According to UBS analysts, Chinese internet giants are poised to capture a larger share of artificial intelligence profits within the next two to three years, contingent on the easing of restrictions on chip and infrastructure supplies, as reported by SCMP.
Currently, the primary margins in AI are held by hardware providers and related services due to a capacity shortage, noted Kenneth Fong, head of Chinese internet sector research at UBS, during an event in Shenzhen.
If chip and infrastructure restrictions are relaxed, Fong believes that "pricing power" could shift to internet platforms with large user bases, data, and distribution channels, restoring a phase of monetization for such companies in China.
Concerns Over Internet Giants' Spending
This forecast comes amid significant increases in AI spending by Tencent and Alibaba. Alibaba nearly tripled its capital expenditures in the second quarter to 52.8 billion yuan ($7.86 billion). The company reported a negative free cash flow for the first time, amounting to -13.8 billion yuan ($2.05 billion).
For the quarter ending in June, Alibaba experienced a free cash flow outflow of 44.7 billion yuan ($6.65 billion), more than double the figure from the previous year. Its quarterly expenditures reached 67.7 billion yuan ($10.07 billion).
UBS highlights that the market is warily observing these investments in light of a slowing macroeconomic environment in the latter half of the year and pressures on short-term profits. Fong estimated the annual AI spending of Chinese tech companies to be equivalent to their cash flow over one to one and a half years.
Focus on Efficiency
Even if the returns are weaker than anticipated, these expenses are necessary to remain competitive, he added. UBS assessed the combined AI expenditures of Chinese tech firms to be roughly one-seventh of those of their large American counterparts.
This gap is attributed to limited access to advanced foreign chips and smaller business scales, which currently preserves the advantage for hardware and infrastructure.
UBS noted that a strong point of the Chinese AI sector is its cost efficiency. UBS Securities analyst Xiong Wei estimated the cost of training Chinese models to be less than 10% of that of global leaders. He mentioned that the average price of APIs for major Chinese models is under 20% of that of international competitors.
According to UBS, in the medium to long term, the key factor will not be the level of capital expenditures, but rather the dominance of platforms with large audiences, data, and service distribution channels.
In August, it was reported that Alibaba raised $10.2 billion to develop its AI initiatives through the issuance of 710 million new shares.