China’s terrific three

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Tencent officers media, entertainment, payment systems, internet and mobile phone value-added services and operates online advertising services; it has a market capitalisation of $350bn. It is one of the largest internet companies globally, leads in gaming, and owns mobile chat service WeChat. 

Alibaba is China’s leading e-commerce player and overtook Walmart to be the world’s largest retailer, with gross merchandising volume equal to Amazon and eBay combined. It has a market capitalisation of $360bn. 

Baidu, the leading Chinese search engine, has a market capitalisation of $60bn. Of the ‘Terrific Three’, Baidu, the smallest in market capitalisation terms, appears the most ambitious. Founded in 2000, Baidu spends 16% of its revenues on R&D and was recently rated the second ‘smartest company’ globally by MIT. 

The focus of Baidu’s strategy is the shift from mobile to Artificial Intelligence (AI). 

Interaction has evolved from a PC with a keyboard and mouse (two hands) to mobile devices with touchscreen displays (one finger) and is now moving to voice controlled/conversations with third-generation devices (no limbs). 

Operating systems started with Windows before moving to iOS and Android, and Baidu has recently developed DuerOS AI, which it views as the third generation that will be the future of digital assistants. 

The Baidu brain uses a combination of image technology and natural language understanding for voice technology. It has developed a Deep Learning Model (DLM) that ensures that AI has the data, cloud infrastructure and processing power it requires to work effectively. The DLM mimics the brain, never forgets and gets better as it gets more data. 

Baidu makes extensive use of Facial Recognition Technology (FRT). At Cannes Lions, Baidu demonstrated how it is fighting Alzheimer’s disease – it has developed glasses that detect and recognise faces with 99% accuracy and then projects the name of the individual the wearer is looking at onto their glasses as a prompt. The work received a standing ovation. 

Another area of focus was voice recognition, which Google expects half of all search to come from by 2020. Baidu is now 10-15% activated by voice. Baidu is developing a home assistant to rival the Amazon Echo. In a test, Baidu DuerOS AI was asked random questions and could answer 90% of questions and get them right 90% of the time. Accents across China are very different and there are more than 80 dialects. Baidu provided a case study of how it worked with KFC to design a digital assistant that could take orders in different dialects. 

Baidu believes that AI will transform marketing – it has the capability to improve the understanding of customers, while enhancing creativity and transmedia storytelling. 

It would be remiss of me not to mention Huawei, which is the third-largest handset manufacturer in the world, having started only five years ago. The group has spent $45bn on R&D over this period. A typical millennial in China spends three hours per day on their phones and interacts with it 500 times per day – yes, 500 times compared with an already mind-boggling 100 in the West. 

Interestingly, Huawei has a corporate structure that has three joint CEOs who operate on yearly rotation. The company is privately owned by its staff; the founder has a 1% share only. The corporate structure of Huawei decentralises areas of focus to the markets it perceives to have the strongest capability. For example, France is the centre for design and Germany for engineering. 

Given the scale of the domestic Chinese market, Huawei is not compelled to expand internationally. A luxury that only the US could boast historically – and we all know where that led in the global leadership race. 

Lorna Tilbian is executive plc director and head of media at Numis Securities.