Artificial Intelligence and Business Strategy
In collaboration withBCG
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China’s ambition in artificial intelligence is often framed as a tech rivalry between two important centers for digital innovation — the east coast of China and the U.S. West Coast. But this rivalry is an undercard for the main event: AI’s largest and most enduring contributions will be in non-technology sectors, as traditional companies unlock value in regions far away from Silicon Valley and the string of coastal cities that constitute China’s innovation corridor.
For non-tech sectors, our research indicates that Chinese companies’ approach to adopting AI differs from those in other regions, raising important questions. Buoyed by the country’s latest five-year plan and enabled by centralized data, these companies are investing aggressively in AI and adapting their business models to accommodate for AI’s potential. However, AI adoption in China is experiencing noteworthy challenges in the form of unclear business cases and bottlenecks due to a lack of technical capabilities. In addition, Chinese companies’ current focus on AI’s potential to aid cost reductions could be partly to blame for expectations of job losses. Regardless of any setbacks in Chinese companies’ momentum, the determination they’re using toward AI adoption could stimulate other governments and companies to ensure their stakes in this competition.
Our findings stem from a survey of 300 executives in China in the spring of 2018 that we compared with a concurrent wider survey of more than 3,000 executives in 126 countries (about a third of the respondents were from the United States and about one-fifth were from Europe). For this article, we were particularly interested in the profiles of the companies most advanced in understanding and adopting AI. These so-called Pioneers make up about one-fifth of the respondents in our global survey. (The full research report, including an in-depth analysis of the wider implications for organizations, will be published in September 2018 by MIT Sloan Management Review.)
Chinese Pioneers Move Aggressively Into AI
Compared with the rest of the world, Chinese Pioneers have higher investment levels across the board in AI-related technology, data, processes, and talent. Not surprisingly, Chinese Pioneer companies are then also the most likely to have modified their business model in the past year to take advantage of AI. (See “Pioneers’ Investment and Business Model Modification.”)
The Chinese government actively supports this shift in investment and business models. It encourages companies to engage in AI in its 13th five-year plan (2016-2020) for science and technology development. Adding to China’s unique environment, particularly for B2C AI applications, are its 700 million consumers who access the internet via sensor-rich smartphones.
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China also has a cultural disposition to centralization that may benefit AI approaches. The country’s long history of central governance dates back to the Qin Dynasty’s creation of imperial bureaucracy around 220 BC. Today, AI engines learn by ingesting training data — the more the better — so companies should pool data management, expertise, and governance. Chinese Pioneers do this particularly well. For example, 78% maintain their corporate data in centralized data lakes, compared with only 37% and 43% of European and U.S. Pioneers, respectively. An even greater 83% of Chinese Pioneers manage corporate data centrally, while the share of European and U.S. Pioneers that do so is only 39% and 40%, respectively. (See “Pioneers’ Data Usage.”)
AI Adoption’s Pressing Challenges
Chinese Pioneers face a bottleneck when it comes to available skills. Nearly six in 10 Pioneer companies in China said constraints in technological talent and capabilities hold them back, more than the number of companies that feel this way in the United States or Europe. This contrast could be related to Chinese companies’ sufficient funding for their AI initiatives, greater management support, and lower cultural resistance.
A more important challenge is when companies have an unclear or missing business case for AI. Nearly half of China’s Pioneers said they are in that situation. (See “Pioneers’ Barriers to AI Adoption.”) While Chinese companies plow ahead in AI, they may ultimately have less to show for their investments than a more deliberate approach would have yielded.
Part of the reason Chinese enterprises are in this position comes from their focus on AI use cases, which do not entail a value premium associated with AI-enabled offerings. Over the past three years, companies worldwide have generated more business value from using AI to boost revenues rather than reduce costs. While 80% of U.S. and European Pioneers view revenue increases as the current main value from AI — in particular for building a competitive lead — only 65% of Chinese Pioneers say the same. As a whole, Pioneer companies expect the emphasis on revenue increase to converge in five years, but important foundations for market share might have been established by then. (See “AI Value: Revenue vs. Cost Improvements.”)
Given Chinese Pioneers’ greater focus on cost reduction, respondents from these companies are both more fearful about job loss and more hopeful that AI can alleviate some of the burdens of their jobs than respondents from other regions. More than two-thirds of Chinese Pioneers, or 68%, said AI is likely to reduce the size of their company’s workforce. In Europe and the United States, just 32% and 50% of Pioneers, respectively, shared that concern. At the same time, 98% of respondents at Chinese Pioneers hope that AI will take over some of their current tasks, 26 and 20 percentage points higher than the share in Europe and the United States, respectively. Consistent with a stronger internal focus, Chinese respondents are also more optimistic that AI will augment skills of the workforce and improve overall productivity. (See “Hope and Fears for AI’s Effects on the Workforce.”)
Aggressiveness Is a Competitive Challenge
These findings illustrate that China’s emphasis on AI isn’t confined to a rivalry within the tech sector. Supported by the government, non-tech Chinese companies are also embracing AI and emulating the success of Chinese internet companies in challenging U.S. dominance. But our results also point to interesting differences among global regions, as Chinese Pioneers differ markedly in several dimensions of AI adoption. Some of the challenges they face, however, reveal that China’s willingness to devote resources to AI may not automatically lead to leadership positions envisioned in the five-year plan.
Whatever happens, China’s determination continues to serve as a wake-up call for governments and companies across the globe. Companies now seek to quickly reap benefits of AI for their business models, top lines, and bottom lines. Moreover, governments around the world — for example, Austria, Canada, China, EU, France, India, Russia, and the U.K. — are beginning to act on the opportunities and challenges of supporting academia and industry. The next months and years will show which approach is ultimately more successful and what government roles can be effective.