The Economist - USA (2022-01-22)

56 Business TheEconomistJanuary22nd 2022

China’s five­year­old aimaster plan set

out  a  number  of  goals.  For  example,  by

2025  the  country  is  to  create  an  industry

with  global  revenues  of  400bn  yuan,

achieve “major breakthroughs” in technol­

ogy  and  lead  the  world  in  some  applica­

tions. Five years later it is to dominate the

industry  (by  then  worth  $1trn  in  sales),

having  written  its  ethical  code  and  set  its

technical  standards,  just  as  Europe  and

America defined the contours of the Indus­

trial Revolution. 

Elements of the Communist Party’s ap­

proach  are  characteristically  prescriptive.

The  Ministry  of  Science  and  Technology

has instructed China’s tech giants with ex­

isting ventures in certain subdisciplines of

ai—Tencent in medical image recognition,

Baidu  in  autonomous  driving—to  double

down  on  these.  That  said,  the  plan  is  less

hands­on than some of the country’s other

development projects, observes Jay Huang

of  Bernstein,  an  investment  firm.  In  the

words of Huw Roberts of Oxford University

and  five  co­authors,  the  blueprint  acts

chiefly  as  a  “seal  of  approval”  which  “de­

risks”  assorted  aiinitiatives  championed

by  central­government  entities,  local  au­

thorities and the private sector. 

In  practice,  the  derisking  involves  dol­

ing out lots of public money. Some of this

takes the form of tax breaks and subsidies,

as in the “little giants” programme to nur­

ture  10,000  promising  startups  across  va­

rious  sectors,  including  ai.  Local  govern­

ments,  even  in  poor  rustbelt  provinces

such as Liaoning in the far north­east, have

also dangled similar incentives in front of

ai­curious companies. 

Another  type  of  support  comes  from

government  procurement.  Firms  do  not

disclose  how  much  revenue  they  derive

from public­sector contracts. But the share

is likely to be significant. Central and local

authorities  use  SenseTime’s  surveillance

technology. Megvii, which also specialises

in  image  recognition,  has  extensive  deal­

ings with state­owned enterprises. 

The state is also investing in aicompa­

nies directly. The central government runs

several  tech­investment  vehicles.  Local

governments  are  increasingly  creating

their  own,  often  armed  with  billions  of

dollars.  Tianjin,  a  coastal  metropolis,  an­

nounced a $16bn aifund in 2018. 

Government  capital  is  increasingly

helping plug a gap left by foreign investors

scared  away  by  American  sanctions

against some of China’s aidarlings, which

are seen as being too close to the Commu­

nist  Party.  A  fund  run  by  the  Cyberspace

Administration  of  China,  a  regulator,  has

acquired  an  undisclosed  stake  in  Sense­

Time, which last month was hit by another

round  of  American  sanctions  over  its  al­

leged  involvement  in  government  repres­

sion of the Uyghur ethnic minority. (Sense­

Time says that the sanctions are based on a

“misperception”ofitsbusiness.)Asepa­

ratevehicle,theMixed­OwnershipReform

Fund,accountedfor$200mofthe$765m

thatthefirmraisedinitsinitialpublicof­

fering(ipo). Localgovernmentschippedin

another$220m.

Lostintranslation

Statedosh,combinedwithaccesstoplen­

tifulpublicdata,hashelpedturnChinese

aifirmsintopowerhousesincertainnich­

es.AccordingtoBain,a consultancy,bylast

JunetheclouddivisionofAlibaba,China’s

e­commercebehemoth,wasoffering 62 ai­

enabledservices,fromvoicerecognitionto

videoanalytics,comparedwith 47 fromits

closest Western rival, Microsoft. Sense­

TimeandMegviimass­producecomputer­

visionsoftwareandhardwarethatcanbe

adaptedtoandinstalledinindividualfac­

tories.Despitebeinglockedoutofmost

Westernmarkets bytheAmerican sanc­

tions,SenseTimerakedin762myuanin

overseasrevenuesin2020,comparedwith

319myuantwoyearsearlier,mostlyfrom

South­EastAsia.

Forallthesesuccesses,though,China’s

aiindustry trailstheWest inimportant

ways.DespiteleadingAmericaintheover­

allnumberofai­relatedpublications,Chi­

naproducesfewerpeer­reviewedpapers

thathaveacademicandcorporateco­au­

thorsorarepresentedatconferences,both

ofwhicharetypicallyheldtoa higherstan­

dard.ItranksbelowIndia,andwellbelow

America,inthenumberofskilledaicoders

relativetoitspopulation.Theseshortcom­

ingsarelikelytopersist,forthreereasons.

First,capitalmaynotbebeingallocated

efficiently.Itisunclear,forexample,how

muchofTianjin’s$16bnkittyhasactually

been deployed. More damaging, Beijing

hascreateda systemforrewardinglocalof­

ficialsthatfavoursdebt­fuelledspending

andseldompunisheswastefulness.

Manystateaiinvestmentshavebeen

“recklessandredundant”,saysJeffreyDing

of Stanford University. Zeng Jinghan of

LancasterUniversityhasdocumentedthe

riseoffirmsthatfalselyclaimtobedevel­

opingaiinordertosuckupsubsidies.One

analysisby Deloitte,aconsultancy,esti­

matedthat99%ofself­styledaistartupsin

2018 werefake.Suchboondogglesnotonly

burnthroughpubliccash,MrDingnotes,

but alsoconsume scarcehuman capital

thatcould more usefullyhave been de­

ployedelsewhere.

China’ssecondproblemisitsinability

torecruittheworld’sbestaiminds,espe­

cially those working on high­level re­

search.A studyin 2020 byMacroPolo,a

Chicago­based think­tank, showed that

morethanhalfoftop­tierresearchersin

thefieldwereworkingoutsidetheirhome

countries.AmericaandEuropelookmore

appealing to such footloose brainboxes,

including many Chinese ones. Though

abouta thirdoftheworld’stopaitalentis

fromChina,onlyatenthactuallyworks

there.A shortageofnon­Chineseresearch­

ersfurtherhandicapsChina’scapabilities,

notesMattSheehanoftheCarnegieEn­

dowmentforInternationalPeace,a think­

tankinWashington.

Evenmoreproblematicfortheparty,its

master plan ignored the cutting­edge

semiconductorsthatpower ai. Sinceits

publication Chinese companies have

found itevermoredifficultto gettheir

Intelligence gathering

Sources:RefinitivDatastream;PitchBook;StanfordUniversity *January19th †Into unlisted companies

Private investment† in artificial intelligence

22, $bn

Australia

Singapore

Japan

India

Canada

Israel

Britain

European Union

China

United States

2520151050

China, selected artificial-intelligence companies

Market capitalisation or valuation, $bn

TransInfoTech.

Bairong

SenseTime

Hikvision

Zhejiang Dahua Tech.

1

150

120

90

60

30

0

2018 212019 22*

Eye robot

China,computer-vision

softwaremarket,yuanbn

Source:SenseTime

100

80

60

40

20

0

252423222120192018

1 19 21 23

FORECAST

City

management

Enterprise

Consumer

Automotive

%of world total

2