Baidu CEO engineers $66 billion comeback after missteps
The internet giant raised $3.1 billion in the biggest homecoming by a U.S.-traded Chinese firm in the city since JD.com Inc. last June.
Baidu Inc.'s stock offering in Hong Kong Tuesday marks an unlikely resurgence for founder Robin Li, who has fought his way back to relevance in China's technology industry after squandering a near-monopoly in search.
The internet giant raised $3.1 billion in the biggest homecoming by a U.S.-traded Chinese firm in the city since JD.com Inc. last June. Li's firm has more than tripled its valuation from the trough last March, with about half the gains coming in the past three months as Baidu's bets in AI finally start to pay off in areas like cloud and electric vehicles. It's a rare stretch during which the company has outperformed larger rivals Alibaba Group Holding Ltd. and Tencent Holdings Ltd., whose shares have struggled in the wake of China's campaign to crack down on its freewheeling tech industry.
In an exclusive interview, the 52-year-old founder sketched out how Baidu is transforming into an AI company and why he supports Beijing's antitrust push. The firm will continue to team with automakers like Geely to stake out a position in the world's biggest vehicle market, sustain a record pace of R&D investment despite compressing margins, and seek to acquire talent and technologies to drive AI development, Li said. Eventually, the bulk of Baidu's revenue will come from businesses beyond search and advertising, he added.
“We've been investing in AI for more than 10 years and we probably lost a lot of money by doing this,” Li said in an interview with Bloomberg Television. “Eventually we'll be rewarded.”
Baidu closed out its first day of trading in Hong Kong unchanged after rising nearly 2% earlier in the session. Its muted debut compares with first-day gains of 3.5% at JD.com and 5.7% for Netease Inc., two other U.S.-listed Chinese firms that turned to the city for secondary listings.
Once part of China's internet triumvirate alongside Alibaba and Tencent, Baidu has fallen behind in the mobile era, where the effectiveness of its search service has been crippled by super-apps like WeChat creating siloed ecosystems. To compete, Baidu's core search product is morphing into an all-purpose platform hosting an array of content from news articles to live-streams and short videos, essentially emulating those apps.
Meanwhile, Baidu has sunk billions of dollars over the past decade into areas from natural language processing to voice interaction, an endeavor that ran into initial trouble with departures of key executives like its well-regarded chief scientist Andrew Ng. Until recently, investors had called into question the firm's R&D spending, which amounted to roughly a fifth of its 2020 revenue. But Li has kept faith in his original vision and is pledging to keep up the pace of investment for the next decade or two.
“For the most part of the past 10 years, I think that investors did not appreciate that,” Li said. “So we were kind of feeling lonely. But it is really in line with our mission.”
Now, commercialization is finally coming to the fore. In January, Baidu unveiled a new venture with Zhejiang Geely Holding Group that will produce smart EVs, prompting analysts to revalue the tech giant's eight-year-old Apollo unit, whose self-driving software had drawn tepid interest from automakers in the past. The venture with Geely will accelerate that integration, Li said, with the goal to deliver its own EVs to the market within three years.
Semiconductors are another use case. Like Alphabet Inc.'s Google and Amazon.com Inc., Baidu started to custom design chips for its own server farms, performing tasks like 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 the AI silicon has started production at fabs despite the global chip shortage, Li said. The unit -- which recently raised $230 million from investors like IDG Capital -- will target more external clients in areas from finance to education and energy, he added.
By pushing into chips and AI, Li is delving into businesses that have become a top priority for China's Communist Party as the world's largest economies vie for global influence. U.S.-China tensions spanning trade to cybersecurity and investments have already engulfed a number of Baidu's peers. Scores of Chinese companies that once saw an American listing as conferring the ultimate cachet have delisted or added secondary listings elsewhere.
Baidu's Hong Kong debut is a hedge against the potential risks of trading in the U.S., Li admitted, but more importantly, it “lets the Chinese investors really share in Baidu's growth story.”
Domestically, Beijing has signaled its intent to end a decade of unfettered expansion by its tech giants, combating behaviors like market abuse and data monopoly since late last year. While Jack Ma's Alibaba and Ant Group Co. have been the most visible of regulators' targets, the country's antitrust watchdog this month also penalized firms including Baidu and Tencent for not seeking its approval for years-old acquisitions and investments. Li pledged to ensure the company doesn't make the same mistake in future deals, which could be funded by proceeds from the Hong Kong listing.
In many ways, Baidu is better shielded from China's crackdown than its fellow tech pioneers. Efforts to encourage private-sector businesses to share the data they've amassed will likely benefit Baidu's core 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 drive to open up data amassed by private-sector companies, Li said.
His firm also doesn't wield the same kingmaker status as Alibaba and Tencent, both of which back a plethora of up-and-comers. Some of their portfolio companies, such as food-delivery giant Meituan and ride-hailing leader Didi Chuxing, were created through billion-dollar mergers. In 2017, Baidu sold its takeout business to rival startup Ele.me, which was later acquired by Alibaba, after losing a costly subsidy war in China's gig economy.
“You just cannot imagine the No. 1 and No. 2 guy all of a sudden merging and gaining more than 90% of market share in the U.S.,” said Li, a graduate of the University at Buffalo in New York. “But that happened quite a few times in China before. That's not good for innovation. So I think that the antitrust push is justified.”
Read more: What Is Behind China's Crackdown on Its Tech Giants: QuickTake
Thanks to its relative immunity to the antitrust push, Baidu's market capitalization has climbed $66 billion over the past year, ahead of its Hong Kong listing where retail demand was 112 times the available stock. Institutions subscribed for 10 times the shares allocated to them.
While the share sale has provided Baidu with a temporary boost, investors are likely to focus more on the firm's search and content as its biggest earnings driver over the medium term. That's where upstarts like TikTok-owner ByteDance Ltd. have been luring away eyeballs and marketing dollars alike. Baidu's Netflix-style service iQiyi Inc. saw revenue fall in the past two quarters as newer platforms like Bilibili Inc. and Kuaishou Technology gained traction.
In November, Baidu agreed to buy Joyy Inc.'s YY streaming service for $3.6 billion in a deal intended to enrich 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 of returns, after years of heavy investment,” said Bloomberg Intelligence senior analyst Vey-Sern Ling. “However incremental revenue generated from these endeavors may have to be reinvested to drive growth, and the profitability of these businesses could stay low until sufficient scale is achieved. Hence Baidu is likely to continue relying on its core search business in the near-term.”
With Baidu still in the midst of transformation, Li is in no rush to relinquish control after 21 years at the helm, unlike other Chinese tech moguls including Alibaba founder Ma and Pinduoduo Inc.'s Colin Huang.
“I 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 like to see all the changes happen.”