Baidu loses ground in Chinese AI sector

Chinese tech giant Baidu Inc. (BIDU, 9888.HK) reported a decline in revenue in the fourth quarter amid increasing competition in the artificial intelligence and internet search sectors. This opens a new chapter in the development of China’s trillion-dollar technology industry.

The company’s financial results exceeded conservative analyst forecasts: revenue decreased by 2% to 34.1 billion yuan ($4.7 billion) against a forecast of 33.4 billion yuan. Net profit reached 5.2 billion yuan, significantly exceeding the expected 3.92 billion yuan. Baidu’s reporting attracted increased investor attention after Hangzhou startup DeepSeek presented AI models that match and in some parameters surpass Western counterparts. This achievement triggered a rise in Chinese technology company stocks, including Tencent Holdings Ltd. (TCEHY, 0700.HK) and Alibaba Group Holding Ltd. (BABA, 9988.HK), however, Baidu largely remained aside from this rally.

The company faced a complex set of challenges in key business areas. In the search segment, Baidu is losing audience and advertising budgets to social applications such as Xiaohongshu and ByteDance Ltd.’s Douyin. The situation is complicated by the general economic downturn in China.

DeepSeek’s breakthrough, achieved through the use of open-source models and ultra-low training costs, has called into question Baidu’s long-standing strategy of developing proprietary technologies. In response to changing market dynamics, the company unexpectedly announced the open-sourcing of its models and integrated DeepSeek’s latest R1 model into its flagship chatbot, following Tencent’s example.

Despite being the first among Chinese technology leaders to introduce large language models to the general public and commercialize the ChatGPT-like Ernie service with an $8 monthly subscription, the company appears to be losing its leadership in AI. Currently, Baidu is forced to refund users after transitioning the application to a free distribution model.