Prevailing Winds is a China-focused blog written by Nicholas Borst, Director of China Research at Seafarer. The blog tracks the economic and financial developments shaping the world’s largest emerging market.

On a recent trip to several of China’s most important tech hubs, I had a chance to see firsthand how technology is shaping the long-term development of the Chinese economy. China has rapidly emerged as a world-class innovator in the field of artificial intelligence (AI) and is at the forefront of applying AI to solve real world business problems. At first glance, AI may seem to be an abstract concept with little commercial relevance, but it has the potential to transform industries through two main avenues:

• AI can take over certain tasks handled by workers or augment workers to complete tasks more efficiently
• AI can analyze large and complex datasets to find solutions to problems faster than humans and sometimes discover new solutions altogether

Here are a few specific examples of industries in China being transformed by AI:

AI + Manufacturing: The manufacturing sector is using AI to increase efficiency on several fronts. The proliferation of internet-connected devices allows for real-time tracking and creates vast amounts of data that can be fed to AI algorithms. This data is then used to improve production processes within factories and optimize supply chains. China is now the largest purchaser of industrial robots by a wide margin.¹ Making use of AI, these robots are able to accomplish increasingly complex tasks independently. Activities still requiring human workers can be optimized to increase efficiency and ultimately reduce the number of workers needed. Visual recognition software is being used to scan for defects during the production process as well as monitor the activities of workers within the factory.

AI + Finance: AI is transforming many areas of financial services in China. Risk analysis, whether it be for lending decisions or determining insurance premiums, is made more accurate by pulling in large amounts of data and allowing AI algorithms to search for new predictive indictors. Algorithms look at a wide variety of personal data points to assess credit worthiness, ranging from location data on your phone to your connections on social media. Because much of this analytical decision-making process can be automated, it becomes economically feasible to make near-instantaneous micro-loans to small business and individuals, who are often ignored by big banks. Across the financial services industry, customer service costs are being reduced by AI chatbots that can field questions from customers with a high degree of accuracy. Costs are being further reduced by advanced fraud-fighting algorithms which allow financial institutions to quickly discover fraudulent claims and identity theft.

AI + Logistics: China’s logistics network is being made more efficient through the application of AI. China has tens of millions of packages delivered each day by couriers, often on motorbike. AI algorithms are able to near-instantaneously analyze millions of package destinations and the locations of tens of thousands of couriers to optimize delivery routes and avoid backtracking or delays. Some companies are even using AI to forecast demand and adjust staffing accordingly. Changes to delivery patterns can be simulated in advance to anticipate problems. Within warehouses, AI can optimize the routing of packages, dramatically reducing the need for human workers. This may lead to large losses in employment over the long-term and require retraining of workers. Further in the future, autonomous vehicles using AI to navigate city traffic may come to play a large role in the delivery of goods.

AI + Healthcare: China’s medical system is plagued by issues related to access to care, with patients waiting in long lines at hospitals for medical conditions ranging from serious to trivial. China is replete with stories of patients waiting hours at a hospital to see a cardiologist when it turns out that they simply had a case of heartburn. AI is now being used to help triage patients before they head to the hospital. Patients undergo an online consultation with an AI assistant that asks about their symptoms and helps guide them to the appropriate level of care. This can reduce the demand on overloaded specialists and lower costs across the system. AI is also improving the health insurance industry by analyzing health data to more effectively assess premiums.

Chinese policymakers have given AI a boost through the creation of a high-level strategic framework, the Next Generation Artificial Intelligence Development Plan, designed to promote the industry. However, China’s prowess in AI is not primarily state-driven, instead relying on advances made by new startups and China’s domestic tech champions like Tencent, Baidu, and Alibaba. The entire sector is being augmented by copious amounts of funding. Between 2013 and the first quarter of 2018, China received 60% of venture capital investments in AI worldwide by value.²

While the application of AI is progressing rapidly in China, it does not mean it will be able to solve every real-world business problem. AI programs have captured headlines by beating human champions in games ranging from chess, to Go, to StarCraft. However, these are games with fixed rules whereas the real world is much more unpredictable. Chinese companies are quick to acknowledge the difficulties involved in implementing AI-driven solutions on the ground. Nonetheless, AI is already being utilized in industries across China and its impact will continue to grow in the future.

The views and information discussed in this commentary are as of the date of publication, are subject to change, and may not reflect Seafarer’s current views. The views expressed represent an assessment of market conditions at a specific point in time, are opinions only and should not be relied upon as investment advice regarding a particular investment or markets in general. Such information does not constitute a recommendation to buy or sell specific securities or investment vehicles. It should not be assumed that any investment will be profitable or will equal the performance of the portfolios or any securities or any sectors mentioned herein. The subject matter contained herein has been derived from several sources believed to be reliable and accurate at the time of compilation. Seafarer does not accept any liability for losses either direct or consequential caused by the use of this information.

As of September 30, 2018, Alibaba Group Holding, Ltd. comprised 1.2% of the Seafarer Overseas Growth and Income Fund. View the Fund’s Top 10 Holdings. Holdings are subject to change. As of September 30, 2018, the Seafarer Funds did not own shares in the other entities referenced in this commentary.

1. “World Robotics – Industrial Robot Report 2018,” International Federation of Robotics, 18 October 2018.
2. “China AI Development Report 2018,” China Institute for Science and Technology Policy, Tsinghua University, July 2018.