Chinese internet platforms with extensive user bases and data reserves are expected to capture a significant share of artificial intelligence (AI) profits within the next two to three years, despite current investor caution driven by macroeconomic headwinds, according to a UBS analyst.
Kenneth Fong, head of China internet research at UBS, explained that although increased AI-related expenditures on hardware and infrastructure are currently suppressing short-term profits, the industry’s profit dynamics are anticipated to shift. Speaking at a UBS event in Shenzhen, Fong said the present bottleneck lies upstream in the AI supply chain, where key capacity constraints mean upstream suppliers currently secure a substantial portion of the overall profit pool. However, he projected that once these constraints ease over the next few years, pricing power will move downstream to internet companies that possess the distribution capabilities, large-scale data, and broad user networks.
“Two to three years down the road after the capacity constraint eases, the pricing power will shift to the downstream, where they have the distribution capability, data and users,” Fong said, adding that internet companies should see profitability return as they leverage their advantages.
Chinese technology giants have already increased capital expenditures significantly to build their AI capacity. Tencent Holdings, for example, nearly tripled its spending in the second quarter to 52.8 billion yuan (approximately HK$61.5 billion), posting a negative free cash flow of 13.8 billion yuan for the first time. Alibaba Group Holding also increased its investment, with a free cash outflow rising to 44.7 billion yuan in the June quarter, following a quarterly outlay of 67.7 billion yuan.
Despite this surge in spending, Chinese tech firms still trail their American counterparts substantially in total AI investment. Fong noted that Chinese companies’ expenditures represent roughly one-seventh of the levels seen among U.S. technology giants. This disparity partly reflects China’s limited access to advanced foreign chips and the relatively smaller scale of its tech ecosystem.
Chinese firms have taken a dual approach to their AI investments, acting both defensively and offensively. They are wary of potentially falling behind in AI advancements while also recognizing strong growth prospects through cloud computing and integration of AI into existing services.
The analysis suggests that although short-term pressures weigh on profitability amid heavy AI spending and a challenging macroeconomic environment, Chinese internet companies remain poised to command a larger share of AI-driven market value as technological and capacity constraints evolve over the medium term.