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China is accelerating the development of AI-related technologies and capacities

By 2026, artificial intelligence (AI) investments in China could rank second in the world. Driven by policies, technologies, and markets, AI investments are becoming a mainstream trend. China is embracing the potential of this highly competitive field by accelerating the development of AI-related technologies and capacities.


In recent years, more and more enterprises have become involved in the Digintelligence Era and started the deployment of digital transformation (DX) and intelligent upgrading, which has thus spawned more demand for AI.


According to iMedia Research, as of 2021, China’s AI market was worth about RMB 150 billion (US$23.196 billion), and the figure is projected to reach RMB 400 billion (US$61.855 billion) by 2025. By 2030, the Chinese government aims for the AI industry to create RMB 1 trillion (US$154.638 billion) worth of annual revenues and have related industries generating RMB 10 trillion (US$1.546 trillion) annually.


Analysts from McKinsey estimate that AI technology in its many forms and applications could bring US$600 billion annually for China’s economy. This revenue could represent an estimated 3.7 % of China’s current GDP.


However, for this to happen, additional investments will be necessary on multiple fronts, including the data and technologies to underpin AI systems, the right talent to build the systems, as well as new business models, industry standards, and partnerships to create data ecosystems. AI start-ups in China received in 2021 about US$17 billion from private equity and venture capital investments.


In the coming decade, experts believe that there will be significant opportunity for AI growth in new sectors in China, including some where innovation and R&D spending have traditionally lagged global counterparts: automotive, transportation, and logistics; manufacturing; enterprise software; and healthcare and life sciences.


Given the opportunity that the sector represents, China has launched a series of incentives, such as Made in China 2025, the Action Outline for Promoting the Development of Big Data (2015), and the Next Generation Artificial Intelligence Development Plan (2017).


Also, the government has accelerated the pace to issue specific policies to regulate AI, regarding industry ethics and algorithms.


In the past two years, the Chinese authorities published several documents and regulations regarding the importance and difficulty of improving the “trustworthiness” of AI systems, the ethical norms for the use of AI in China, and the importance of strengthening the overall governance of internet information service algorithms and stimulating the healthy development of the sector.


In March 2022, the Cyberspace Administration of China (CAC) issued the Internet Information Service Algorithmic Recommendation Management Provisions, which govern companies’ use of algorithms in online recommendation systems, requiring that such services are moral, ethical, accountable, transparent, and disseminate positive energy.


Given the intense international competition in this sector, China is searching for a balance between the strict scrutiny of the country’s biggest tech companies of the past few years and the need to ease some of its regulations to enable companies to continue their AI development.

This year, the Shenzhen government became the first one to issue a local regulation to encourage AI development.


Starting Nov. 1, the Shenzhen AI Regulation establishes guidelines for public data sharing, creates an AI ethics council to develop safety standards, and invites governmental organizations to utilize related technology and increasing financial support for AI research.


Shenzhen-based AI services and products that are assessed as “low risk” can go for testing and trials even in the absence of local and national norms if they adhere to international standards.

The Shenzhen authorities plan to invest more than RMB 700 billion (US$108 billion) in hi-tech research and development by 2025. The region is home to many tech giants and AI-related businesses.


In a similar way, Shanghai’s AI sector has grown significantly in the past few years. In 2021, the combined output value of Shanghai’s AI enterprises above the designated size reached RMB 305.68 billion (US$42.73 billion), according to China Securities Journal.


The number of talented professionals working in the AI field in the city has soared from 100,000 in 2018 to 230,000 in 2021. AI is one of the three leading industries that Shanghai seeks to develop with concentrated efforts, along with integrated circuits and biomedicine.


Shanghai passed last September China’s first provincial-level law covering AI development, effective October 1, 2022. The legislation promotes innovation and breakthroughs by developing core AI industries and strengthening the agglomeration of AI enterprises.


The Shanghai AI Regulation stipulates a certain degree of tolerance for minor infractions to encourage exploration of scientific frontiers and inspiring innovation. The rationale is that the AI field is unknown waters, and this disclaimer clause can ensure certain space for trials and testing.


By 2030, there will be more than 300 vehicles on Chinese roads, surpassing the United States. According to McKinsey, AI could have the greatest impact potential on the automobile market, delivering more than US$380 billion in economic value. This value creation will likely be generated in three main areas: autonomous vehicles, personalization for auto owners, and fleet asset management.


Autonomous vehicles (AV) make up the largest portion of value creation in this sector ($335 billion). Some of this is expected to come from a reduction in financial losses, such as medical, first-responder, and vehicle costs. Road accidents stand to decrease an estimated 3 to 5 percent annually.


In Shenzhen, registered AVs are now allowed to operate without a driver in the driving seat across a broad swath of the city, but a driver must still be present in the vehicle. Shenzhen’s regulations provide a crucial framework for liability in the event of an accident.


In 2021, China implemented its first national standards for grading autonomous driving. The country’s Taxonomy of Driving Automation for Vehicles provides official definitions for self-driving cars. Chinese cities have allowed robo-taxis to operate in restricted areas with permission of local authorities.


In the field of robotics, China is looking to compete with the world’s most innovative economies. By embracing more robots, China’s factories can keep costs down, making it less advantageous for companies to shift production to other emerging markets or their own home countries.


According to a report from the Chinese Institute of Electronics (CIE), China’s robotics industry was worth RMB 83.9 billion (US$12.12 billion) in 2021. Of this, industrial robots were worth RMB 44.6 billion (US$6.44 billion), while service robots were worth RMB 39.3 billion (US$5.68 billion).


Various AI applications, such as collaborative robotics that create the next-generation assembly line, and digital twins that replicate real-world assets for use in simulation and optimization engines, will increase manufacturing capabilities and efficiency and will improve product quality.


With digital twins, manufacturers, machinery and robotics providers, and system automation providers can simulate, test, and validate manufacturing-process outcomes, such as product yield or production-line productivity, before commencing large-scale production so they can identify costly process inefficiencies early.


The Chinese government released the latest Five-Year Plan for the industry. By 2025, the plan states that China should become a global source of innovation in robotics and make breakthroughs in core robotics technology and high-end robotics products. By 2035, China’s robotics should be among the world’s best.


Realizing the value from AI would require significant investment and innovation across six key areas. The first four areas are data, talent, technology, and work to shift mindsets as part of adoption and scaling efforts. The remaining two, ecosystem orchestration and navigating regulations, can be considered collectively as market collaboration, and should be addressed as part of strategy efforts.


However, recent trade tensions between China and the United States haven’t made things easier. The US has imposed a series of export restrictions that could hit China’ AI industry, which still relies on foreign chips to a certain extent.


Last October, the Biden administration rolled out a new round of policies, further curbing chip exports to China. The new rule will block the shipment of components, advanced chips, and tools that China could use for manufacturing chips. It also restricts the service and maintenance support that are vital to keeping advanced chip equipment running smoothly.


China’s AI industry still depends heavily on advanced chips produced in the US to conduct computing activities. A record number of Chinese chip firms have also gone out of business. In August, chip exports from China plummeted by nearly a quarter, the biggest monthly drop since records began in 1997. These new rounds of export restrictions will give a massive blow to China’s AI development.


Given the uncertainties in this sector, businesses should get familiarized with China’s domestic technologies and explore alternative supply chain options as early as possible.


On the other hand, these restrictions will motivate China to invest more heavily and to increase the pace towards self-sufficiency. While China lacks certain software and equipment capabilities for advanced AI, the environment remains open for foreign investment and talent.


To learn more about our services in China, contact our Head of Business Advisory - Ms. Kristina Koehler-Coluccia at kristina@woodburnglobal.com.




DISCLAIMER: All information in this article is verified to the best of our ability and is assumed to be correct at time of release; however, Woodburn Accountants & Advisors does not accept responsibility for any losses arising from reliance on the information provided within. The information provided is for general guidance and does not replace specialized advice.

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