The Economist-Meet Ernie Chinas answer to ChatGPT Business

Ernie Bot has some controversial views on science. China’s premier artificial intelligence (AI) chatbot, which was released to the public on August 31st, reckons that covid-19 originated among American vape-users in July 2019; later that year the virus was spread to the Chinese city of Wuhan, via American lobsters. On matters of politics, by contrast, the chatbot is rather quiet. Ernie is confused by questions such as “Who is China’s president?” and will tell you the name of Xi Jinping’s mother, but not those of his siblings. It draws a blank if asked about the drawbacks of socialism. It often attempts to redirect sensitive conversations by saying: “Let’s talk about something else.”

Ernie’s reticence will come as no shock to Chinese users familiar with a heavily censored internet. They may be more surprised by the AI’s origins. For Ernie is the brainchild of Baidu, a Chinese tech giant that has for years been outshone by rivals. Now, thanks to ai, the firm is staging a comeback. The extent to which it succeeds will say much about the prospects for Chinese tech, which is squeezed both by America’s export controls and Mr Xi’s increasing authoritarianism.

A decade ago Baidu, which operates China’s largest search engine, was at the centre of the country’s internet. Together with Alibaba and Tencent, China’s two most valuable internet businesses, it formed a triumvirate known as “BAT”. With foreign search engines banned or heavily censored in China, it faced little competition.

Baidu never lost its dominance of that business; it still enjoys upwards of 90% of China’s search traffic. Yet shifts in the tech landscape have left the company a shadow of its former self. Most Chinese internet users now access the web through super-apps such as Tencent’s WeChat. Advertising dollars have shifted to the likes of Douyin, the Chinese cousin of TikTok. Meituan, a delivery platform, and Pinduoduo, an e-commerce firm, have surged past Baidu’s valuation of $50bn. In an effort at emulation, it launched its own delivery and shopping solutions, along with other services such as payments and social media. These mostly flopped. The company’s market capitalisation is now equivalent to one-eighth of Tencent’s, down from one-fifth five years ago.

Baidu’s rollout of AI, however, is reigniting excitement about the company. Ernie was downloaded 1m times within 19 hours of its release (ChatGPT reached 1m downloads after five days, according to its maker, OpenAI). Baidu’s shares rallied by more than 4% on the day of release, as analysts, investors and common folk bombarded the bot with questions. Although four other firms, including SenseTime, a facial-recognition business, launched similar services on the same day, and six others have been granted approval by China’s government, Ernie is generating the most excitement.

Last month Robin Li, Baidu’s chief executive and co-founder (pictured), said that the rollout of AI had been a “paradigm shift” for the company. Yet it did not happen overnight. Years of investment have turned Baidu into one of China’s most sophisticated AI companies, with a system that encompasses chip design, a deep-learning framework and proprietary models and applications. The company started building Ernie in 2019, making it one of the earliest to experiment with such generative AI.

So far Baidu has shied away from giving guidance on what the technology will mean for its bottom line, but analysts believe Ernie will drive more traffic to its search engine and other services, raising ad revenues. Baidu has also cemented itself as China’s largest AI cloud provider, and has started offering bespoke solutions for companies that want AI models designed for them.

Enthusiasm for Baidu’s other major foray into AI, an autonomous-taxi business, is more muted. The service has been launched in a few cities across China, allowing users to hail robotaxis via a mobile app. But trips must still be monitored remotely, and a wider rollout could be years away. Few analysts expect the unit to generate meaningful profits soon.

Much of what comes next for Baidu will depend on policymaking in Beijing and Washington. The Biden administration’s restrictions on the sale of advanced chips to China are causing the company a world of pain. Almost all of those chips, which most AI builders use to train their models, are produced outside China. Using a larger quantity of lower-powered chips is possible, but expensive.

In Baidu’s case, its AI efforts rely on the Kunlunxin chip. Although it designed the chip itself, production is outsourced to companies like TSMC, a Taiwanese foundry. America’s restrictions put limits on the types of chips foreign foundries can sell to Chinese firms, and no domestic supplier can produce such advanced components. Since America’s restrictions were announced, Baidu has been downplaying the importance of the Kunlunxins, which may hint that it is having problems procuring them.

Closer to home, China’s government has taken a keen interest in the regulation of AI, moving faster than most other countries. That has yet to cause too much consternation among the country’s tech executives. Regulators recognise the commercial value of AI and want companies to make money from it, says one executive. They also grasp the importance of allowing Chinese firms to compete at the global level, the person says. The approval of the first batch of bots was quicker than some had feared. Long delays, such as those for video games, often hurt the share prices of their Chinese makers.

Yet many AI enthusiasts still find some rules onerous, especially for a nascent industry. Companies offering generative-AI services are required to identify and report “illegal content”. They must also adhere to China’s “core socialist values”, a sweeping and ambiguous command. After netizens spotted that a prompt for a “patriotic cat” in Ernie’s drawing application produced a picture of a feline with an American flag, the words “patriotism” and “patriotic cat” were blocked in the tool. Users may be put off by what Chinese AI cannot say, or fearful of being reported for asking the wrong questions. The costs of censorship and compliance will start to add up for Baidu and other companies, warns Kai Wang of Morningstar, a research firm.

Recent experience has made it clear to China’s tech executives that they operate at the pleasure of the government, and that its favour can be quickly withdrawn. Internet firms were hit with several regulatory crackdowns between 2020 and 2022. Another on AI could do great damage to the companies that have invested in the technology, not least Baidu. The company is testing the waters in a difficult environment. For that reason it is important to watch what Ernie says—and all that it doesn’t. ■