Chinese government support benefits domestic AI companies

China is winning the artificial intelligence competition with the United States. 

This idea has recently become less of a rumor and more of a validated and shared concern among those who care about technology and power competition between the two countries. As American tech companies and the government fail to support one another in this race, the United States is falling further and further behind. For China, AI development is consistently a top strategic goal and the Chinese domestic AI industry continues to grow.


How China Supports AI Development

The Chinese government strongly supports its domestic companies in strategic industries. This support is often labeled by European and American competitors as unfair subsidies. Regardless, this support promotes the research and development abilities of Chinese companies. 

As a result, Chinese AI companies develop their systems quickly with both financial and regulatory boosts. Unlike the direct governmental control seen in the telecom or energy industries, Beijing embraces market competition when it comes to AI, meaning there are no state-owned enterprises in the industry. Despite this relatively hands-off approach, there are still significant ways that the government indirectly influences market direction and collaborates with private companies. 

Among big names in Chinese tech, iFlytek is a champion in AI voice recognition that has received controversial backlash for its AI development and its close relationship with the government. When it was revealed that iFlytek received substantial government subsidies — to a degree that exceeds half of the year of net profits — doubts about the company reached a peak. 

Jiangtao, a senior vice president of iFlytek, explained to investors that the majority of the subsidies are either tax reimbursement or research and development grants. The two forms of subsidies are just a reflection of the close and frequent cooperation between iFlytek and the government. Relying heavily on government projects may sound like a poor business model, but growing AI capabilities in China speak to the success of these partnerships and the unique nature of China’s system of governance.

The tech-government relationship in China is not a one-way street. Both the Chinese government and China’s large tech firms mutually benefit from this cooperation. While many AI engineers do not work directly for the government, China employs AI technology in many levels of its government through smart-city (Zhihui Chengshi) or smart-governance (Zhihui Zhengwu) programs. Through these initiatives, the government posts their desired AI-construction projects in official bidding websites, and invites key private firms to apply. 

Most of the governmental projects do not need advanced new technologies. However, firms see them as opportunities to apply their technologies and receive funds from the government. As part of this, project application managers would look for potential programs to apply, consult with the governmental officials about requirements, coordinate in-progress and final acceptance examinations and keep in contact for future networking. 

The government and technology giants have built a strong cooperative relationship through past projects. China is able to support its strategic AI companies and utilize the generated technology in municipalities. Financially, the programs provide returns on investment to AI companies and, politically, the programs tell companies the preferences of the government on AI development and application. 

Both the smart-city and smart-governance programs are focal points of the Chinese government in recent years, and as a result, there has been real progress in these sectors. Meanwhile, the relationship between the government and AI companies is missing in the United States — letting Washington fall far behind Beijing. But there are signs that the close relationship between the Chinese government and domestic tech firms might not be as problem-free as it first seems.

The Concerns

Corrupt relationships between private firms and public entities have always been a concerning issue in China. Chinese President Xi Jinping launched an anti-corruption campaign in 2012, his very first year in power. However, the close and frequent cooperation between the government and firms makes corruption inevitable. In January 2022, a high official at the provincial level in Zhejiang China was expelled from the government and party for “colluding with the capital and supporting the chaotic expansion of capital.” 

With such large sums of government funds in AI development, Chinese tech companies occasionally seek beneficial opportunities through corrupt government dealings. Government projects go through a public bidding process before any company can secure and carry out the development of the contract. However, the transparency and fairness of this bidding process remain a problem.

While most projects are issued at the municipal or national levels, tech companies local to certain areas have a significantly higher chance of winning these biddings. National protectionism has long been an issue in Chinese public works, and local affiliation seems to replicate that problem in the AI industry. Last year, the majority of smart-city projects were carried out by local companies or those who have headquarters nearby. Tencent, headquartered in Shenzhen, Guangzhou, took charge in all the smart-city projects for that city in contracts that surpassed 100 million Chinese Yuan ($15 million). The local ties between government and tech companies are not only potential breeding grounds for corruption but also threats to Beijing’s top-down control.

Large firms may also rely on the government to crowd out their competitors in the market. Because government contracts comprise a huge portion of the AI market in China, whichever firm wins these projects can potentially control the whole sector. Larger firms may also use pricing strategies to monopolize government projects on their way to establishing market control. In 2017, the city of Xiamen allowed firms to bid for its cloud construction project. Tencent bid 0.01 Chinese Yuan on this project. Although it was against the law to bid below the price, the Xiamen government still accepted the contract without providing any explanation. 

The close relationship between the Chinese government and China’s tech firms is a double-edged sword for the country’s rapid AI development. The government remains the financial supporter and policy director of the firms, giving it enormous leverage, but it should also be aware of potential corruption resulting from close public-private cooperation. As the United States ramps up its own AI development, it would do well to learn from both the successes and failures of the Chinese example. 

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