Chinese internet platforms are capable of capturing a significant share of profits from artificial intelligence within a two-to-three-year horizon. The key condition is the easing of export restrictions on chips and related infrastructure. I draw this conclusion based on fresh data and an analysis of market dynamics presented during an industry conference in Shenzhen.
At the current stage, the bulk of margins in the AI sector is accumulated by suppliers of hardware and computing power. The market is hitting an acute shortage of resources, which temporarily shifts the balance of power in favor of "hardware." However, if sanctions barriers are relaxed, the pricing advantage will shift to platforms with extensive audiences, accumulated data, and developed distribution channels. For players such as Tencent and Alibaba, this means a return to a phase of active monetization.
Investment Gap and Market Reaction
The forecast looks particularly telling against the backdrop of explosive growth in capital expenditures by Chinese tech giants. Alibaba increased its capital expenditures 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, amounting to -13.8 billion yuan ($2.05 billion). For the quarter ending in June, the free cash outflow reached 44.7 billion yuan ($6.65 billion)—more than double the level from the previous year. Total quarterly spending surged to 67.7 billion yuan ($10.07 billion).
Such massive investments are causing caution among investors, especially against the backdrop of a slowing macroeconomic environment in the second half of the year and pressure on short-term profits. According to my estimates, Chinese tech companies' annual AI spending is equivalent to their combined cash flow over 18 months. This is a serious burden, but it is justified: without such investments, companies risk falling out of the competitive race, even if the returns fall short of expectations.
Hidden Advantage: Efficiency vs. Scale
The combined AI spending of the Chinese tech sector amounts to only about one-seventh of the level of the largest American competitors. This gap is explained by limited access to advanced foreign chips and smaller business scales. In the short term, this preserves the advantage for infrastructure players.
However, the Chinese AI sector has a powerful trump card—cost efficiency. The cost of training local models does not exceed 10% of the level of global leaders, and the average API price of leading Chinese models is less than 20% of international counterparts. This creates a foundation for expansion in the medium and long term, where the decisive factor will be not the volume of capital expenditures, but the dominance of platforms with large user bases and data.
In August, Alibaba additionally raised $10.2 billion for AI development through the placement of 710 million new shares, confirming the seriousness of its intentions.
My comment: Chinese platforms are in a unique position—they are forced to compete with limited resources, but it is precisely this that spurs them toward innovations in efficiency. If restrictions ease, AI monetization in China could follow a more aggressive scenario than in the West, thanks to a huge domestic audience and low model costs. The only question is when political will will outweigh technological isolation.