The technological rivalry between the United States and China has intensified, marked by Chinese companies’ increasing success in overcoming barriers erected by Western sanctions. Baidu, with its flagship ERNIE Bot model, has emerged as a symbol of resilience against American efforts to technologically contain China.
What was intended to curb China’s artificial intelligence ambitions has ironically fueled the growth of its domestic AI ecosystem, laying the groundwork for a technology infrastructure independent of the West.
Sanctions imposed by the Biden administration, continuing policies initiated by President Trump, aimed to halt China’s AI advancement by cutting off access to advanced semiconductors. However, the outcome has been quite different. Chinese tech firms have not only survived but have accelerated their development of indigenous AI solutions.
Defying Expectations: China’s Homegrown Chipsets
Initially, Huawei surprised global analysts by introducing its Ascend chips, whose AI application performance rivals NVIDIA’s chips. Internal tests conducted by an independent Shenzhen laboratory revealed that the Ascend 910B chips achieved 80% of the NVIDIA H100’s performance in tasks involving training large language models. This achievement seemed impossible just two years ago for a company cut off from Western technology.
Baidu, for its part, has invested over 15 billion yuan (approximately $2.1 billion) in developing Kunlun accelerators, specifically designed for processing large language models. The second generation of these chips, the Kunlun II, features 512 cores, 77 billion transistors, and offers a performance of 256 TOPS (tera operations per second) while consuming half the energy of its predecessor.
The Kunlun II processor is tailored for vector mathematical operations, essential for large language models. This enables the Chinese company to train its language models without relying on imported chips, ensuring independence from American suppliers.
Alibaba, through its Pingtouge division, has expanded its team of semiconductor design engineers from 200 to over 2,000 in the past two years. The company recently announced the successful testing of its first 5-nanometer chip, a significant step towards bridging the technological gap.
Circumventing Barriers: The Chinese System
Chinese companies employ multiple innovative strategies to bypass sanctions, demonstrating remarkable effectiveness and comprehensiveness.
Networks of Shell Companies in Third Countries
Investigations by U.S. intelligence services have uncovered intricate networks of shell companies operating primarily in the United Arab Emirates, Singapore, and Malaysia. These entities procure advanced NVIDIA A100 and H100 chips, which are then shipped to Chinese research centers. In 2023 alone, the U.S. Department of Commerce estimates that over 10,000 advanced AI chips may have entered China through this backdoor.
A network of over 300 companies was identified, engaging in no actual operational activities but serving as intermediaries in purchasing American chips. These companies frequently change names and ownership structures to avoid detection.
A particularly intriguing case was discovered in Dubai, where a company registered as a medical equipment importer purchased NVIDIA chips worth over $200 million, which were then distributed among Chinese AI startups. Mountain Summit Technologies, the company involved, was established just one month after the U.S. imposed sanctions.
Redesign and “Downgrading” of Technology
Another strategy involves intentionally redesigning chips to technically fall outside the scope of sanctions. NVIDIA, aiming to retain its significant Chinese market presence, created special versions of its chips – the A800 and H800 – modified to comply with U.S. regulations. Although officially downgraded in performance compared to the A100 and H100 versions, Chinese engineers have found ways to partially restore their original computing power.
This is a classic cat-and-mouse game. As manufacturers reduce chip performance to meet regulatory requirements, Chinese companies have found ways to optimize software to compensate for these limitations, enabling access to the latest developments while circumventing sanctions.
Acquisition of Used Chips on the Secondary Market
The used parts market has emerged as a surprising source of advanced components. Chinese companies actively purchase used servers and workstations with advanced processors and video cards. Older generation NVIDIA video cards, such as the V100 series, are particularly valuable. They are not subject to sanctions but still offer significant computing power for AI tasks.
In 2023, it was discovered that several large American corporations unknowingly sold their decommissioned data centers to intermediaries who then resold the video cards to Chinese companies. While new regulations have partially addressed this loophole, experts predict that the used parts market will remain a significant source of components for Chinese corporations.
Development of Alternative Computing Architectures
The most ambitious response to sanctions is developing entirely new computing architectures optimized for AI but operating on different principles than dominant Western solutions. The Shanghai Artificial Intelligence Laboratory, in collaboration with Fudan University, is working on a neuromorphic processor that mimics the structure of the human brain.
This new Neuromorphic Computing Platform (NCP) uses an entirely different architecture than conventional GPUs. Instead of massively parallel processing, it employs a network of artificial neurons and synapses, offering a significant advantage in energy efficiency.
ERNIE Bot: A Chinese Giant Emerges
ERNIE Bot (Enhanced Representation through Knowledge Integration) from Baidu is a prime example of the effectiveness of the Chinese strategy. The model debuted in March 2023, but its latest version – ERNIE 4.0 – has raised concerns in the West. Independent tests conducted by Tsinghua University in China showed that ERNIE 4.0 outperformed GPT-4 in tasks requiring knowledge of Chinese cultural context, while demonstrating results comparable to the OpenAI model in other categories.
A Surprising Architecture
ERNIE 4.0 is based on the Transformer architecture, similar to OpenAI and Google models, but incorporates several significant innovations. One of these is the "Knowledge Transformer with Enhanced Deepening," which integrates encyclopedic knowledge from Chinese sources, such as Baidu Baike (the Chinese equivalent of Wikipedia), directly into the model’s training process.
Another unique aspect is the ability for "continuous learning." ERNIE 4.0 can be trained continuously using new data without risking "forgetting" previously acquired knowledge, a significant advancement compared to Western models that require complete retraining for updates.
Chinese Context as a Competitive Advantage
Chinese AI models are developing with astonishing speed, despite the sanctions. ERNIE Bot has a fundamental advantage in the Chinese market. It was developed with the needs of Chinese users in mind, considering local language and cultural nuances that Western models lack.
This advantage is most evident in tests related to Chinese idioms, proverbs, and cultural allusions. ERNIE 4.0 achieves 95% accuracy in understanding and generating traditional four-character Chinese idioms (chengyu), while GPT-4 achieves only 45% for the same tasks.
Censorship as an Unexpected Asset in Training
Paradoxically, China’s censorship requirements may have contributed to ERNIE Bot’s development. Models like GPT-4 are trained using various safeguards and filters that often limit their capabilities. ERNIE Bot, while subject to censorship, is trained under different standards.
Robin Li, co-founder, chairman, and CEO of Baidu, announced ERNIE 4.0 at Baidu World 2023, held in October 2023.
Chinese models have a different definition of what is permitted and forbidden. This creates an interesting asymmetry. ERNIE Bot can freely discuss topics that are taboo for GPT-4 but avoid politically sensitive topics in China.
Key Advantages of ERNIE Bot Over Western Competitors
Baidu has created a comprehensive ecosystem around its flagship AI model that Western competitors will find difficult to replicate. ERNIE Bot has key advantages over Western competitors, namely:
- Access to Vast Datasets in Chinese: As the operator of China’s most popular search engine, Baidu has a unique collection of texts, queries, and interactions in Chinese, spanning over 20 years of Chinese Internet history.
- Deep Integration with the Baidu Application Ecosystem: ERNIE Bot is integrated with over 50 Baidu applications, from maps to streaming services, creating a closed loop of data and interactions unavailable to Western competitors.
- Better Understanding of Chinese Cultural Context: The model is trained on Chinese literature, history, and local media, giving it a deep understanding of cultural nuances and historical references.
- Government Support and Protectionist Policies: Chinese law favors domestic solutions, especially in sectors considered strategic, giving ERNIE Bot an advantage in a market of over 1.4 billion potential users.
- Optimized for Chinese Hardware: Unlike Western models, ERNIE Bot is optimized to run on Chinese processors, such as Kunlun, ensuring better performance with lower energy consumption.
From Local Player to Global Expansion
Baidu’s strategy is not limited to the domestic market. The company has established partnerships with companies in the Global South, particularly in Southeast Asia and Africa. In Malaysia, Thailand, and Nigeria, ERNIE Bot is already available in local language versions, while OpenAI and Anthropic models are still planning to expand their operations into these markets.
The “Digital Silk Road” Initiative
As part of the "Digital Silk Road" initiative, which is part of the broader "Belt and Road" project, Baidu offers special access conditions to its AI technologies to governments and companies from developing countries. In Kenya and Ethiopia, Baidu is collaborating with local telecom operators to offer access to ERNIE Bot through simple SMS interfaces, allowing AI use even for people without access to smartphones or high-speed internet.
Addressing Local Needs
"Unlike Western models, which are designed primarily for users from developed countries, our solutions take into account the specificities of developing markets," explains Wang Haifeng, Baidu’s chief technology officer. "We offer models that require less bandwidth and run on lower-end hardware, which is key to widespread adoption in markets like Africa and Southeast Asia."
This strategy yields tangible results. In Indonesia, where Baidu collaborates with local technology giant GoTo, ERNIE Bot gained over 8 million active users in just three months after launch, largely due to its integration with popular local applications.
The Investment Race: Trillions of Yuan for Artificial Intelligence
According to data from the International Data Corporation (IDC), Chinese investment in artificial intelligence grew by 58% in the past year, reaching over $120 billion. In comparison, the United States saw a growth of 35%.
Unprecedented State Support
China’s Ministry of Science and Technology announced in June 2023 the creation of a special fund worth 800 billion yuan (approximately $111 billion), dedicated exclusively to developing domestic AI technologies. In addition, provincial and municipal authorities are creating their support programs. For example, Shanghai has committed to investing 100 billion yuan ($14 billion) in its local AI ecosystem by 2025.
"This is an unprecedented mobilization of resources," comments Dr. Mary Johnson of the Peterson Institute for International Economics. "China views artificial intelligence as a key element of national security and international competitiveness, leading to an investment level comparable to the U.S. space program in the 1960s."
Private Capital Follows State Capital
Private investment follows state investment. According to data from PitchBook, Chinese AI startups raised a total of $45 billion in funding in 2023, up 75% from the previous year. Investors are particularly interested in companies specializing in quantum computing, AI chips, and multimodal models.
Sequoia China, which changed its name to HongShan after separating from its parent company in the U.S., has pledged to invest $8 billion exclusively in Chinese AI startups.
"We believe that at least 50 AI ‘unicorns,’ worth over $1 billion each, will emerge in China over the next 5 years," predicts Neil Shen, founder of HongShan.
The Boomerang Effect: Sanctions Accelerate China’s Development
Experts note that sanctions may have paradoxically accelerated the development of the AI ecosystem in China, forcing companies to become more self-sufficient and invest more heavily in research. While a technological gap between the U.S. and China still exists, it is narrowing at an astonishing rate, calling into question the effectiveness of the U.S. containment strategy.
Accelerated Localization of Supply Chains
Before the sanctions, Chinese companies depended on Western technologies and had little incentive to develop their solutions. American restrictions created an existential threat that mobilized resources and talents in ways that would typically take decades.
In response to the sanctions, the Chinese government launched the "Local Innovation" program, which offers significant tax breaks and preferential loans to companies investing in domestic AI technology development. The program has attracted over 5,000 companies that have committed to localizing their supply chains.
Reverse Brain Drain
An interesting phenomenon is the return of Chinese AI specialists from abroad. According to data from the Chinese Ministry of Education, over 3,000 Chinese scientists and engineers specializing in AI who previously worked in the U.S. and Europe returned to the country in 2023, more than double the number in 2020.
"In Silicon Valley, I felt a growing sense of uncertainty about my status as a Chinese researcher," explains Dr. Chen Xiaohui, who returned to Beijing to join Baidu’s AI team after 15 years at Google. "In China, I have access to vast datasets, significant computing resources, and, most importantly, the opportunity to work on projects of strategic importance to the country."
Unexpected Consequences for American Business
Sanctions have also affected American companies. NVIDIA, whose GPUs are crucial for AI development, has lost access to the Chinese market, worth over $10 billion per year. In response, the company has intensified lobbying efforts to ease restrictions, arguing that sanctions harm America’s competitiveness more than China’s.
Intel and AMD have also reported significant revenue losses. Goldman Sachs estimates that American chipmakers have collectively lost over $25 billion in potential revenue due to the sanctions, leading to reduced research and development budgets and a potential slowdown in technological progress.
The Future is Painted in Chinese Colors
While the world watches the competition between OpenAI, Anthropic, and Google, the real threat to American dominance in AI may come from a different direction. ERNIE Bot and other Chinese models may soon become a global alternative to Western solutions, reshaping the technological map of the world for decades.
Forecast for the Future
Analysts at the consulting firm McKinsey predict that by 2028, Chinese AI models will be globally competitive in most applications, and in certain niches, such as image recognition and Asian language processing, they may even achieve dominance.
"There is a real risk that over the next five years, we will see a digital world divided into two spheres of influence," warns Dr. Sarah Miller of the Center for Strategic and International Studies. "A Western one, dominated by models like GPT and Claude, and an Eastern one, dominated by ERNIE Bot and similar solutions."
Such a scenario could have far-reaching implications not only for technology but also for geopolitics, trade, and global ethical standards regarding artificial intelligence.
The Last Word Belongs to Innovation
Baidu CEO Robin Li sums up the situation in his characteristically optimistic terms: "External restrictions may slow down development, but they cannot stop innovation. The history of technology shows that true progress always finds a way. ERNIE Bot is proof that the Chinese AI ecosystem is not only resilient to sanctions but can turn them into a catalyst for its development."
Despite political instability, one thing is certain: the technological cold war between the U.S. and China is entering a decisive phase, and its outcome may be quite different from what American leaders initially expected.