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China’s answer to ChatGPT, Ernie Bot, can answer all kinds of difficult user questions. To investors, it is the answer to the slowing growth its maker Baidu has faced. But a plunge in the shares of the Chinese search giant on Monday reflects how fragile the local tech sector is.
Shares of Baidu fell 12 per cent, the most in over a year, after a report linked its Ernie artificial intelligence platform to key Chinese military research. The report claimed an institute affiliated with a unit of the People’s Liberation Army, which oversees cyberwarfare, had tested its AI system on Ernie. Baidu denied any affiliation or partnership with the institute and said it had no knowledge of the research project.
Nonetheless, the outsized sell-off reflects two concerns. The first is how important Baidu’s chatbot has become to its future earnings. The second is just how much of that earnings outlook is currently subject to US influence.
Baidu has been recognised as China’s leading AI developer in recent months thanks to the launch of Ernie Bot. The chatbot, as China’s first answer to OpenAI’s ChatGPT, gives Baidu a first-mover advantage ahead of much bigger tech rivals such as Tencent.
Ernie Bot had attracted more than 100mn users as of the end of 2023, following its launch to the public in August. Baidu’s sales for the quarter of its launch have already beaten estimates. A boost to advertising revenue from the chatbot is expected in results for the final quarter of last year.
It is a rare chance for the company to make a comeback after years of fierce competition for ad dollars. The massive popularity of China’s giant short-video platforms have battered sales at Baidu’s core business, online marketing. Search growth had started slowing more than a decade ago.
Strong demand for Ernie Bot and related services should also boost Baidu’s other businesses including cloud services and smart cars.
But all that relies heavily on funding and access to advanced technology. The US has already banned investment in some areas of China’s high-tech sectors including AI. A bigger blow comes from being cut off from access to chips. Tighter export controls on advanced chips used for AI development and the equipment used to manufacture them are proving difficult to bypass. Monday’s report rekindled concerns about an escalation of sanctions from Washington.
Baidu shares are down a quarter in the past year and trade at just 10 times forward earnings, less than half that of global peers including Google. China’s AI hopefuls may struggle to perform as long as geopolitical uncertainty remains high.
Lex is the FT’s concise daily investment column. Expert writers in four global financial centres provide informed, timely opinions on capital trends and big businesses. Click to explore
