BEIJING -- Smarting from its first profit decline since stock listing, Chinese search engine giant Baidu is making a hard break toward artificial intelligence by tapping a ringer from Microsoft to spearhead the reform.
"This is a very exciting time, as China plus AI is an enormous opportunity for growth, which Baidu is very well-positioned to lead," Lu Qi, the chief operating officer appointed in late January, said during Friday's conference call. "We have a great journey ahead of us, and I have already been very energized by the amazing work that's going on here."
Not so amazing is Baidu's latest earnings result. Net profit in 2016 nosedived 65.4% to 11.63 billion yuan ($1.69 billion). Although sales managed to climb 6.3% to 70.54 billion yuan, that is a whisper after the past few years, when the top line figure would jump anywhere from 30% to 50%-plus.
There is no denying that Baidu is in a stunted growth phase. The blame lies squarely with the company's core web search service, which seems to have lost consumer confidence.
Last April, a college student died after undergoing an alternative cancer treatment the search engine listed among top results. Baidu faced accusations that it promoted questionable search results after receiving large sums of money from treatment providers. Users apparently drifted away after the scandal.
Baidu controlled a 60.2% share in China's web searches in mid-January, down from the most recent peak of 74.1% in mid-August 2015, according to analytics company StatCounter. Meanwhile, domestic rival Qihoo 360 Technology is encroaching on Baidu's once-impregnable territory with a 24.8% share.
Even within smartphone searches, an increasingly hotter market, Baidu's share shrank from the 96.8% peak to 84.3%. Shenma, Alibaba Group Holding's mobile-only search engine, is now racking up a 10.3% share.
Baidu "received government support when it took on Google, but it does not receive that backing when it competes against domestic firms," said an analyst familiar with China's internet sector.
The AI pivot
Baidu is now mapping out a resurrection via AI, and Lu is serving as the point man. After graduating from China's prestigious Fudan University, Lu earned his doctorate in computer science at Carnegie Mellon University in the U.S. He later oversaw Yahoo's search engine business, later leading the same operation at Microsoft. The American tech giant made Lu an executive vice president in 2013.
He took his current position at Baidu after Chairman and CEO Robin Li, a friend of two decades, put out the offer. Lu's understanding of AI surpasses Li's more than tenfold, says the Baidu chief. "Baidu is primed to lead the AI revolution in China," Li said during the conference call, repeatedly emphasizing the group's pivot toward the innovation.
The reason behind the keen focus on AI lies in the rapidly evolving Chinese tech landscape. Alibaba, one of Baidu's biggest competitors, is diversifying from its e-commerce operations. Tencent, which rounds out the triad, is expanding from chat apps and into financial services.
Dependent on its search engine business, Baidu is being outdistanced by its two big rivals on the revenue front. Baidu's market capitalization is currently about a quarter of either of the other two.
Not only will AI be used to generate more accurate search results, Baidu plans to utilize the technology in finance, autonomous driving and other applications. The company has already established a lab devoted to augmented reality. Baidu is also strategically collaborating with China's BAIC Motor to develop self-driving cars. And an online bank jointly owned by Chinese investment conglomerate Citic group recently obtained government approval.
Stanford deep learning expert Andrew Ng joined Baidu in 2014, and he is heading the company's AI research lab in America. With such a lineup of global talent behind him, Li is eager to establish a powerful new source of earnings.
"Qi oversees our product, technology, sales, marketing and operations," said Li, a job description that shows his full confidence in Lu. Lu's tech prowess, honed across the Pacific, will be tested as Baidu navigates one of the most delicate periods in its 17-year history.