Chinese Tech Giants Alibaba and Tencent Accelerate AI Investments

Chinese Tech Giants Alibaba And Tencent Ramp Up AI Investments, With Nearly A Third Of Deals Since 2023 Aimed At AI Startups - Alibaba Gr Hldgs (NYSE:BABA), Meta Platforms (NASDAQ:META)

Chinese tech giants Alibaba Group Holding Ltd BABA and Tencent Holdings Ltd TCEHY are significantly increasing their investments in artificial intelligence startups, despite a general decrease in their overall investments. What Happened: Since 2023, Alibaba and Tencent have directed 40% and 30% of their deals in China, respectively, toward AI startups, marking record-high investments in the sector for both companies, reported The Wall Street Journal on Wednesday. This shift in focus comes at a time when the two tech giants have been scaling back their investments due to regulatory challenges, the impact of the COVID-19 pandemic, and a slowing Chinese economy. Despite these challenges, both companies have identified AI as a strategic priority. They aim to leverage the technology to strengthen their market influence and technological edge. This renewed focus on AI is seen as a move to drive profits and expand their cloud services, which offer access to AI computing power and foundational AI models developed in-house. Wei Sun, senior analyst at market research firm Counterpoint Research stated "Investment in AI startups is a strategic effort to strengthen their technological edge and expand market influence," according to the report. See Also: Shiba Inu Lead Developer Shytoshi Kusama Opens Up On Revealing True Identity -- Here's What Was Said "Generative AI holds massive business potential, and no tech giant would want to miss the opportunity," Charlie Dai, an analyst at market research company Forrester said, according to the report. "Investing in leading startups, even [ones that have already received investment from] competitors, will help tech giants to grasp the opportunities as much as they can." Alibaba and Tencent have been instrumental in the growth of six Chinese AI startups, each valued at over $1 billion. These startups, known as China's "Little Artificial-Intelligence Dragons," have received significant funding from both companies. Why It Matters: The increased investment in AI startups by Alibaba and Tencent is a significant development in the global AI landscape. This move comes at a time when Asian startups are challenging the dominance of NVIDIA Corp. NVDA in the AI chip market by developing more energy-efficient and cost-effective chips for specific AI applications. Alibaba, in particular, has been heavily investing in generative AI, claiming that its new AI models outperform Meta Platforms Inc.'s META Llama 3 in specific tasks. The company is also set to launch an AI-powered conversational sourcing engine in September to enhance the buying and selling of goods online. Furthermore, SoftBank Group SFTBY recently acquired UK-based chipmaker Graphcore to bolster its AI capabilities. This acquisition highlights the growing importance of AI infrastructure, including semiconductors and systems, in the tech industry. Read Next: Top Analyst Says Nvidia Poised For Strong Q2 Results: 'There's Still A Ton Of Spending On The AI Chips' Image Via Shutterstock This story was generated using Benzinga Neuro and edited by Kaustubh Bagalkote Market News and Data brought to you by Benzinga APIs

Alibaba, Tencent cast wide net for AI upstarts

Since 2023, investors -- including the country's biggest tech companies -- have valued at least six China-based startups developing large language models at more than $1 billion each. Most of these unicorns, dubbed China's six "Little Artificial-Intelligence Dragons," have received capital from Alibaba and Tencent. While both companies have dramatically reduced their overall investments in the past two years, their interest in AI has intensified. Since 2023, 40% of Alibaba's deals in China and 30% of Tencent's have targeted AI startups -- both record highs for the two tech titans, according to Beijing-based deal data provider ITJuzi. Alibaba and Tencent are "positioning themselves as frontrunners in the generative AI space," said Wei Sun, senior analyst at market research firm Counterpoint Research. "Investment in AI startups is a strategic effort to strengthen their technological edge and expand market influence." Chinese tech giants, once known for their aggressive dealmaking, have shifted focus to making profits in recent years after being hamstrung by Beijing's regulatory clampdown on the sector, the Covid-19 pandemic and a faltering Chinese economy. Generative AI has emerged as a rare exception to their newfound conservatism. Alibaba and Tencent have made AI a strategic priority, seeking to cash in on the technology, develop their own foundation AI models, and sell access to both those and AI computing power via cloud services. At the same time, China's AI-model arena is getting increasingly crowded, with more than 190 products now on the market, raising fears among some companies that they are falling behind. By investing in AI unicorns, companies hope to get firsthand insight into research and development, plus access models that could bolster their product offerings and business practices, solidifying their edge in the industry. "The investments of big tech vendors in AI startups are crucial for their long-term strategies, helping them stay competitive and innovative in a rapidly evolving tech landscape," said Charlie Dai, an analyst at market research company Forrester. Alibaba and Tencent didn't respond to requests for comment for this article. Similar to how Microsoft and Amazon backed OpenAI and Anthropic, respectively, both Alibaba and Tencent have offered significant parts of their investments to portfolio companies in the form of computing power. Alibaba said in May that it recently invested around $800 million for a 36% share in Beijing-based Moonshot AI. More than $300 million of that was provided in the form of credits to use Alibaba's cloud-computing infrastructure, people familiar with the matter said. These credits, when used, can be booked as revenue for Alibaba, benefiting its financial results, they said. Alibaba Chief Executive Eddie Wu said in an analyst call last week that the company expects its revenue from external cloud customers to return to double-digit growth in the next one to two quarters, driven by the expanding adoption of AI cloud services. Providing computing resources can be more valuable than cash in China given that the U.S. has effectively blocked access to cutting-edge semiconductors in a bid to contain Beijing's advancement in AI capabilities. Computing tasks typically form the majority of capital expenditure of LLM startups. An Nvidia processor for AI workloads can have the same price tag as a Cadillac sedan, and training LLMs requires thousands of such chips. Investors provide computing power support in different ways, including by renting out hardware or selling cloud computing at discounted rates and offering funds earmarked for purchasing chips. Some startups also tap their backers' connections to obtain restricted chips. In December, a Beijing-based LLM unicorn bought several hundred of Nvidia's H100 chips through an affiliate of one of its investors in Singapore, people familiar with the purchase said. Last September, a Shanghai-based startup developing a healthcare-focused LLM rented computing power provided by Nvidia's A100 chips from a state-run AI data center in the southwestern city of Chongqing after an investor helped negotiate for a below-market rate, according to people familiar with the deal. People close to AI investments say capital-hungry startups can access funding from tech giants more easily now than a few years ago, when powerful investors often sought exclusive agreements that prevented startups from accepting money from competitors. Beijing has tightened antitrust rules and cracked down on what regulators called tech companies' "disorderly capital expansion" in recent years. "Generative AI holds massive business potential, and no tech giant would want to miss the opportunity," Forrester's Dai said. "Investing in leading startups, even [ones that have already received investment from] competitors, will help tech giants to grasp the opportunities as much as they can." Write to Raffaele Huang at raffaele.huang@wsj.com and Tracy Qu at tracy.qu@wsj.com