China's Booming AI Industry: What You Need to Know

Shriram Ramanathan, Ph.D., Senior Analyst

China has already grabbed the number one spot in many areas related to the digital economy. It has the world’s largest number of internet users, is the world’s largest purchaser of semiconductor products and industrial robots, and boasts the largest market in mobile payments and Internet of Things (IoT) marketChina has its sights set on being a leader in the realm of artificial intelligence (AI). Not only is China gearing up to lead innovation in fundamental AI technologies but is also rapidly implementing AI in the marketplace. Clearly, this offers significant opportunities as well as poses challenges for Lux clients.

Lux Research - China AI

While the U.S. continues to remain the global leader in AI, China has quickly risen to second place and is ready to make a case for first. China’s rapid growth in AI can be traced back to a sharp rise in publications and patent filings a few years back. Today, China exceeds the US in the number of AI publications and patents filled. However, China’s strong momentum in AI is not limited to patents and R&D. In June of 2018, China had the second largest number of AI companies in the world-nearly half that of the number of startups in the U.S. but significantly more than the U.K. and Canada, which are in the third and fourth place respectively.

Chinese startups raised more total VC dollars at much higher valuations compared to U.S. startups in 2017. A recent Brookings Institute survey found that an equal number of people believe that, in the next 10 years, China is as likely as the U.S. to become the leader in AI.

China is positioned better than most countries in establishing itself as the world leader in AI for several reasons:

1.    China’s rapid rise in artificial intelligence has been largely driven by its government’s ambition to become the global leader in AI. To achieve this goal, the Chinese government has adopted a series of policies to support the development and adoption of AI. The two most important policies include the “Next Generation AI Development Plan,” which established China’s roadmap to achieve global AI leadership by 2030, and the “AI Three-Year Action Plan 2018-2020,” that outlines the country’s 2020 AI development goals. These policies have worked in boosting the innovation and commercialization of AI technologies.  More importantly, the Chinese government has successfully put these policies and associated funding into place by establishing science parks, development zones, and incubators. The government is also playing an active role in providing financial support (at least for the first several years) as well as access to investors and potential partners for startups.

2.    China’s population of more than a billion people, coupled with lax data privacy regulations, offers an unlimited source of data for AI algorithms, which become increasingly better as more data is fed into them.

3.    China’s “big brother” policies (which is also passively accepted by the citizens) have enabled the government to rapidly adopt AI technologies for applications such as traffic management, people tracking, and public security thereby accelerating the commercialization of AI technologies; now, many of these AI technologies have also started percolating other spheres such as social and economic welfare, and education.

4.    More recently, the Chinese government, realizing that data is the new oil, has adopted stringent regulations surrounding export of data and analytics.

Thus, Chinese AI companies have the advantage of being able to reach high levels of fundraising and market adoption much faster than their foreign counterparts as can be seen from examples of SenseTime and eyeSight Mobile Technologies.

Many clients may be experiencing déjà vu; a few decades back, China successfully copied manufacturing technologies from companies in the western hemisphere and, using low-cost labor, was able to manufacture goods at much lower prices compared to western nations. This forced many U.S. and European companies to move their manufacturing to China and, in some cases, disrupted markets (see electronics markets for example). Nevertheless, the U.S. and European companies continued to remain centers of revenue and profits as the global demand for products was largely concentrated in the western hemisphere and these companies had developed strong unbreakable relationships with their customers over centuries.

However, we at Lux believe that this time is different. China is eager to shed its copycat/technology follower image; the country wants to be an innovation leader and is targeting global growth and dominance in AI. This is clearly reflected in the top-down approach that the government has adopted with regards to driving innovation and commercialization of AI technologies. It is also important to note that AI and big data technologies are unique because of their scalability and stickiness (see report “Strategies to monetize data”). One doesn’t have to look beyond companies like Facebook, Amazon, and Google to understand the power of scalability and stickiness; these companies have managed to establish themselves as global behemoths within a span of about two decades.

We believe clients should be paying serious attention to developments in China, be it to compete with these companies or to partner with them.  In a series of insights that we will be publishing over the next few months, we will dissect and analyze China’s AI industry. Be on the lookout as we dive deeper into topics surrounding AI in China such as:

  • Government policies and regulations
  • Investment activity
  • Where the country leads and lags with respect to innovation and adoption
  • Leading startups in different AI areas
  • Strategies adopted by these startups to achieve their global growth goals

 

Please note: Jerrold Wang, Analyst at Lux Research, also contributed to this article.