China AI sell-off: Key takeaways
- China’s technology sell-off makes a stronger case for judging AI businesses by commercial results
- Tencent and Alibaba report growing demand for AI-powered services, although revenue growth comes alongside substantial investment
- For brands, advertising performance, shopping conversion and service quality should guide decisions about adoption
Swathes of my friends are starting small businesses. This must be the hallmark of the AI era. That and the pull of conversation towards the bubble’s coming pop. Don’t listen to anyone who tells you they know when that’s coming. It’s speculation. But late October did give us something more concrete than speculation to think about: news that in China the bubble might have already burst.
The STAR 50 – tech arm of China’s stock market index – dropped around 40% in less than four months. By late October, approximately US$480 billion in market value had been wiped from the books. Demand concerns, lofty valuations, export restrictions on Chinese tech have been cited as the cause.
It’s a good talking point when conversation next drifts towards AI bubbles. But share prices only say so much about how useful a technology has become. In advertising and online shopping, the tech has put down serious and useful roots. Not only in those small businesses that seem to be springing up everywhere, but at the other end of the scale.
Tencent gives us something practical to consider
Consider Tencent (腾讯). The company reported second-quarter marketing services revenue of RMB43.6 billion (approximately US$6.4 billion), up 22% year on year. Among the drivers were improvements to AI advertising recommendations and upgrades to their automated campaign management system, AIM+. Closer integration with shopping within WeChat (微信) helped too.
The idea is straightforward enough. Show people more relevant advertisements, generate more interest. Help businesses manage their campaigns, make it easier for them to market effectively. Give interested customers fewer hurdles to jump on the way to the checkout. These have long been marketing jobs. AI has made these jobs much easier, and it is delivering results.
Alibaba and why demand is only part of the story
Now take Alibaba (阿里巴巴). Its June-quarter results reported 45% growth in external cloud revenue. AI-related product revenue also delivered a twelfth consecutive quarter of triple-digit growth. There is commercial demand here. It’s just that serving that demand comes with a bill.
Growing sales and heavy spending can happen together
Alibaba reported a quarterly free cash flow outflow of RMB44.7 billion (approximately US$6.58 billion), and they attributed most of it to increased cloud infrastructure expenditure. Growing sales and heavy spending can happen together, which is why revenue figures deserve to be read alongside the costs supporting them.
If you’re in China and you’ve been shopping online, you might have encountered some of this tech via the Qwen Shopping Assistant on Taobao (淘宝). It’s there to support shoppers from their first whim to after-sales service. Merchant tools also help sellers with product listings and store management, advertising, and customer service.
Merchant tools also help sellers with product listings and store management, advertising, and customer service
It’s solving those same practical marketing problems: are customers finding suitable products, completing purchases and getting their problems resolved? Are staff saving time without spending it correcting mistakes? Is this making platforms more money?
Asking for more
The sell-off is a good reason to look more closely at what AI businesses are delivering. Tencent and Alibaba show that demand is growing but meeting that demand costs money. We should really be asking customers if they’re getting enough value, and whether the companies providing these tools can make a profit.
For my friends starting businesses, it’s an easy question: does a tool save time or bring in enough work to justify its price? The same question applies to much bigger companies. Tencent and Alibaba seem to be finding applications for AI. Share prices may fall sharply, but that doesn’t mean the tools stop being useful.
