AI in China: Baidu and Its Shrouded Horizons

Baidu is the dominant Chinese company offering web services, with its eponymous search engine as its primary service. It tops the search engine charts in China and stands fifth globally, boasting a 0.94% market share. Since August 2022, Baidu's stock has risen by roughly 13%. This is an impressive performance, especially when the Hang Seng Tech Index, which tracks tech companies, has declined by 3% over the same period.

Baidu is often highlighted as one of China's most visionary tech companies, primarily due to its pioneering efforts in creating the nation's first AI service. This initiative, bearing similarities to the U.S.'s ChatGPT, is named Ernie Bot, or more formally, “Enhanced Representation through Knowledge Integration.” It's powered by the extensive language model “Ernie 3.0-Titan.” Initiated in 2019, this tool, designed for AI chatbots, is a testament to Baidu's innovative prowess.

However, in recent times, there's been increasing feedback from industry experts pointing to a growing disillusionment among its users. A notable indication of this sentiment is the lukewarm adoption rate, which seems to be hindering Ernie Bot's widespread success. Unless there's a surge in demand or significant improvements, the trajectory of Baidu's AI segment remains unclear. 

Investors, who were banking on Baidu's persistent growth, might need to recalibrate their expectations. The tech titan is on the brink of announcing its second-quarter financial figures, and market watchers are anticipating a potential slowdown in the uptick of its adjusted net earnings.

Notably, several major brokers, such as Citigroup Inc., China International Capital Corp., and Daiwa Capital Markets Hong Kong Ltd., have adjusted their profit expectations for Baidu downwards. This sentiment is further substantiated by the current put-to-call ratio, indicating a prevailing bearish sentiment among Baidu's shareholders. For clarity, a “put” option allows the holder the right to sell an asset at a specified price, while a “call” grants the right to purchase it at a predetermined rate. The prevailing market trend reveals a tilt, with traders increasingly favoring “puts” over “calls”, suggesting mounting skepticism. This growing pessimism is also reflected in the volatility of the stock prices of this Chinese search giant.

Kai Wang, an analyst at Morningstar Inc., points out that the lowered expectations concerning Baidu could extend throughout 2023. This downturn can be linked to Baidu's stunted revenue growth from its AI-cloud sector during this year's third quarter. This deceleration results from hold-ups in rolling out local smart transport projects. The weakening economy is pressing officials to tighten their fiscal belts, attempting to navigate the challenging economic climate. Put simply, Baidu and its AI ventures are getting squeezed by unfavorable macroeconomic currents. Yet, Goldman Sachs data suggests that Baidu continues to be the front-runner among Chinese internet enterprises, even though its concentrated AI pursuits haven't yielded substantial earnings so far.

Baidu is viewed as being in the lead for generative AI because of its more visible investments over the years. But the development of generative AI applications is still at an early stage,

commented Vey-Sern Ling, the Managing Director of Union Bancaire Privee, Switzerland.

However, even with the apparent plateau in the appetite for Chinese AI frameworks, the industry is poised to face a surging tide of competition soon. This past August, Tencent Holdings, one of the globe's and China's premier venture firms, declared their intent to craft the nation's premier AI model. Concurrently, Alibaba Group has already dived into the integration of AI, mirroring ChatGPT, into its suite of conference tools and messaging platforms. Importantly, Baidu's shares have seen a more rapid ascent this year compared to Tencent and Alibaba. But who will emerge as the dominant player by the close of the third quarter and throughout 2023 remains to be seen.