Baidu CEO Engineers $ 66 billion comeback after missteps

The stock offering of Baidu Inc. in Hong Kong, Tuesday marks an unlikely resurgence for founder Robin Li, who has fought his way back to relevance in China’s tech industry after squandering a near-monopoly in the quest.

The internet giant raised $ 3.1 billion in the largest homecoming by a US-traded Chinese company in the city since then JD.com Inc. last June. Li’s company has more than tripled its valuation from last March’s low, with about half of its profit in the past three months as Baidu’s bets on AI are finally starting to pay off in areas like cloud and electric. vehicles. It’s a rare period when the company has outperformed bigger rivals Alibaba Group Holding Ltd. and Tencent Holdings Ltd., whose stocks have struggled in the wake of China’s campaign to work hard on its free-running tech industry.

In an exclusive interview, the 52-year-old founder outlined how Baidu is turning into an AI company and why he backs Beijing’s antitrust push. The company will continue to work with automakers such as Geely to gain a position in the world’s largest automotive market, maintain a record rate of R&D investment despite narrowing margins, and acquire talent and technologies to drive AI. stimulate development, Li said. Ultimately, most of Baidu’s revenue will come from companies beyond search and advertising, he added.

“We’ve been investing in AI for over 10 years and we’ve probably lost a lot of money doing this,” said Li in an interview with Bloomberg Television. “In the end we will be rewarded.”

Baidu made a muted debut in Hong Kong and was up about 1.2% early Tuesday. That’s comparable to a first-day gain of 3.5% at JD.com and 5.7% for NetEase Inc., two other US-listed Chinese companies that turned to the city for secondary listings.

Baidu was once part of China’s Internet Sodium Virate alongside Alibaba and Tencent, but has fallen behind in the mobile age, where the effectiveness of its search service was paralyzed by super apps like WeChat that created silos ecosystems. To compete, the core of Baidu search product turns into a universal platform that hosts a range of content, from news articles to live streams and short videos, and essentially mimics those apps.

Meanwhile, over the past decade, Baidu has sunk billions of dollars into areas from natural language processing to speech interaction, an enterprise that initially ran into problems with departure of key executives such as well-known chief scientist Andrew Ng. Until recently, investors had questioned the company’s R&D expenditures, which amounted to about one-fifth of its revenues in 2020. But Li has retained his original vision and pledges to maintain the pace of investment over the next decade.

“For most of the past 10 years, I don’t think investors have appreciated that,” said Li. So we felt a little lonely. But it is really in line with our mission. “

Now commercialization is finally emerging. In January, Baidu unveiled a new one along with Zhejiang Geely Holding Group to produce smart EVs, prompting analysts to reassess the technology giant’s eight-year-old Apollo unit, whose self-driving software had in the past attracted lukewarm interest from car manufacturers. The partnership with Geely will accelerate that integration, Li said, with the goal of bringing its own EVs to market within three years.

Semiconductors are another use case. Like it Google 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 company, with nearly half of Kunlun chips used by third parties last year. The new 7-nanometer iteration of the AI ​​silicon has begun manufacturing in factories despite the global chip shortage, Li said. The unit – recently $ 230 million raised from investors like IDG Capital – will target more outside clients in areas from finance to education and energy, he added.

Delving into chips and AI, Li delves into companies that have become a top priority for the Chinese Communist Party as the world’s largest economies compete for global influence. Tensions between the US and China, ranging from trade to cybersecurity and investment, have already engulfed some of Baidu’s colleagues. Numerous Chinese companies that once saw a US listing confer ultimate cachet have removed or added secondary listings elsewhere.

Baidu’s Hong Kong debut is a hedge against the potential risks of US trading, Li to admitted, but more importantly, it “really lets Chinese investors share in Baidu’s growth story.”

Domestically, Beijing has expressed its intention to end a decade of unfettered expansion by its technology giants by fighting behaviors such as market abuse and data monopoly since late last year. While Jack Ma’s Alibaba and Ant Group Co. was the most visible target of regulators, and the country’s antitrust watchdog this month also sanctioned companies, including Baidu and Tencent, for failing to seek approval for years of acquisitions and investments. Li promised to make sure the company doesn’t make the same mistake on future deals, which could be funded with the proceeds from the Hong Kong stock exchange listing.

In many ways, Baidu is better protected from China’s crackdown than his fellow technology pioneers. Efforts to encourage private sector companies to share the data they have collected will likely benefit Baidu’s premier search service by dismantling the walls around the country’s most popular mobile apps. The open platforms for self-driving and in-depth technologies are in line with Beijing’s drive to make data collected by private sector companies accessible, Li said.

His firm also doesn’t have the same kingmaker status as Alibaba and Tencent, both of which support a plethora of newcomers. Some of their portfolio companies, such as food delivery giant Meituan and ride-hailing leader Didi Chuxing, were created through multi-billion dollar mergers. In 2017 Baidu sold his Takeaway for rival start-up Ele.me, which was later acquired by Alibaba after losing a costly subsidy war in China’s gig economy.

“You just can’t imagine the No. 1 and No. 2 guys suddenly merging and capturing more than 90% of the US market share,” said Li, a graduate of the University of Buffalo in New York. “But that has happened a few times before in China. That is not good for innovation. So I think the antitrust push is warranted. “

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 has grown by $ 66 billion over the past year, more than its listing in Hong Kong, where retail demand was 112 times available inventory. The institutions subscribed for 10 times their allocated shares.

While stock sales have given Baidu a temporary boost, investors are likely to focus more on the company’s search and content as the main driver of earnings in the medium term. That’s true upstart like TikTok owner ByteDance Ltd. lures away eyeballs as well as marketing dollars. Baidu’s Netflix-like service iQiyi Inc. saw sales decline over the past two quarters as newer platforms such as Bilibili Inc. and Kuaishou technology took hold.

Withdraw from Nosedive

Baidu’s sales in the December quarter grew fastest in 2020

Source: Bloomberg

In November, Baidu agreed to use Joyy Inc.’s YY streaming service. for $ 3.6 billion in a deal intended to enrich its content offering. Sales for the first quarter are expected to grow by at least 15% from last year, when Covid-19 contracted its advertising business.

“Baidu’s efforts to commercialize its artificial intelligence initiatives are positive. Investors now have a better view of returns after years of heavy investment, ”said Bloomberg Intelligence senior analyst Vey-Sern Ling. “However, the incremental revenues generated from these efforts may need to be reinvested to drive growth, and the profitability of these companies may remain low until sufficient scale is achieved. Therefore, Baidu will likely continue to rely on its core search business in the near term. “

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

“I’ve always wanted to find someone who can replace me as CEO,” he said. “But in the meantime, I do enjoy my current work. I like technology. I enjoy watching all the changes happen. “

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

Updates with Hong Kong stocks traded in the fifth paragraph