Even in the futuristic world of tech executives, few paint as rosy a picture of artificial intelligence and its prospects as Robin Li.
The founder and CEO of Baidu, which is often called “China’s Google,” even went so far as to claim last week that “artificial intelligence will … give people eternal life.”
Li may have made a Freudian slip when he mentioned people, and instead meant Baidu. Because his belief that the future will be shaped by AI — from speakers that recognize your voice, to cars that drive themselves — has led Li to all but bet his company’s future on it.
Why Li has done that says as much about Baidu as it does about how internet use has changed in China when compared with the U.S. — and also why investors have, for now, all but given up on the company’s shares.
Ironically for a company that made its name in internet search, Baidu has lost its way.
Shares in the “B” of the BAT trio of Chinese internet giants — which includes Alibaba Group Holding and Tencent Holdings, and that one Washington official has described as a U.S. “national security risk” — have hit the skids. After peaking at an all-time high a year ago, its share price now hovers near 10-year lows.
Steven Johnson, chief investment officer at Sydney-based Forager Funds, even goes so far as to call his firm’s 2016 investment in Baidu stock “a mistake.” (Forager sold out the position earlier this year at an average 35% loss.)
It is a long fall from grace for the internet company that started out in a dingy Beijing hotel room, listed on Nasdaq in 2005 and then became the country’s No. 1 search engine — a position only fortified when Google pulled out of China in 2010.
The main reason for its change of fortune has been a structural shift in how China surfs the web. Most Chinese have leapfrogged from the pre-internet era, over the desktop and laptop years, and straight into the modern day of smartphone dominance.
As a result, Chinese consumers did not build up the same search habits and brand loyalty that Google, with its more global user base, still enjoys.
Instead, they mostly search the internet on their smartphones through mobile apps owned by domestic rivals such as Tencent and ByteDance, owner of social media app TikTok.
Furthermore, these apps are designed to encourage consumers to stay within “walled gardens” by providing a series of other services, too, from e-payments to ride-hailing or food delivery.
This has only further undercut Baidu’s relevance in search. In just three years, its share of Chinese internet search has collapsed from 83% to less than two-thirds now, according to data from global market intelligence firm Statcounter.
“The evolution of walled applications, especially the likes of WeChat, is eating into Baidu’s ability to increase ad pricing,” one fund manager who has been cutting his Baidu stake told the Nikkei Asian Review on condition of anonymity. “From an unparalleled success story, the company is now trying to stay relevant.”
Weakness in the Chinese economy and its advertising market has further hurt Baidu’s bottom line, with ad revenues falling at a steady clip, and slipping 2% in the last quarter. By contrast, Google’s ad revenues continue to climb.
The quest for Baidu to stay relevant is why Li has bet so big on AI. Here his interests are fully aligned with Beijing’s, which has stated it wants to make China a world leader in AI.
Baidu has made great strides. Its mapping app is the most popular in China. Its engineers have also devised highly praised voice-recognition systems for Mandarin. According to the Economist, it has also invented smart chopsticks that warn when food is unsafe to eat, and a bicycle that monitors riders’ vital signs.
The problem is that refashioning the company’s focus toward AI-powered driverless cars and cloud services has required massive investment.
Moreover, self-driving cars are yet to take off. For all the hoopla, there are only 1,400 self-driving vehicles in the U.S., according to Department of Transportation data, and the U.S. is the most advanced automated driving market in the world.
In the meantime, the company has hemorrhaged talent, from senior to executives to top scientists such as Lu Qi, the captain of Baidu’s artificial intelligence unit.
“Baidu is in the process of a painful transition,” said Martin Bao, an analyst specializing in Chinese internet companies at ICBC International in Hong Kong. “This will have a negative impact on its shares for the next 12 to 18 months, but we do believe the company will benefit from it in the long run.”
Ironically, one of the company’s most promising prospects may be in search — via smart speakers that recognize voice patterns rather than via text.
The company overtook Google to become the second-biggest seller of smart speakers, behind Amazon, earlier this year, according to research specialist Canalys.
Meanwhile, the installed base of Baidu’s DuerOS voice assistant currently stands at over 400 million users, over four times more than the year before. Monthly voice queries in June also surpassed 3.6 billion, an almost 800% annual increase.
Baidu is far from the only internet company to want to embed users in an ecosystem that combines hardware with software. Google, which is ramping up its smartphone presence, is increasingly moving into hardware, too.
So far, though, investors are giving Baidu’s plans little credence.
Its current market capitalization is $36 billion, but only around half of that is its actual business. Subtract holdings in listed companies that are worth $9 billion, according to S&P Capital IQ data, and net cash worth about another $9 billion, and its core business, which is profitable, is valued at just $18 billion.
If Baidu’s voice-recognition system “develops as the standard… in China it might give them an edge over the competition for a while,” Forager Fund believes.
Baidu’s search for the next big thing, let alone the eternal life that Li mentioned, looks as though it will be a long haul.
With additional reporting by Olivia Tam in Hong Kong.
This article was first published in Nikkei Asian Review