China’s quest for artificial intelligence

Daniel J. Graña

Daniel J. Graña
Portfolio Manager, CFA, AIF, 06/19/18


  • Chinese hardware technology companies are embracing artificial intelligence (AI).
  • The government is promoting AI hubs in a bid to become a global leader.
  • Surveillance, including facial recognition, and self-driving cars are poised for growth.
A new digital frontier

China is rapidly making a name for itself in the artificial-intelligence space. The buzz around this new digital frontier has been growing over the past year, and the government is working with the country’s tech industry, from start-ups to established firms, to promote AI research and infrastructure.

During a recent visit to China, we were surprised but enthusiastic to meet so many innovative, hardware technology companies focused on AI-enhanced tools. The offerings included machine vision — a rapidly growing branch of AI that aims to give machines sight comparable to our own. We were also shown industrial automation, voice recognition devices, and mobile chipsets designed to better tackle machine-learning tasks.

China’s tech sector benefits from a pool of Western-educated engineers and local graduates, along with a wealth of government assistance. Such talent is needed to develop AI hubs. During our trip, we discovered that innovations in technology are no longer exclusive to developed markets. Investors who underestimate China in this space are making a mistake.

During a recent visit to China, we were surprised but enthusiastic to meet so many innovative, hardware technology companies focused on AI-enhanced tools.

Bargaining chip

Spurred by concern that China imports $200 billion in semiconductor chips, President Xi Jinping’s government views the development of the tech industry as a key ingredient in moving the country from middle-income to high-income status. Furthermore, the trade rift with the United States, with its possible implication of lost access to high-end U.S. technology, is deemed a national security threat.

Therefore, China has put in place a robust plan for state funds and localization targets. At this stage, however, there is a gap between the proposals and action. Some experts say the government is not concerned about the sector’s profitability as long as its policies guarantee globally competitive Chinese companies. While success isn’t guaranteed, of course, the medium-term targets include South Korea’s Samsung* and SK Hynix, the U.S.’s Micron Technology, Qualcomm Inc., and Intel Corp., and semiconductor equipment makers.

China’s tech ambitions have also played into the ongoing trade dispute with the Trump administration. China has yet to approve Qualcomm’s $43 billion takeover of Dutch rival NXP Semiconductors. The government’s review of the acquisition has languished amid the escalating trade fight between the world’s two largest economies, fueling concern the NXP deal has become a bargaining chip.

Embracing surveillance and facial recognition

There are a multitude of possible AI applications. But the companies we met with are concentrating on two end markets: surveillance and autonomous vehicles. We watched some demonstrations that combined public surveillance and AI.

Hangzhou Hikvision Digital Technology† , a systems integrator, Sunny Optical Technology Group, a maker of optical-related products, and Face++, a start-up that focuses on facial recognition, are among companies that have carved a niche in this space. Given the lack of concern about privacy in the country, Chinese companies are likely to be global leaders in AI-enhanced surveillance and facial recognition technologies going forward.

Major retailers such as Walmart§ may eventually use AI expertise to track customers at its stores, analyze pricing, and assess store layouts and product positioning. But companies that manufacture parts (OEMs or original equipment manufacturers) for use in vehicles, and governments such as China will likely be the among the first to embrace this technology.

China currently regulates traditional and social media, including television and online posts. Surveillance technology backed by AI promises to cement the government’s ability to control and influence every aspect of society and the activities of its more than one billion people.

The autonomous vehicles race

Nowhere is the enthusiasm for self-driving vehicles more apparent than in China, the world’s largest car market. Start-up Horizon Robotics Inc. was chosen by Volkswagen AG’s Audi brand to develop a platform for autonomous vehicles for the Chinese market. Beijing-based Horizon counts Intel and other pedigreed venture capital firms as investors.

Another player in this field is Sunny Optical, the world’s largest supplier of vehicle lenses. The company makes automotive lenses that are used as sensors.

With China’s demand for cars showing no signs of slowing down, it is likely the country will be among the first to make the transition from traditional automobiles to autonomous forms of transport.

 

Putnam Emerging Markets Equity Fund (PEMMX) portfolio holdings as of March 31, 2018, included stocks quoted in this article:

* Samsung Electronics – common stock, 4.65%

 Hangzhou Hikvision Digital – A 144A/RegS warrants expiring on February 11, 2019, 0.54%

Sunny Optical Technology Group – common stock, 1.00%

§Walmart de Mexico SAB de CV – common stock, 1.18%

For a complete Emerging Market Equity Fund holdings visit putnam.com. For Emerging Market Equity Fund risk disclosure read putnam.com.

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