Baidu CEO engineers return $ 66 billion after mistakes

The offer of shares of Baidu Inc. in Hong Kong on Tuesday marks an unlikely resurgence for founder Robin Li, who struggled to regain relevance in China’s technology industry after wasting an almost monopoly on research.

The Internet giant raised $ 3.1 billion in the biggest homecoming of a Chinese company with shares traded in the United States in the city since JD.com Inc. last June. Li’s company has more than tripled its valuation since the depression last March, with about half of the gains occurring in the past three months, when Baidu’s AI bets finally began to bear fruit in areas such as cloud and electric vehicles. It is a rare period during which the company has outperformed larger rivals Alibaba Group Holding Ltd. and Tencent Holdings Ltd., whose shares have struggled at the start of China’s campaign to crack down on its free technology industry.

In an exclusive interview, the 52-year-old founder outlined how Baidu is becoming an AI company and why he supports Beijing’s antitrust push. The company will continue to work in partnership with car manufacturers like Geely to secure a position in the largest vehicle market in the world, maintain a record pace of investments in R&D, despite tight margins, and seek to acquire talent and technologies to drive development of AI, Li said. Eventually, most of Baidu’s revenue will come from business besides search and advertising, he added.

“We have been investing in AI for more than 10 years and we probably lost a lot of money on it,” Li said in an interview with Bloomberg Television. “Eventually we will be rewarded.”

Baidu had a quiet debut in Hong Kong, up 1.2% on Tuesday. This compares to the first day’s gains of 3.5% from JD.com and 5.7% from NetEase Inc., two other Chinese companies listed in the U.S. that have turned to the city for secondary listings.

Once part of the Internet triumvirate in China alongside Alibaba and Tencent, Baidu has lagged behind in the mobile era, where the effectiveness of its search service has been undermined by super-applications like WeChat, creating isolated ecosystems. To compete, the core of Baidu The research product is transforming itself into a multifunctional platform that hosts a variety of content, from news articles to live streams and short videos, essentially emulating these applications.

Meanwhile, Baidu has spent billions of dollars over the past decade in areas ranging from natural language processing to voice interaction, an enterprise that had initial problems with exits of key executives, such as its renowned chief scientist, Andrew Ng. Until recently, investors questioned the company’s R&D spending, which accounted for about a fifth of its 2020 revenue. But Li has maintained faith in his original vision and is promising to keep the pace of investment in the next decade or two.

“For most of the past 10 years, I think investors didn’t like that,” said Li. “So, we were feeling lonely. But it is really in line with our mission. “

Now, marketing is finally gaining prominence. In January, Baidu unveiled a new venture with Zhejiang Geely Holding Group that will produce smart EVs, prompting analysts to reassess the tech giant’s eight-year Apollo unit, whose standalone software has attracted the warm interest of automakers in the past. The venture with Geely will accelerate this integration, said Li, with the aim of delivering its own EVs to the market within three years.

Semiconductors are another use case. Like Alphabet Inc. and Amazon.com Inc., Baidu began designing custom chips for its own server farms, performing tasks such as search rankings. But what started as a cost-cutting exercise has turned into a new business, with almost half of its Kunlun chips used by third parties last year. The new 7 nanometer iteration of AI silicon has started to be produced in factories, despite the global chip shortage, said Li. The unit – which recently raised $ 230 million from investors like IDG Capital – will target more external clients in finance, education and energy, he added.

By investing in chips and AI, Li is delving into businesses that have become a top priority for the Communist Party of China, as the world’s largest economies compete for global influence. Tensions between the U.S. and China, from trade to cybersecurity and investments, have already involved several Baidu peers. Dozens of Chinese companies that once considered an American listing giving the most prestige have removed or added secondary listings elsewhere.

Baidu’s Hong Kong debut is a hedge against the potential risks of US trade, Li Admitted, but more importantly, “allows Chinese investors to really share Baidu’s growth story”.

Internally, Beijing has signaled its intention to end a decade of unrestrained expansion by its technology giants, fighting behaviors such as market abuse and data monopoly since the end of last year. While Jack Ma’s Alibaba and Ant Group Co. has been the most visible target for regulators. The country’s antitrust body this month also penalized firms like Baidu and Tencent for not seeking approval for acquisitions and investments from years ago. Li pledged to ensure that the company did not make the same mistake in future deals, which could be financed with funds from the Hong Kong listing.

In many ways, Baidu is better protected from China’s repression than its technology pioneering colleagues. Efforts to encourage private sector companies to share the data they have accumulated are likely to benefit Baidu’s central search service, dismantling the walls around the country’s most popular mobile apps. Its open platforms for self-learning and deep learning technologies combine with Beijing’s effort to open data accumulated by private sector companies, said Li.

Nor does your company have the same status as a kingmaker as Alibaba and Tencent, both supporting a plethora of promising ones. Some of its portfolio companies, such as food delivery giant Meituan and leader Didi Chuxing, were created through billion-dollar mergers. In 2017, Baidu sold its take-away business with rival startup Ele.me, which was later acquired by Alibaba, after losing an expensive subsidy war in China’s giant economy.

“You just can’t imagine guy # 1 and # 2 suddenly merging and gaining more than 90% market share in the United States,” said Li, a graduate of the University of Buffalo in New York. “But it has happened a few times in China before. This is not good for innovation. So, I think the antitrust pressure is justified. “

Read More: What’s behind China’s crackdown on its tech giants: QuickTake

Thanks to its relative immunity to the antitrust push, Baidu’s market capitalization rose $ 66 billion last year, ahead of its Hong Kong quote, where retail demand was 112 times the available stock. The institutions subscribed 10 times the shares attributed to them.

Although the sale of shares provided Baidu with a temporary boost, investors are likely to focus more on the search and content of the company as its biggest medium-term earnings driver. That’s where beginners like the owner of TikTok ByteDance Ltd. has attracted eyes and marketing dollars. Baidu’s Netflix-style service, iQiyi Inc., has seen revenue drop over the past two quarters as new platforms like Bilibili Inc. and Kuaishou Technology has gained momentum.

Pulling out of the Nosedive

Baidu’s December quarter revenue grew faster in 2020

Source: Bloomberg

In November, Baidu agreed to buy Joyy Inc.’s YY streaming service for $ 3.6 billion in a deal that aims to enrich its content offerings. Revenue for the first quarter is expected to grow at least 15% from last year, when Covid-19 plunged its advertising business into a contraction.

“Baidu’s attempts to commercialize its artificial intelligence initiatives are positive. Investors now have better visibility into returns after years of heavy investment, ”said Bloomberg Intelligence senior analyst Vey-Sern Ling. “However, the incremental revenue generated by these ventures may have to be reinvested to drive growth, and the profitability of these businesses may remain low until sufficient scale is achieved. Therefore, Baidu is likely to continue to depend on its core research business in the short term. “

With Baidu still in transformation, Li is in no hurry to give up control after 21 years at the helm, unlike other Chinese tech magnates, including the founder of Alibaba Ma and Colin Huang of Pinduoduo Inc ..

“I always wanted to find someone who could replace me as CEO,” he said. “But in the meantime, I like my current job. I like technology. I like to see all the changes happen. “

– With the help of Zheping Huang, Tom Mackenzie, Sabrina Mao and Allen K Wan

(Hong Kong stock updates traded in the fifth paragraph)