How OpenAI’s Decision Not to Operate in China Will Reshape the Chinese AI Scene

OpenAI’s abrupt move to ban access to its services in China is setting the scene for an industry shakeup, as local AI leaders from Baidu Inc. to Alibaba Group Holding Ltd. move to grab more of the field.

The ChatGPT creator this week sent memos to Chinese users warning it will cut off access to its widely used AI development software and tools from July, triggering a scramble to fill the void. Since Tuesday, at least a half-dozen companies and startups including Tencent Holdings Ltd. and Zhipu AI began offering incentives to developers making the switch.

OpenAI’s shift will accentuate the divide between China and the U.S., which is trying to curb Beijing’s AI and chip efforts. While the startup’s exit offers an opportunity for sector leaders to grow their user base, it also deprives entrepreneurs and cash-strapped startups of some of the best tools available to fine-tune or get their AI applications off the ground.

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For China, that could help usher out many smaller startups created during the “battle of a hundred models,” in the wake of ChatGPT’s late 2022 debut. And a bigger concern may be whether open-source models like Meta Platforms Inc.’s Llama also cut off access, said Bernard Leong, chief executive officer of Singapore-based Dorje AI.

“There’s probably going to be a bloodbath of the large language models and I suspect that there’s probably going to be very few players left,” said Leong, who’s also founder of the tech podcast Analyse Asia. “There will be very few winners, and those will be the biggest in China.”

Chinese artificial intelligence-related stocks, including Alibaba and Iflytek Co., rose on Wednesday.

The major firms were quick to sense the opportunity. 

For users migrating from OpenAI, Baidu promised free AI model fine-tuning and expert guidance on its flagship Ernie model, along with 50 million free tokens that developers can use to query the bot. Alibaba and Tencent posted ads encouraging the shift. Tech pioneer Kai-fu Lee’s 01.AI touted heavy discounts.

Baichuan, which is backed by both Alibaba and Tencent, offered 10 million free tokens. SenseTime Group Inc. dangled 50 million. Zhipu put forth 150 million tokens and a series of training sessions to ease the transition. Even Microsoft Corp. — OpenAI’s biggest backer — published a step-by-step guide on WeChat on how to migrate to its local service, operated by local partner 21Vianet.

U.S. firms such as OpenAI, Meta and Alphabet Inc. have led the world in generative AI, which spits out text, images and video from simple coMMAnds. Underpinning those models are application programming interfaces that developers use to build up and refine their own platforms to integrate services either with the likes of ChatGPT, or their own proprietary models.

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That was a boon to Chinese developers starting from scratch, who accessed OpenAI’s tools through virtual private networks or other ways around the country’s Great Firewall. Many local developers — particularly those without deep pockets — favored training AI systems and applications via OpenAI’s tools, because they were regarded as industry benchmarks.

OpenAI is now threatening to sever the connection. 

“Leading Chinese large language models can benefit from the restricted access to OpenAI, and it will help to filter out smaller, less effective players from the market,” said You Chuanman, head of the Chinese University of Hong Kong-Shenzhen’s IIA Centre for Regulation and Global Governance. “At the same time, it will make it harder for Chinese developers to use the most advanced global AI algorithms.”

OpenAI’s move coincides with rising pressure from Washington to curb Chinese access to the most advanced artificial intelligence and semiconductor Technology. The U.S. Treasury Department advanced plans over the weekend to further restrict investments by U.S. individuals and companies into China, with a focus on curtailing next-generation technologies.

In the long run, industry experts say a lack of access to global tools may further impede Chinese AI players in general as they play catch-up to the US. Alibaba Chairman Joe Tsai has said it would take at least two years for homegrown AI models to match U.S. ones.

It could also accelerate a migration overseas by Chinese tech startups seeking faster-growing markets with less political uncertainty. 

“This situation is directly related to the ongoing comPetition between China and the U.S. in frontier technologies,” said Neil Zhu Xiaohu, the founder and chief scientist of University AI, which trains Chinese companies.

“We had U.S. laws targeting Chinese semiconductors previously and more recently, there are semiconductor and AI work restrictions, so the restriction of China’s API services is not something that happened out of the blue.”