As the e-commerce company looks beyond its main business for development, Alibaba Group Holding Ltd. has inked its third significant AI agreement of the year, contributing a further 5 billion yuan ($691 million) to the Chinese startup Baichuan.

The governments of Beijing, Shanghai, and Shenzhen have just provided money for Baichuan, which has a current valuation of 20 billion yuan, the firm announced in a statement on Thursday. Existing investors Tencent Holdings Ltd. and Xiaomi Corp. joined them.

Having been established in April 2023, Baichuan is a pioneer in China’s generative AI market, having been among the first Chinese companies to receive Beijing’s approval for widespread release. According to the announcement, the Beijing-based business unveiled an AI assistant in May and has since developed 12 large language models.

China may require years to catch up with the US, according to founder Wang Xiaochuan, whose firm was called after the Chinese phrase for “a hundred rivers.” Wang made this statement to News last year.

Following backing from Alibaba, MiniMax and Moonshot AI, two Chinese competitors of Baichuan, also witnessed a rise in valuation beyond $2 billion earlier this year.

The e-commerce company is betting heavily on generative AI, the technology behind ChatGPT, alongside other Silicon Valley heavyweights like Microsoft Corp. The Baichuan transaction indicated that Alibaba is increasing the rate at which it makes investments, a move that has solidified its technological and commercial supremacy and aided in the ascent of companies like Didi Global Inc. in previous years.

After Daniel Zhang stepped down as CEO in 2023, Joseph Tsai and Eddie Wu, two experienced dealmakers, took over as Alibaba’s new leaders. They are currently investigating ways to turn around a struggling business that has been under regulatory scrutiny for the past two years. The Hangzhou-based company is planning a multi-way split in addition to investing in AI with the goal of fostering autonomous business lines ranging from cloud to logistics.

It is attempting to bring back the cloud industry and incorporate AI and its proprietary model, Tongyi Qianwen, into a broad enterprise that includes the entertainment industry. According to Tsai, the cloud division currently services roughly 80% of China’s tech companies and is home to half of the nation’s generative AI startups.

Alibaba’s increasing investments in AI are also consistent with Chinese President Xi Jinping’s recurrent promises to organize the country as a whole to lessen its dependency on Western technology. Because AI has the potential to be revolutionary, Beijing and Washington are very interested in this technology, which has both military and economic uses.

The first-quarter profits of the four automakers show that Chinese electric car businesses with listings in the United States are investing more in research relative to sales than Tesla.

It’s a survival tactic in the very competitive global auto market in China. Both battery- and hybrid-powered vehicles are considered new energy vehicles, and their share of sales has increased significantly to over 40%.

According to Paul Gong, an auto analyst at UBS, many Chinese automakers already spend as much as or more on research and development as a percentage of revenue, which is a considerable rise from many years ago.“In certain cases, even in terms of absolute dollars, it has bypassed.”

Nio, the top-ranked Chinese electric car company with a U.S. listing, allocated over 29% of its income to research and development during the first three months of the year. Compared to Tesla, which had a ratio of 4.2% in the second quarter and 5.4% in the first, that is far greater. The business owned by Elon Musk is renowned for having a low ratio.

Less is known about whether the increased spending will result in sustained competitiveness.

For years, Nio has operated at a loss, and only in the last few months has it begun to receive delivery of its high-end vehicles. The firm has hosted events to showcase its battery services and other innovations in addition to car premieres in previous years. One such event was on automobile “quality” in late June.

At the ceremony, Feng Shen, the head of Nio’s quality management committee, said in Mandarin, “Everyone is talking about involution right now.” He was using a Chinese expression that’s often used to characterize intense competition, particularly in the electric vehicle sector.

Shen stated, “What companies should [compete] on is quality,” and that “there’s nothing you can say if you can’t do a good job on quality.” He outlined Nio’s comprehensive strategy for improving product quality, which focuses mostly on supply chain innovation and new technology.

Shen, an executive vice president of Nio, was previously the president of Polestar, a high-end electric vehicle company in China. Shen has also held quality management positions at Ford Motor in both China and the United States.

In September 2022, Nio inaugurated its second factory in Hefei City, which serves as a production base for other automakers. The plant employs about 2,000 people total, including 756 robots that help automate much of the production process.

Regarding worldwide production, Li stated that Nio would follow the same manufacturing standard but did not provide specific plans for other countries.

proximity of the supply chain The provincial capital of Anhui, located west of Shanghai, is Hefei. China claims the area, known as the Yangtze River Delta, is home to so many factories that a maker of new energy vehicles can locate all the parts they need in a four-hour journey.

In a statement, China’s Ministry of Industry and Information Technology said that it has collaborated with automakers and suppliers to develop hundreds of industry best-practice examples and application benchmarks for smart manufacturing.

With an emphasis on Chinese vehicles, Jing Yang, a director in Fitch Ratings’ Asia-Pacific corporate ratings office, stated that “A key competitive advantage for Chinese companies in China is actually the highly effective or efficient supply chain,” 

She pointed out that this can assist Chinese electric vehicle manufacturers in reacting to consumer and market demands faster than conventional automakers.

The U.S.-listed electric vehicle company Zeekr and the Hong Kong-listed automotive behemoth Geely are based in Zhejiang province, another portion of the region.

According to Zeekr’s first-quarter earnings, R&D accounted for 13% of sales. Parent Geely has increased its research spending dramatically over the last four years, allocating at least 4% of revenue to the endeavor. However, the company did not disclose this amount in its first-quarter report.

While the business is working to develop both hardware and software for cars, Geely’s vice president of auto R&D, Ren Xiangfei, stated late last month that the latter can offer more differentiation.

Security, entertainment, and driver-assistance software are all included in cars.

Ren pointed out that because new energy cars have larger batteries than conventional fuel-powered cars, they can accommodate more of these services.

“This will introduce a new concept, the software-defined car,” he declared.

The “Aegis Short Blade Battery,” which Geely introduced last month, passed tests beyond industry standards without blowing up.

It is a competitor to BYD’s “blade battery,” which is credited with propelling the business into the lead position in EVs. The China Passenger Car Association reports that in terms of new energy vehicle sales in the first half of the year, Geely came in second and Tesla third.

According to Ren, the new battery will initially be installed in Geely cars. This will result in an approximate $1,000 rise in production costs above those of competing vehicles.

He stated that because the chemical formula for producing batteries is more developed, it is now more crucial to guarantee consistency in production. “That requires the support of a smart factory.”

Additionally, Geely unveiled the SEA electric car architecture, which it claims enables faster manufacture of various vehicle sizes.

“Vehicle platform is probably the most important thing to look at, and then consistency with their approach,” said Snow Bull Capital CEO Taylor Ogan, who is headquartered in Shenzhen.

It’s critical, he said, to observe that a business is delivering on its promises pretty quickly and that distinct teams are already at work on upcoming product releases. He stated,  “I think that’s the clear differentiator.” 

Automakers versus IT businesses Research expenditure to sales, or R&D intensity, is a proxy for IT innovation, but UBS’s Gong issued a warning about it.

“If they can sell more cars with better profitability, that basically means their innovative ways are probably right. Some of it may not have cool features,” Gong stated. It might involve systemic cost-cutting.” “Less fancy, but really powerful.”

Xpeng’s first-quarter R&D intensity was 20%. Li Auto’s share was just 11%, but its range-extending automobiles have outsold fully battery-electric cars by a wide margin.

In terms of total U.S. dollars, Hong Kong-listed BYD invested $1.47 billion, or 8.5% of its revenue, in research during the first quarter. That exceeds the $1.15 billion that Tesla invested in R&D during that same period.

Electric car manufacturers are trying to differentiate themselves in the future from CATL and Huawei in the software and battery markets, respectively, according to Jing Liu, a professor of accounting and finance and the director of the investment research center at the Cheung Kong Graduate School of Business.

According to Liu, it is improbable for a company to outperform both suppliers in terms of quality, which implies that automakers would ultimately find it challenging to differentiate themselves in a market where consumers may quickly move between brands.

In Japan, where consumers are already struggling with low incomes and are frantically trying to stretch their hard-earned yen, consumer prices are growing quickly.

Consumer prices were up 2.8% year over year in June, nearly matching the 3.0% increase in US prices.

Since the beginning of 2023, Japan’s inflation has momentarily exceeded that of the United States twice. It’s almost time to do that once more.

Speaking on the inflation rate, Jun Saito, a senior research fellow at the Japan Center for Economic Research, stated, “Inflation is around 2% to 3%, which is very high by our standards.”

The rate at which prices are rising has surprised me.

Mizuho Securities predicted a year ago that by now, inflation would be less than 2%. And at the time, it was expecting inflation to be less than 1% by year’s end.

Japan has been battling deflation for decades, but its progress has been patchy and typically more dependent on external factors; the COVID-19 aftermath contributed to the country’s most recent high of 4.3% in January 2023, at least in part.

Presently, price increases in Japan are deviating from the pattern by staying stable at the same time that inflation decreases globally. In Japan, it has been rather stable, rising from a previous low of 2.2% in January and staying at 2.8% for two consecutive months. In the United States, it has been gradually declining in recent months.

The June inflation report reveals unusual price increases for numerous household-favorite goods. Rice has increased 12.3% year over year, along with cuttlefish (8.7%), Niboshi dried tiny sardines (34.6%), milk (8.9%), potatoes (28.5%), cabbage (276.6%), and tomatoes (15.6%).

This is largely offset by the costs of other well-known goods. For the year, tofu increased by just 2.4% and natto by by 1.3%. Mayonnaise declines by 0.4%.

As earnings stagnate, citizens are starting to worry about prices.

Japan has historically had low wages. For many years, Japan has had the lowest average yearly salary among the Group of Seven major industrialized nations. The OECD reports that Japan’s average annual wage is $42,118, while the average annual wage for all member states is $55,420. Regarding average wages, Japan was placed between Poland and Italy in that class in 2023.

It’s feasible because of its low costs.

Because of its low to negative inflation rate, Japan is among the least expensive developed nations. Despite the low pay, it has also been able to maintain a high standard of living.

Elevated inflation modifies the formula.

Since the beginning of 2022, real earnings have been declining, and as buying power declines, consumers are beginning to feel the pinch.

Analysts argue that the 5.1% increase reached in the annual winter\ spring offensive salary negotiations is not very significant in the grand scheme of things because employees of smaller companies receive much less than the headline figure.

Saito stated, referring to the consumer price index, “this helped, but still the average wage relative to the CPI inflation rate is negative.”

The Bank of Japan is forced to hike rates in order to control inflation, but it must exercise caution so as not to slow down the economy and therefore undermine wage growth.

The administration needs to move cautiously as well. The yearly minimum wage debate should suggest a raise that is sufficient to maintain household stability while preventing an excessive number of small businesses from going out of business.

If the American economy works together, Japan’s pricing issues might resolve themselves. Rates may drop and the currency may appreciate versus the yen if slowing indicators in the US economy persist, relieving pressure on the central bank and containing price increases.

According to Asian Development Bank principal economist John Beirne, “a narrowing of the interest rate differentials between Japan and the United States would support the yen and alleviate the extent of imported inflation.”

As the U.S. Federal Reserve begins to reduce rates, DBS senior foreign exchange strategist Philip Wee predicted in a recent paper that the value of the yen would reach 150 by year’s end and 139 by December 2025.