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Artificial Intelligence: China Racing to Pole Position

artificial intelligence

September 2020

Industrial and Digital Revolution of the Past Steam engines, electricity and computers are three technological innovations that have resulted in game-changing productivity boosts. The industrial revolution in 1800’s, led by the invention of the steam engine in Europe, changed the world order. Europe experienced a tremendous upswing while China and India, which missed the industrial revolution, shrank from 65% to 15% of the world’s GDP. Now, 150 years later, computers and software have once again changed the order of the world economy. The big five US companies, Facebook, Apple, Amazon, Microsoft and Alphabet dominate the new economy, and account for over 28% of the S&P and 40% of Nasdaq market capitalization. China followed the US closely while Europe lagged behind significantly in terms of technology.

AI Revolution Ahead Artificial intelligence (AI) will be the driver for the next industrial revolution. The trend is already underway. AI can process not only an unimaginable amount of data, but it can also learn independently, and at high speed. Today there are already AI-controlled self-driving cars. Fintech companies can determine the creditworthiness of borrowers in seconds. Online retailers predict buying behavior with each click. In the future, education, finance, manufacturing and services will be driven by AI. Acceleration of Digitization in China

New World Order Emerging The two world powers China and USA currently invest billions in AI. The Chinese government has joined forces with the three big Internet giants Tencent, Alibaba and Baidu. Whether China is really investing USD 70 billion this year is controversial. Nonetheless, the investment is undisputedly very high. Already 21 AI-based Chinese companies have achieved unicorn status, i.e. a valuation of over USD 1 billion. Moreover, China has very fertile soil for developing AI. It stores 10 times as much data per transaction as the US and makes 50 times more mobile payments. With this data, deep-learning algorithms can better predict human behavior.

Also in the US, large Internet companies like Alphabet, Apple, Amazon, and eBay have taken over AI leadership, albeit without state subsidies. Europe, however, has already lost its leadership in the Internet and IT sectors. In particular, Europe lags behind China and the US in attracting top talent and capital and developing cutting-edge R&D. In Germany, only SAP remains in the top league. The state does not have a compelling AI strategy, and onerous regulations and data privacy concerns further stymie AI development. Consequently, the upcoming AI mega- productivity boost will be driven exclusively by China and the USA. Europe and Germany are falling by the wayside.

China Racing to Pole Position What is China doing to reach the AI pole position in the coming years? The strategies are clear. The state works closely with the leading digital companies, promotes startups and provides substantial funding support to leading universities. In 2017, the Chinese State Council published the “Next Generation AI Development Plan” with the goal to develop a one trillion AI industry by 2030. 17 key areas were defined, including intelligent vehicles, intelligent service robots, intelligent drones, chips for neural networks, intelligent consolidations and AI applications in supply chain management. The Chinese Ministry of Education has included AI in its high school curriculum in 2018. In 2018, 96 Chinese universities offered AI as a course - in 2017 there were only 17. In addition, many established internet companies, of whom we are invested in, are working to become AI leaders:

In health services, Alibaba, Tencent and Ping An have all developed AI-powered software to diagnose COVID cases from CT scans within 20 seconds with over 90% accuracy. Ping An’s Good Doctor platform recorded over 1.1 billion consultations at the height of the Covid-19 pandemic in February 2020. Their AI system has learnt to diagnose over 3000 diseases by scanning over 100 million medical images in order to propose a diagnosis plan for doctors. The AI system has been used over 22 million times by over 400,000 doctors in just the first half of 2020. In many cases, AI detected diseases like cancer at very early stages even before the onset of disease. It is estimated that up to 90% of unnecessary operations could be avoided with this smart system.

In retail, Meituan Dianping has developed an AI-powered “Super Brain” for its food delivery service. The system analyzes time, location, driver trajectory and traffic data to plan dispatches. The smart system optimizes over 40 million orders daily through 2.9 billion route plans per hour.

In urban management, Alibaba Cloud has piloted its AI solution “City Brain” in 23 cities that have decreased traffic jams by 15%. The City Brain assesses traffic data and adjusts traffic lights, bus schedules and taxi dispatches to alleviate congestion. The AI system scans real-time images of traffic incidents and dispatches police, fire, medical and rescue vehicles to the scene. The system is now being rolled out in Macau and Malaysia. In voice recognition, iFlytek is the market leader in AI-assisted speech recognition, AI medical diagnoses and AI-supported individualized curricula for students. For example, its digital voice assistant can deduce from the pitch and emphasis of a spoken sentence what is the mood of the person. From the vocabulary, sentence structure and content, the AI can create an almost complete profile of a person with educational level, financial situation, interests, feelings and wishes.

Over 20 Chinese AI Unicorns

In addition, there are many Chinese start-ups and unicorns in the AI space. The company Smart Finance calculates the creditworthiness of a borrower in 8 seconds based on 5000 characteristics. In contrast, banks only check about 10 pieces of information as no bank employee can process 5000 pieces of information.

Megvii recognizes a person in the crowd with absolute certainty in 0.1 seconds, even from behind the aisle. You can already pay with Megvii facial recognition in fast food restaurants in China.

Sensetime, the world's most valuable AI start-up in 2019 with a valuation of USD 4.5 billion, focuses on face, object and handwriting recognition, autonomous driving and health care. The state gives Sensetime access to China's 1.4 billion people database. Honda, Qualcomm, Alibaba and many more are already using Sensetime technology.

DJI now holds two-thirds of the world drone market. In a partnership with Microsoft, AI software is being developed that allows drones to independently examine buildings, gas and power lines, bridges, and even apple orchards for errors and problem areas. Drones can independently monitor traffic and optimize the flow of traffic better than any human being. The use of AI with drones is almost limitless.

China aspires to take world market leadership from the US in AI by 2030 - and it is well on the way there. With the research of the ACATIS Qilin Marco Polo Asia Fund, we are very close to the topic of artificial intelligence - an area that is already covered quite well with our investments in Tencent, Baidu, Alibaba, Ping An Good Doctor and iFlytech. We are very excited to see numerous highly attractive future investment opportunities in the Chinese AI market. If you have any remaining questions, please do not hesitate to contact us anytime.

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