The author is a Reuters Breakingviews columnist. The opinions expressed are her own.
By Robyn Mak
HONG KONG, March 20 (Reuters Breakingviews) - It's never a good sign when rivals try to outspend one another. In China, technology giants Tencent 0700.HK and Alibaba 9988.HK are battling it out in artificial intelligence. Yet similar to how it's playing out in the West, business models are hazy and competition is fierce. Returns will be a long time coming.
Tencent last year more than tripled its capital expenditure to $10.7 billion, or 12% of its top line, and says it plans to spend a similar "low teens" percentage of revenue this year. That's a huge step up from the less than 5% it devoted two years earlier. Most of that will go towards stockpiling graphic processor units and servers used in Tencent's advertising and video-games businesses. The new equipment will also help with training and deploying large language models for its nascent AI offerings. Throw in additional research and development expenses - which jumped 10% to just under $10 billion last year - and Tencent's spending is adding up fast.
It's a similar narrative at arch-rival Alibaba, which last month declared it will splash out at least 380 billion yuan ($52.6 billion) in cloud computing and AI infrastructure over the next three years. Meanwhile, TikTok's Chinese owner ByteDance has budgeted over 150 billion yuan this year mostly for data centres and networking equipment, Reuters reported in January, citing sources.
True, demand for chatbots and agents has accelerated in the People's Republic, partly thanks to DeepSeek's low-cost and freely available models. The number of daily active users on Tencent's AI assistant, Yuanbao, for example, increased more than 20-fold between February and March, the company disclosed.
The problem is, it's not clear how these heavy investments will pay off over time. Tencent executives stressed that AI can help boost margins at its existing businesses. Yet they also said that AI is still in its early days, so it's "really hard to talk about what the eventual state would look like".
A more immediate threat to profitability is an intensifying price war that is playing out amid China's burgeoning AI offerings and models. Last year, Alibaba, for example, announced price cuts of up to 97% on a range of its Tongyi Qwen large language models. And DeepSeek in February said it would offer developers an up to 75% discount during off-peak hours. Investors should brace for a long race to the bottom.
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CONTEXT NEWS
Tencent on March 19 said it will increase spending on artificial intelligence. Martin Lau, the company's president, said capital expenditure for 2025 would rise to the "low teens" as a percentage of revenue.
The company on the same day reported revenue of 172 billion yuan ($23.8 billion) in the three months to the end of December, an increase of 11% from the same period in the previous year. Domestic gaming revenue rose 24% to 33.2 billion yuan in the quarter.
Tencent's Hong Kong shares were down 2.7% to HK$525.50 during mid-morning trading on March 20.
Graphic: Tencent's new spending normal https://reut.rs/4hlfqJR
(Editing by Antony Currie and Ujjaini Dutta)
((For previous columns by the author, Reuters customers can click on MAK/ robyn.mak@thomsonreuters.com))
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