China’s tech sector runs out of steam as government policies tighten grip

The Chinese tech industry, once viewed as a formidable competitor to the US, is now experiencing a slowdown akin to Japan’s historical stagnation period. Chinese companies, once lauded for their advancements in artificial intelligence (AI), are now lagging behind American counterparts such as OpenAI in generative AI.

China’s reliance on foreign AI chips has been challenged by tightening supply lines from the US. Also, domestic semiconductor manufacturers are struggling to produce chips capable of supporting AI training tasks, Nikkei Asia quoted Nina Xiang, Managing Director at TH Capital and author of “US-China Tech War: What Chinese Tech History Reveals About Future Tech Rivalry,” as saying.

Market capitalization and revenue figures further illustrate the widening gap between Chinese and American tech giants, he said, adding that despite previous dominance, Chinese companies like Baidu now trail significantly behind their US counterparts like OpenAI in terms of market value and revenue.

According to Xiang, a rising number of economists are questioning whether China’s Gross Domestic Product (GDP) will ever surpass that of the US as the country grapples with declining momentum.

Also, the decline in the number of Chinese unicorns (startups valued at over USD 1 billion) and venture capital funding signals a shrinking pool of future-defining tech companies in China.

Chinese AI companies also operate on a smaller scale than their American counterparts. Baidu, China’s leader in large language models (LLMs), has a market capitalization of USD 33.7 billion and generated USD 91 million of AI-related revenue during the fourth quarter of 2023. OpenAI, by comparison, is valued at over USD 80 billion and recorded USD 2 billion in revenue last year, Nikkei Asia reported.

This is a critical point because training advanced LLMs can cost hundreds of millions of dollars and the expense could reach the billion-dollar level soon. Training requires massive capital investment, something that even the biggest Chinese tech companies have fallen behind on.

Xiang attributed China’s tech stagnation to Chinese President Xi Jinping’s policies, which have stifled private-sector development and instilled fear among entrepreneurs. The regulatory crackdown, coupled with government-led initiatives dictating innovation priorities, has led to a market landscape where government planning overrides market forces.

Xiang warns that while government intervention may yield short-term successes, sustainable innovation can only thrive in a free and open market environment.

Ultimately, Xiang underscores the consequences of China’s tech decline falling squarely on President Xi, who may not fully grasp the severity of the situation due to a lack of candid feedback from advisors, Nikkei Asia reported.

Analysts caution that unless China shifts towards a more market-led approach, its tech sector’s decline could have far-reaching implications for the country’s economic future.

With ANI inputs.