Baidu CEO Creates $ 66 Billion Comeback After Missteps

Baidu Inc.’s stock offering in Hong Kong on Tuesday marks an unlikely resurgence for founder Robin Li, who has struggled to regain his relevance in China’s tech industry after squandering a near-monopoly on the search.

The internet giant raised $ 3.1 billion in the biggest homecoming of a US-listed Chinese company in the city since JD.com Inc. last June. Li’s company has more than tripled its valuation from the low last March, with roughly half of the gains in the past three months, as Baidu’s bets on AI finally begin to pay off in areas such as the cloud and electric vehicles. It’s a rare stretch during which the company has outperformed bigger rivals. Alibaba Group Holding Ltd. and Tencent Holdings Ltd., whose stock has struggled in the wake of China’s drive to crack down on its carefree tech industry.

In an exclusive interview, the 52-year-old founder outlined how Baidu is transforming into an artificial intelligence company and why he supports Beijing’s antitrust push. The firm will continue to team up with automakers such as Geely to position itself in the world’s largest vehicle market, maintain a record pace of R&D investment despite compressed margins, and seek to acquire talent and technologies to drive development of artificial intelligence, Li said. Eventually, most of Baidu’s revenue will come from businesses beyond search and advertising, he added.

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

Baidu made a quiet debut in Hong Kong, trading roughly 1.2% higher early Tuesday. That compares with first-day gains of 3.5% on JD.com and 5.7% for NetEase Inc., two other US-listed Chinese firms that flocked to the city for secondary listings.

Once part of China’s Internet triumvirate alongside Alibaba and Tencent, Baidu has lagged behind in the mobile age, where the effectiveness of its search service has been affected by super-apps like WeChat that create siled ecosystems. . Competing, the core of Baidu The search product is morphing into an all-purpose platform that hosts a variety of content, from news articles to live streams and short videos, essentially emulating those apps.

Meanwhile, Baidu has invested billions of dollars over the past decade in areas from natural language processing to voice interaction, an effort that had initial problems with exits from key executives such as its renowned chief scientist Andrew Ng. Until recently, investors had questioned the company’s R&D spending, which accounted for about a fifth of its 2020 revenue. But Li has kept faith in his original vision and is committed to keeping pace with the trends. investments for decades to come.

“For most of the last 10 years, I think investors didn’t appreciate it,” Li said. “So we felt a little lonely. But it’s really in line with our mission. “

Now, marketing is finally coming to the fore. In January, Baidu unveiled a new company with Zhejiang Geely Holding Group that will produce smart electric vehicles, prompting analysts to revalue the tech giant’s eight-year-old Apollo unit, whose autonomous driving software had attracted tepid interest from automakers in the past. The company with Geely will accelerate that integration, Li said, aiming to bring its own electric vehicles to market in three years.

Semiconductors are another use case. I like it Google and Alphabet Inc. 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-saving exercise has morphed into a new business, with nearly half of its Kunlun chips used by third parties last year. The new 7-nanometer iteration of AI silicon has started production in factories despite a global shortage of chips, Li said. The unit, which recently raised $ 230 million from investors such as IDG Capital, it will target more external clients in areas from finance to education to energy, he added.

By pushing chips and artificial intelligence, Li is delving into businesses that have become a priority for the Communist Party of China as the world’s largest economies compete for global influence. Tensions between the United States and China ranging from trade to cybersecurity to investment have already affected several Baidu peers. Dozens of Chinese companies that once viewed a US listing as giving them the highest prestige have either delisted or added secondary listings elsewhere.

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

Domestically, Beijing has signaled its intention to end a decade of unfettered expansion by its tech giants, fighting behaviors such as market abuse and data monopoly since late last year. While Jack Ma’s Alibaba and Ant Group Co. has been the most visible target of regulators, the country’s antitrust watchdog also this month sanctioned companies such as Baidu and Tencent for not seeking their approval for acquisitions and investments from years ago. Li promised to ensure that the company does not make the same mistake in future deals, which could be financed from the proceeds of the Hong Kong listing.

In many ways, Baidu is better protected from China’s crackdown than his fellow tech pioneers. Efforts to encourage private sector companies to share the data they have accumulated will likely benefit Baidu’s flagship search service by dismantling the walls around the country’s most popular mobile apps. Its open platforms for self-driving and deep learning technologies dovetail with Beijing’s push to open up data accumulated by private sector companies, Li said.

His firm also doesn’t have the same king-maker status as Alibaba and Tencent, both of which endorse a plethora of promising players. Some of the companies in his portfolio, such as food delivery giant Meituan and ridesharing leader Didi Chuxing, were created through multi-billion dollar mergers. In 2017, Baidu sold its takeout company to compete with startup Ele.me, which was later acquired by Alibaba, after losing a costly subsidy war in China’s concert economy.

“You can’t imagine man number one and man number two suddenly merging and gaining more than 90% of the market share in the US,” said Li, a graduate of the University of Buffalo in New York. “But that happened several times before in China. That is not good for innovation. So I think the antitrust push 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 has risen $ 66 billion over the past year, ahead of its listing in Hong Kong, where retail demand was 112 times greater than available stock. Institutions subscribed for 10 times the shares that were assigned to them.

While the share sale has provided Baidu with a temporary boost, investors are likely to focus more on the company’s search and content as its main medium-term profit driver. That’s where upstarts like the owner of TikTok ByteDance Ltd. has been drawing both the eyes and the marketing dollars. Baidu’s Netflix-style service iQiyi Inc. has seen a drop in revenue over the past two quarters as newer platforms like Bilibili Inc. and Kuaishou technology gained traction.

Pulling out of Nosedive

Baidu’s December quarter revenue grew faster in 2020

Source: Bloomberg

In November, Baidu agreed to buy Joyy Inc.’s streaming service YY for $ 3.6 billion in a deal aimed at enriching its content offerings. Revenue for the first quarter is forecast 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 Vey-Sern Ling, senior analyst at Bloomberg Intelligence. “However, the incremental revenues generated from these efforts may need to be reinvested to drive growth, and the profitability of these businesses could remain low until sufficient scale is achieved. Therefore, Baidu is likely to continue to rely on its core search business in the short term. “

With Baidu still in the midst of transformation, Li is in no rush to relinquish control after 21 years in command, unlike other Chinese tech moguls, including Alibaba founder Ma and Pinduoduo Inc.’s Colin Huang.

“I always wanted to find someone who could replace me as CEO,” he said. “But in the meantime, I enjoy 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 Trading Updates in the Fifth Paragraph)