In their rush to go public, China’s AI unicorns reveal a fatal flaw – Nikkei Asia

Source : Nikkei

In their rush to go public, China’s AI unicorns reveal a fatal flaw

Investor should be wary, as risk factors listed in IPO prospectuses are real

Yitu’s exhibition booth at the World Artificial Intelligence Conference in Shanghai, pictured in August 2019: the majority of the company’s revenues came from governments. © FeatureChina/AP

Nina Xiang is the founder of China Money Network, a media platform tracking China’s venture and tech sectors.

In 10 years no one will remember the names of China’s artificial intelligence unicorns. While many aspects of the coming AI revolution remain unpredictable, one thing is clear: no AI company will emerge as a Big Tech brand.

While the internet era of the 2000s, and the mobile internet era of the 2010s, created the Chinese tech giants of today, such as Baidu, Alibaba Group Holding, and Tencent Holdings, collectively referred to as BAT, as well as Toutiao, Meituan, Didi-Chuxing, together known as TMD, the AI era is unlikely to produce anything like that by comparison — even if overly zealous investors have nursed over a dozen AI unicorns in China worth tens of billions in total.

That is partly because AI businesses are not consumer-facing. Because they are mostly providers of back end hardware and software to other businesses, or, more critically, to governments, AI business will not become giant platform companies servicing billions of users.

More importantly, as these highly valued startups rush to list publicly, their fatal flaw is laid bare: they simply do not — and probably will not ever — have a sustainable long-term business model. All those who have disclosed financials in an IPO prospectus, including Megvii, Shanghai Yitu Internet Technology, Cambricon Technologies and Beijing Unisound Information Technology, are deeply in the red to the scale of billions of yuan.

While AI businesses must invest heavily in research and are still in the early days of commercialization, suffering large losses is understandable. What is more concerning is their reliance on government contracts or a few big customers.

Take Megvii, where around 73% of its total revenue during the first half of 2019 came from city IoT solutions — in other words, smart city initiatives paid for by government. For Yitu, the majority of its revenues also came from governments, with its top five customers accounting for 62% of total revenue in the first half of 2020. This type of concentration is probably true right across China’s AI unicorn herd.

Whether AI companies can continue to gain ground in this to-government market is questionable. Compared to traditional surveillance camera makers and public security providers like Hikvision and Dahua Technology, AI unicorns like Megvii and SenseTime are not the ones with the deepest moats. The competitive edge enjoyed by most AI companies is also being eroded as the likes of Hikvision and Dahua improve their own AI algorithms to go with their rather comprehensive product suites.
Megvii’s booth at the 2020 China International Fair for Trade in Services in Beijing, pictured on Sep. 4: around 73% of the company’s total revenue came from city IoT solutions. © Reuters

Another core dilemma for China’s AI unicorns is whether it makes sense for their big clients to outsource such a critical business function. Should a big bank contract out and hand over its most sensitive data to an outside AI company for a mission-critical initiative? Would it really be better for a big retailer to share its proprietary data with an industry outsider in exchange for algorithms that it could probably develop on its own?

In very few cases, the answer may be yes. But as the technological barrier to once inaccessible AI algorithms crumbles, the scale will tilt against AI companies, especially when the data is proprietary and in the hands of owners of traditional businesses.

This raises yet another challenge for AI unicorns. As the so-called intelligence "enablers" to various industries from financial services and health care, to retail and education, they need to develop expertise across vastly different sectors. If that is not hard enough, having to customize products to different industries makes it harder to achieve economies of scale. With all the AI unicorns seeking to expand in the same industry verticals, that will only further intensify competition.

This does not mean the coming AI revolution will not thoroughly transform our businesses and our lives, or that there will not be some sizable AI companies that will go on to become large and profitable businesses. Automated logistics and robotic delivery services are most likely to see such success stories.

But it also remains to be seen how big a role these AI unicorns — born out of university labs amid a renewed wave of public fantasy following AlphaGo’s landmark success in 2016 — will play. Or, for how long — if one believes such enabler roles to be transitional. What is more likely is that some of the vertical enabler AI companies will end up being acquired by their traditional business counterparts.

In the end, China’s AI unicorns and their investors, clients, and end-users may all benefit from the third AI wave as AI makes our lives smarter. But at the same time, retail investors need to be extra careful buying these unicorns’ shares, as all the risk factors listed in those IPO prospectus are very real.

via In their rush to go public, China's AI unicorns reveal a fatal flaw – Nikkei Asia.

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