China Tech Earnings Expose AI Growing Pains

During a call with analysts on Thursday evening, Alibaba Group Holdings Ltd. Chief Executive Officer Eddie Wu touted how the adoption of artificial intelligence is happening at a rapid clip beyond just China’s tech sector.

“Animal farming,” Wu said twice, referring to the proliferation of AI across a range of businesses. It seemed an eyebrow-raising example that exposes how companies are grappling with applying the nascent technology — and making money doing so. 

Earnings from some of China’s biggest tech companies this week revealed resilience in the face of sluggish consumer spending and a trade war. But they also exposed uncertainty about how massive AI bets will pay off. 

Alibaba’s revenue slightly missed analysts’ expectations. The company pivoted earlier this year to go all-in on AI, becoming one of the most aggressive investors and releasing new announcements and product updates seemingly every week. Its results reveal that while tech companies are barreling ahead with AI, domestic consumers are unwilling to shell out money for the new technology. 

Tencent Holdings Ltd.’s earnings were bolstered by its marquis gaming division, but when it comes to AI, President Martin Lau told analysts: “We’re at uncharted territory, not only for Tencent but for the whole world in terms of the deployment of artificial intelligence.”

One potential bright spot Tencent pointed to was how AI investments are bearing fruit via improvements in targeted advertising. Lau pointed to how the company is working on evolving AI products into agentic tools, which refers to bots performing complex tasks on their own, the next leap in the space. That would be a significant technological step, but he also admitted that these tools likely won’t be much different from those from competitors who are racing to do the same.

While users outside of China may be willing to pay for AI, software services have been a notoriously difficult sell domestically, and most companies provide AI for free. It’s unlikely Chinese tech giants will be able to mimic a revenue stream like the one provided by users paying for OpenAI’s ChatGPT. It puts outsized pressure on these firms to come up with novel monetization strategies. Lau’s acknowledgement that he doesn’t see subscription models for AI taking off in China only exposes how the saturated market is propelling innovation, even if its forcing rivals to undercut each other.  

Meanwhile, if Alibaba executives were hoping all the excitement would be around the company’s aggressive AI expansion, they may have been disappointed. Most of the questions were related to its e-commerce operations, another area marked by enormous local competition, and exposing the pains China is contending with amid tariff uncertainty. A sluggish economy and the trade war are casting a shadow over tech ambitions despite companies’ efforts to keep pace with Silicon Valley’s breakthroughs.

The mixed results indicate that competition in China’s tech sector remains fierce. Entrepreneurs and engineers receive a host of incentives to master new technologies and meet consumer preferences. We will likely see mushrooming productivity growth, but the key challenge remains how that will translate into revenue growth. 

Investors will soon expect some near-term signals that there is a sustainable monetization path. In the face of this, Alibaba’s aggressive expansion feels risky compared to Tencent’s more cautious approach. 

Let’s hope these animal farmers find AI meaningful enough for productivity to start paying for it.