Chinese internet giants are on the verge of an active phase of monetizing artificial intelligence. Based on my estimates, grounded in a deep analysis of market trends, platforms with large user bases will begin capturing the lion's share of profits in this sector within the next two to three years. The key condition is the easing of export restrictions on chips and related infrastructure.
Currently, margins in the AI industry are primarily being taken by suppliers of hardware and cloud capacity—the market is hitting a severe shortage of computing resources. This is a temporary phenomenon. Once supply chains normalize, the balance of power will shift toward companies that possess data, audiences, and distribution channels.
Giants' Investment Appetite Rattles the Market
These forecasts come amid unprecedented growth in capital expenditures by Tencent and Alibaba. The latter increased its capex nearly threefold in the second quarter, to 52.8 billion yuan ($7.86 billion). Notably, the company's free cash flow turned negative for the first time, at -13.8 billion yuan ($2.05 billion). For the quarter ending in June, the outflow under this item reached 44.7 billion yuan ($6.65 billion)—more than double the level from the previous year. Total quarterly expenditures hit 67.7 billion yuan ($10.07 billion).
Such investments look risky against the backdrop of slowing macroeconomic dynamics in the second half of the year. Chinese tech companies' annual AI spending is already equivalent to their cash flow over a year and a half. This is a deliberate bet: without such investments, it is impossible to stay in the competitive race, even if the returns fall short of expectations.
The Efficiency Factor
It is noteworthy that the total AI spending of the Chinese tech sector amounts to only one-seventh of the expenditures of American competitors. The gap is explained by limited access to advanced foreign chips and a smaller scale of business. However, the Chinese model has an undeniable advantage—efficiency. The cost of training local models does not exceed 10% of the level of global leaders, and the average API price of major Chinese models is less than 20% of international counterparts.
In the medium term, the decisive factor will not be the volume of capex, but the dominance of platforms with large audiences and developed distribution. It is they who will convert AI capabilities into real revenue.
My conclusion: the Chinese AI market is moving toward consolidation around ecosystem giants. Investors should prepare for the current phase of the "arms race" in hardware to be replaced by a battle for user scenarios, where platforms with the greatest reach will gain the advantage.