Chinese internet giants are expected to capture a significant share of AI profits within two to three years, provided that restrictions on chip and infrastructure supplies ease, according to SCMP, citing UBS analysts.
Currently, the primary margins in AI are being taken by hardware and related service providers due to capacity shortages, said Kenneth Fong, head of China internet sector research at UBS, during an event in Shenzhen.
If chip and infrastructure restrictions are relaxed, “pricing power” could shift to internet platforms with large audiences, data, and distribution channels, Fong believes. He noted that a monetization phase could return for such companies in China.
Market Concerns Over Internet Giants’ Spending
The forecast comes amid a sharp increase in AI spending by Tencent and Alibaba. The latter nearly tripled its capital expenditures in the second quarter to 52.8 billion yuan ($7.86 billion). For the first time, the company’s free cash flow turned negative, amounting to minus 13.8 billion yuan ($2.05 billion).
For the quarter ending in June, Alibaba reported a free cash flow outflow of 44.7 billion yuan ($6.65 billion), more than double the previous year. The company’s quarterly expenses reached 67.7 billion yuan ($10.07 billion).
UBS notes that the market is wary of such investments amid a slowdown in the macro environment in the second half of the year and pressure on short-term profits. Fong estimated annual AI spending by Chinese tech companies to be equivalent to one to one and a half years of cash flow.
Focus on Efficiency
Even if returns are weaker than expected, these expenses are necessary to remain competitive, he added. UBS estimated that the combined AI spending of Chinese tech companies is about one-seventh of that of major American competitors.
The bank attributed the gap to limited access to advanced foreign chips and smaller business scale. In the near term, this maintains an advantage for hardware and infrastructure.
UBS highlighted cost efficiency as a strength of the Chinese AI sector. UBS Securities analyst Xiong Wei estimated the cost of training Chinese models to be less than 10% of global leaders’ levels. He stated that the average API price for major Chinese models is less than 20% of international competitors’ levels.
According to UBS, in the medium to long term, the key factor will be the dominance of platforms with large audiences, data, and service distribution channels, rather than the volume of capital expenditures.
In August, Alibaba raised $10.2 billion for AI development through the issuance of 710 million new shares.
