Can China’s AI industry live up to the hype?

In 2015, 200 million TV viewers saw the AI computer program AlphaGo easily win a game of Go, a 3,000-year-old Chinese board game, against Lee Sedol, winner of 18 world titles. An AI wave swept China. Four domestic AI companies, dubbed the “four little dragons,” appeared on the scene.

By 2018, investor and former Google China head Kai-Fu Lee (李开复 Lǐ Kāifù) told The China Project, “I think we’ve shifted to the age of implementation, where China excels and arguably catches [up] with the U.S. and maybe leads the U.S. over the next five years [in AI technology].”

Could he be wrong? These are the four dragons, and their dragon disorders:

Cloudwalk

All of the little dragons have had an arduous road to issue public offerings, because what makes the AI industry so challenging is the vast funding required for R&D. Earlier this month, the application of CloudWalk Technology 云从科技 to join the Science and Technology Innovation Board, also known as the Star market, on the Shanghai Stock Exchange was approved, making CloudWalk’s potential IPO appear tantalizingly close.

Yet CloudWalk’s annual report illustrates the company’s dilemma clearly. It works on various “smart” projects such as smart finance, smart governance, smart travel, and smart cities, but while revenue has increased steadily, reaching 1.07 billion yuan ($164.54 million) in 2021, the company made net losses of over 2.32 billion yuan ($356.77 million) from 2019 to 2021. The reason is simple: R&D costs have accounted for half to three-quarters of all costs.

CloudWalk expects to start turning a profit in 2025, but it and the other little dragons have faced criticism of simply burning through cash with no discernible result, and none are as yet turning a profit.

It does not help that all four little dragons have been sanctioned by the U.S. Treasury Department for their alleged role in the surveillance of Uyghurs and other Muslim minorities in Xinjiang, which puts them off limits to U.S. investors and creates other obstacles to doing global business.

Megvii

Megvii 旷视科技, a designer of image recognition and deep-learning software, gained approval to join the Star market in March 2021, but has since been the subject of ongoing inquiries by the China Securities Regulatory Commission regarding the company’s profitability. A court case of a company driver trying to extort the board of directors by threatening to reveal sensitive company information did not help Megvii’s case.

Yitu

At the end of 2020, Shanghai Yitu Network Technology Co., Ltd 依图科技有限公司, which works to integrate AI technologies with industrial applications, applied to join the Star market, but then withdrew its application based on its financial results. In 2021, the company had the goal, so far unrealized, of listing on the Hong Kong Stock Exchange.

SenseTime

Though it was able finally to launch an IPO on the Hong Kong Stock Exchange in December 2021, SenseTime 商汤科技, the largest of the little dragons, is yet to turn a profit and lost more than 24 billion yuan ($3.69 billion) in three and a half years.

Dragons with clipped wings?

Apart from the huge costs of R&D, another challenge facing China’s little IPO dragons is stiff competition, not only among themselves but also with AI equipment manufacturers like Hikvision 海康威视 and Zhejiang Dahua Technology Co., Ltd 浙江大华技术股份有限公司, and with the tech giants like Alibaba 阿里巴巴, Tencent 腾讯, Baidu 百度, and Huawei 华为, who have all made forays into AI technology.

There is no doubt that China is going to play a major role in the engineering, use and abuse, and global governance of AI in the next decade. But perhaps the four dragons will not soar quite so high as it seemed they would a couple of years ago.

Whether or when the four little dragons are able to break through the barrier of profitability and power a cash-generating, world-dominating industry will have significant implications for China’s geopolitical rivalry with the U.S.