Baidu – World No. 1?

Baidu is now the biggest & cheapest AI ecosystem.

• While OpenAI is withdrawing from China, Baidu has already moved to fill the void as its users have jumped by 50% since April confirming that Baidu now has the largest user pool of any generative AI service in the world.
• At its Create 2024 developer conference (see here), Baidu announced that its ERNIE foundation model had 200m users handling 200m queries per day which was pretty vague.
• I deduced this to 67m daily active users (DaU) handling 3 queries per day each on average.
• 2 months have passed and now Baidu is announcing a new model (ERNIE 4.0 Turbo) and also that it has reached 300m users and 370,000 businesses to date.
• These statements were made by CTO Wang Haifeng at a corporate event and reported on by Reuters (see here).
• This is a big jump in numbers and I suspect is largely due to users and companies switching away from international LLMs like ChatCPT to domestic variants.
• I suspect that the Chinese state has been quietly encouraging this move for some time, and the move by OpenAI to block access from Chinese IP addresses to its services from July 9^th will also have been a meaningful factor.
• This has also been seen in the developer pool which has now swollen to 14m developers who have collectively created 950,000 AI models and services within its ecosystem.
• Assuming that the numbers are accurate, this means that Baidu’s ERNIE is now the largest AI ecosystem in the world by some considerable margin.
• However, its growth potential is limited as the appeal of Baidu’s AI ecosystem is Chinese generative AI services by Chinese companies for Chinese users meaning that outside of the expatriates, there will be little to no appeal outside of China.
• This is further exacerbated by the heavy regulatory shadow that is being cast by the Chinese state.
• ERNIE, ChatGPT, Bing, and other generative AI systems can be easily induced into making bad or untrue statements and the Chinese state is concerned that this could be used to undermine its standing and authority with the Chinese people.
• This means that all generative AI systems have to be approved by the regulator before they can be released to the public and any that do not behave are likely to be harshly punished.
• This approval requires the assurance that these systems will not behave badly but with the way these systems are designed, there is no real way this can be guaranteed.
• This is because all neural networks and especially LLMs are black boxes where their creators know that they work but have very little idea how.
• Furthermore, given the potential severity of the punishment (of which Jack Ma is a clear example), the guard rails around Chinese generative AI will be ironclad.
• The problem here is that this has already been shown to diminish the performance capability of these systems and so the state would appear to be hampering the very technology it is trying to develop.
• Many companies have decided to either not bother or to leave China and several AI startups have chosen to locate themselves in Singapore instead.
• This gives them a much more permissive regulatory environment and access to leading-edge semiconductors for training and inference, but will probably cut them off from the Chinese market.
• Consequently, there appears to be very little competition for Baidu in the world’s second-largest market, meaning that it could easily take the whole market and earn high margins on its revenues.
• Hence one would expect the shares to be riding high but they are down around 22% year to date.
• This makes Baidu a very interesting prospect but one has to get comfortable with both its questionable corporate governance and the unknown quantity of state action in the market.
• No one right now wants to hear anything about investing in China which is exactly the time when one should consider buying, but getting comfortable with the uncertainty remains a struggle.
• There is nothing on the horizon to change this position and so investors with nerves of steel have time to consider the opportunity.