China's technology sector is on the brink of a fundamental shift: over the next two to three years, the country's leading internet platforms could begin accumulating a significant share of profits from artificial intelligence. The key condition for this is the easing of export restrictions on chip supplies and the development of the necessary infrastructure. Such a conclusion emerges from an analysis of market dynamics that I conducted based on the latest data on capital expenditures and strategies of the largest players.
Currently, the main margin in the AI field is captured by hardware manufacturers and providers of related services. The market is hitting a severe shortage of computing power, which gives equipment suppliers enormous pricing power. However, the situation could change dramatically if supply chains normalize. In that case, the advantage would shift to platforms with a massive user base, accumulated data, and developed distribution channels. It is precisely these assets that will become the main driver of AI monetization in China.
Investment fever and investor anxiety
Forecasts of imminent monetization come amid unprecedented growth in AI spending by Tencent and Alibaba. The latter nearly tripled its capital expenditures in the second quarter, bringing them to 52.8 billion yuan ($7.86 billion). This led to a historic event: the company's free cash flow turned negative for the first time, amounting to -13.8 billion yuan ($2.05 billion).
The scale of investment is impressive: quarterly free cash outflow reached 44.7 billion yuan ($6.65 billion), more than double last year's figures. Alibaba's total quarterly expenditures soared to 67.7 billion yuan ($10.07 billion). Such an aggressive investment policy raises justified market concerns, especially against the backdrop of a slowing macroeconomic environment in the second half of the year and expected pressure on short-term profitability.
A bet on efficiency and survival
It is critically important to understand: even with weak returns on investment, these expenditures are a necessary condition for maintaining competitiveness. The technology race does not forgive pauses. Notably, the total AI spending of Chinese tech companies amounts to only about one-seventh of comparable expenditures by their American competitors. This gap is driven by limited access to advanced foreign chips and a smaller business scale.
However, the Chinese sector has its own trump cards. The main one is striking cost efficiency. The cost of training local models does not exceed 10% of the level of global leaders, and the average API price of Chinese models remains below 20% of international counterparts. This creates a powerful pricing advantage that could become a decisive factor in the medium term.
My analysis shows: in the long term, victory will depend not on the volume of capital expenditures, but on the ability of platforms to convert their audience and data into real AI products. It is precisely dominance in these assets that will prove decisive for Chinese giants in the battle for AI profits.
Notably, Alibaba is already taking active steps to strengthen its position: in August, the company raised $10.2 billion to develop its AI division through the placement of 710 million new shares. This signals long-term confidence from management in monetization prospects, despite current financial sacrifices.
Expert commentary from Cryptalist: We are observing a classic dilemma of "invest now — profit later." Chinese platforms are deliberately sacrificing current liquidity for future dominance. However, the key risk is that the window of opportunity could close faster than expected if geopolitical tensions intensify. The success of the strategy will depend on the ability of companies to adapt to constantly changing conditions of technology access.