China AI Software Outlook 2025

China is well placed as the main contender to the US in AI, though its software firms face an arduous road to profitability. Putting the industry on a commercial footing will be hard to achieve as long as they’re willing to sacrifice profit for market share, even as a number of companies, including Alibaba, Baidu and SenseTime have earmarked the sector as a near-term revenue and earnings driver. Consumer indifference toward AI and intense competition are further barriers.

Key Research Takeaways

  • Smaller Models Alleviate Chip Shortage: China’s software companies have narrowed the development gap with the US by turning to smaller, more-focused Large Language Models (LLMs), allowing them to mitigate the impact of US chip export controls to date. Smaller models are cheaper to develop and require less computing power, making them better suited to run on lower-spec, domestically produced chips.
  • Commercialization Challenges: China’s AI developments remain on track, but its software vendors will struggle to monetize in a market awash with free tools. A change in consumer willingness to pay for AI products is also required. China’s top 10 AI Chatbots generated less than $1 million iOS revenue in the first nine months of 2024, according to Sensor Tower, compared with $160.5 million revenue generated by ChatGPT.
  • Limited Revenue Opportunity: China’s AI software, IT services and cloud computing markets are set for rapid growth in 2024-33 from a low base. Still, the estimated market size of $51 billion — equivalent to 24% of Tencent and Alibaba’s combined 2023 sales — is modest.
  • Scale to Win Out: China’s internet platforms should allow them to ultimately lead the sector, though we expect their AI ventures to remain loss-making in aggregate for three years. AI startups will likely struggle to scale their user base, gain pricing power or achieve profitability given the competition in the sector, with weaker names vulnerable to a funding squeeze

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