reporting by Emma Dunkley in HongKong
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