Eurasia Group Examines Artificial Intelligence in China
In case you haven’t been paying attention, China has been in the news quite a bit lately as a country that is quickly surpassing the United States in technical prowess, much to the dislike of those pundits who would rather stick their heads in the sand and pretend the threat isn’t real. “Silicon Valley would be wise to follow China’s lead” says one of the world’s most successful venture capital firms, Sequoia, to which the pundits respond “Moritz sabotages Sequoia, again“. For some reason it’s controversial now to say that those who work the hardest will enjoy the most success. For investors, the world no longer has borders, and we’re more than capable of investing in Chinese stocks that will give us exposure to the country with the strongest work ethic. However it’s not the work ethic that the United States should be most worried about. It’s the fact that China has now surpassed every country on this planet with the amount of money they are pouring into artificial intelligence:
In this article we’re going to talk about a white paper that was put out by Eurasia Group, “the world’s largest political risk consultancy“. The Economist refers to Eurasia Group as “an inspiration for any academic with a seemingly useless degree in political science” noting that this group counts “big banks and investment-management firms” as customers along with multinationals and hedge funds. What all these customers want to understand is “political risk”, best described as the global political events that will be as impactful as economics in shaping the direction the world moves in. Late last year, Eurasia Group produced a report titled “AI in China: Cutting Through the Hype“, and we’re going to spend the rest of this article summarizing that entire white paper for those of you who don’t have time to read the entire 13-page white paper.
“…the countries that master AI first will have a crucial strategic advantage in writing the rules for the next global order.”
The white paper was a collaboration between Kai-Fu Lee, founder of Sinovation Ventures, and Paul Triolo, head of Eurasia Group’s Geo-technology practice, so it contains perspectives from both the East and the West. To date, all the coverage of China’s progress in artificial intelligence has centered around the “US vs. China” contrast, the deployment of AI by China’s large Internet companies like Tencent and Alibaba, and of course a “stiff dose of alarmism” that hints at robots that speak Engrish arriving on the shores of ‘Murica and hassling people. The paper says that this fails to capture the nuances of artificial intelligence, in other words, the vast number of potential applications that AI can be applied to and where it is presently being applied. It then goes on to make some predictions, of which we’ve cherry picked the following three:
- AI-ready data is the single advantage that China has which will be insurmountable by other counties.
- Government support will significantly accelerate AI development in China and unsurprisingly, Beijing will be “the new Silicon Valley“
- Business AI is where China will lag because Chinese businesses have been slow to adopt data warehousing and enterprise applications
The first bullet point is perhaps the most compelling. AI algorithms are only as good as the data you feed them, with the best algorithms using the largest datasets. That data needs to be clean and “AI-ready” otherwise it’s “garbage in, garbage out” as the old saying goes. Just looking at the size of China’s mobile phone market shows how much more data can be obtained from things like mobile payments:
It’s not just the availability of the data but people’s willingness to give it up. Chinese citizens are much less concerned about privacy, which means that these massive data sets can be extracted much more easily. Then there’s that whole shared bike infrastructure with each one of those bikes being connected to form one of the largest Internet-Of-Things networks in the world generating 20 terabytes of data per day.
It’a not all rainbows and gumdrops though. One problem China will face is a “talent gap”. While Baidu has the largest number of AI experts in China, Google alone has perhaps 50% of the world’s top 100 AI scientists. Still, the trend is moving in the right direction. As of 2015, Chinese researchers accounted for 43% of contributions to the best 100 AI journals and conferences:
People want to be rewarded for their hard work, and all those misguided souls trying to preach about the “myth of meritocracy” are going to chase all these hard-working, talented researchers out of the “old Silicon Valley” and into the “new Silicon Valley” – Beijing – where hard work is appreciated and rewarded. The white paper concludes that not only will China catch up due to “Chinese universities’ strong computer science and mathematics programs” but soon their talent will be a competitive advantage.
Of course all these talented researchers need hardware to run their algorithms on, and China lags in that respect with U.S. companies like Nvidia dominating the AI chip space. China recognizes this resource gap, and a fair number of Chinese startups are looking to build AI chips leading us to ask the question, Can Chinese AI Chip Makers Compete with Nvidia? If history is anything to go by, then the answer is yes. When it comes to the country with the most supercomputers, the USA and China are now in a dead heat.
The transformation of China’s startup scene over the past 10 years is “largely a result of capital flowing into China, a large pool of determined and hard-working entrepreneurs, and supportive government policies“. This is what that “capital flow” looks like:
The Chinese government has a strong track record of delivering on what they say they will do. For example, back in 2010 they decided to dominate the globe in high speed rail (HSR). Today their global market share of HSR is about 60%. In 2014, they announced a “Mass Entrepreneurship and Innovation Plan” at a time when there were only 1400 incubators in China. Today that number exceeds 8000. That’s why this next statement should be taken seriously:
Beijing’s AI policy priorities are clear. The “Next Generation Artificial Intelligence Development Plan,” announced by China’s State Council in July 2017, called for China to catch up on AI technology and applications by 2020, and to become a global AI innovation hub by 2030.
While that’s the plan we hear about the most in the media, the number of initiatives the country has proposed in the past few years relating to AI and Chinese robotics are plentiful:
Artificial intelligence is now the new electricity, the new oil, and the new black. As global investors, we need to be aware of which countries will develop competitive advantages in AI so that we can make appropriate investments. All signs point to China as becoming a global leader in AI which means we should think about allocating a meaningful amount of our portfolio towards Chinese stocks. If we were to map some of the biggest players in both countries, it would look something like this:
- Google (NASDAQ:GOOG) and Baidu (NASDAQ:BIDU)
$775 billion vs. $86 billion - Facebook (NASDAQ:FB) and Tencent (HKG:0700)
$521 billion vs. $536 billion - Amazon (NASDAQ:AMZN) and Alibaba (NYSE:BABA)
$722 billion vs. $486 billion
Reports like this confirm that domestic bias is a threat to United States investors who will feel more comfortable sticking with familiar names like the U.S. companies listed above. In future articles, we’re going to be watching this space closely and continue to identify opportunities for foreign investors to get “safe” diversified exposure to China’s growth story. If you want to read the Eurasia Group report in it’s entirety, it can be found here – “AI in China: Cutting Through the Hype“.
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