UBS predicts Chinese tech giants will increase AI profits within 2-3 years if chip restrictions ease, despite current financial pressures.
UBS analysts forecast that Chinese tech giants are set to significantly increase their share of artificial intelligence profits in the next two to three years, provided that restrictions on chip and infrastructure supplies are eased. Kenneth Fong, head of Chinese internet sector research at UBS, highlighted this potential during a recent event in Shenzhen.
Currently, the majority of AI profits are concentrated among hardware suppliers and related services, driven by a shortage of capacity. Fong suggested that if supply constraints are lifted, internet platforms with extensive user bases, data, and distribution capabilities could gain enhanced pricing power, leading to improved monetization opportunities for these companies in China.
Increased Spending by Tech Giants
This optimistic outlook coincides with a surge in AI-related expenditures from major players like Tencent and Alibaba. Notably, Alibaba nearly tripled its capital expenditures in the second quarter, reaching 52.8 billion yuan ($7.86 billion), and reported a negative free cash flow of -13.8 billion yuan ($2.05 billion) for the first time. The company's cash flow outflow for the quarter ending in June hit 44.7 billion yuan ($6.65 billion), more than double the previous year's figure.
UBS expresses concern about these heavy investments amid a slowing macroeconomic environment and pressure on short-term profits. Fong noted that the annual AI spending of Chinese tech firms is roughly equivalent to their cash flow over the span of one to one and a half years.
Efficiency and Competitive Edge
Despite potentially lower returns, Fong emphasized that these expenditures are crucial for remaining competitive. UBS estimates that the total AI spending of Chinese tech companies is about one-seventh of that of their larger American counterparts, partly due to limited access to advanced foreign chips and smaller operational scales, which currently favors hardware and infrastructure providers.
Nonetheless, the Chinese AI sector showcases strong cost efficiency. UBS Securities analyst Xiong Wei pointed out that the cost of training AI models in China is less than 10% of that of leading global players, with the average price of APIs for major Chinese models being under 20% of international competitors' prices. UBS asserts that in the medium to long term, the key determinant of success will be the dominance of platforms with substantial audiences, data, and distribution capabilities.
In August, it was reported that Alibaba had raised $10.2 billion to further its AI initiatives through the issuance of 710 million new shares.
