Baidu Inc., often hailed as China's leading AI developer, faced a significant setback as its shares plunged sharply, the most in over a year, amid concerns over its artificial intelligence technology's alleged links to Chinese military research. This development underscores the vulnerability of China's tech sector to geopolitical tensions and the heavy influence of US policy decisions.
The drop in Baidu's shares by 12% on Monday followed a report by the South China Morning Post, which suggested that the company's AI platform, Ernie Bot, was tested by an institute affiliated with the People's Liberation Army's Strategic Support Force, a unit overseeing cyberwarfare. This association raised fears of potential retaliation from Washington, including sanctions, given the current geopolitical rivalry between the US and China. Baidu has categorically denied any affiliation or partnership with the institute and claims to have no knowledge of the research project.
Ernie Bot, launched in 2023, is China's first substantial response to OpenAI's ChatGPT and has quickly become a cornerstone of Baidu's growth strategy. Attracting over 100 million users since its public rollout, Ernie Bot has given Baidu a significant edge in the AI race, outpacing tech giants like Tencent and Alibaba. The chatbot's success is seen as a rare opportunity for Baidu to reclaim its footing in the tech market, especially against the backdrop of its declining core business in online marketing due to the rise of short-video platforms.
However, Baidu's reliance on advanced technology, much of which is subject to US export controls, adds a layer of complexity. The US has already imposed investment bans in some areas of China's high-tech sectors, including AI, and the tighter export controls on advanced chips used for AI development pose a significant challenge. These restrictions, combined with the recent report linking Ernie Bot to military research, have rekindled concerns about further sanctions from Washington.
The situation represents a precarious balancing act for Baidu and other Chinese AI hopefuls. While there is strong demand for services like Ernie Bot, and related industries such as cloud services and smart cars, the dependence on funding and access to global technology makes these companies particularly vulnerable to international politics.
Investor confidence in Baidu has been shaken, as evidenced by the sharp decline in its stock value. The company's shares are down a quarter in the past year and currently trade at just 10 times forward earnings, significantly lower than global peers like Google. This valuation reflects the heightened geopolitical uncertainty and the risk of US sanctions that loom over Chinese tech firms, particularly those involved in advanced AI development.
