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Business

Company in focus: China's leader in voice recognition AI goes global

IFlytek isn't as big as China's internet giants, but its success and connections are formidable

An employee at iFlytek's regional headquarters in Guangzhou. The company's value more than doubled last year.   © Getty Images

HEFEI, China At January's CES extravaganza in Las Vegas, Chinese artificial intelligence company iFlytek for the first time had its own booth, where curious crowds checked out its AI translation systems and other technology.

The company's purpose was clear.

"The time has come for artificial intelligence technology to be used in real life," iFlytek Chairman Liu Qingfeng said on Jan. 9 as he unveiled the company's partnership with U.S. technology company Nvidia. "Given that we have received tie-up proposals from more than 100 companies in the world, the time is ripe for us to look beyond our borders."

IFlytek is China's leading voice recognition tech company, with a more than 70% market share. Still, less than 1% of its sales come from overseas. The company wants to change that.

The iFlytek booth at this month's CES in Las Vegas (Photo by Kim Jaewon)

In recent years, iFlytek has been making inroads into overseas markets. It has opened an office in Silicon Valley, sought partnerships with foreign automakers and collaborated with global tech conglomerates.

Last summer, iFlytek began attracting attention outside China after it ranked sixth in the "50 Smartest Companies 2017" list from MIT Technology Review, a magazine published by the Massachusetts Institute of Technology.

The company's ranking was higher than that of China's top three internet companies, Baidu, Alibaba Group Holding and Tencent Holdings, whose market capitalizations -- at $88 billion, $506 billion and $556 billion, respectively -- dwarf that of iFlytek's $13 billion.

IFlytek has fared well in comparison with its bigger peers. The value of the company more than doubled in 2017, a year in which the benchmark Shenzhen Composite Index dropped 3.5%.

And the market remains bullish on its outlook. In a research note, Eric Qiu and Ronnie Ho, analysts at CCB International, said the company "has headroom for growth as it has carved out a niche in a burgeoning new area of technology that has applicability in a vast array of industries." The note maintained an "outperform" rating with a target price of 66 yuan, 9% higher than iFlytek's closing price on Jan. 25.

The appetite for iFlytek among global investors is reflected in the heavy buying of its shares on the stock-connect program between Hong Kong and Shenzhen, where the company's stock is listed. Hong Kong Securities Clearing was the fifth-largest shareholder, with a 1.32% ownership as of last September. The latest update by the Hong Kong exchange indicates that its holding had risen to 1.5% as of Jan. 25.

IFlytek's ambitions are evident at the company's headquarters in Hefei, Anhui Province.

The lobby displays a sign that reads, "Develop high technology and realize industrialization." The slogan comes from government's "863 Program" introduced in March 1986, and is based on calligraphy originally written by then-paramount leader Deng Xiaoping.

The building's second floor has photographs of iFlytek's top executives together with current government leaders, including President Xi Jinping and Vice Premier Wang Yang.

STRONG BEGINNINGS The company was founded in 1999 by 18 graduate students and alumni of the University of Science and Technology of China.

The leader of this group was Liu, the current chairman. When he was a graduate student developing an expertise in voice recognition, Liu consulted his mentor, professor Wang Renhua, about starting the company.

Wang fully backed Liu, and the professor today is considered the "father of iFlytek." Wang remains the company's fourth-largest shareholder as of September.

Shortly after gaining Wang's support, the company became eligible to receive government support under the 863 Program, including 1.5 million yuan ($237,000 at the current exchange rate) in research and development funding. This backing also boosted the company's credibility, opening up new business relations with government agencies and corporations.

An example is a deal struck in 2000 with telecommunications equipment manufacturer Huawei Technologies. IFlytek developed a system for call-center operators and jointly worked with Huawei in securing clients.

By 2001, the number of corporate clients using iFlytek's voice recognition technology exceeded 100 and it started receiving funds from Lenovo Group's investment unit. IFlytek also has launched a series of joint development projects with universities and research institutes.

Employees at iFlytek's regional headquarters in Guangzhou. The company has a market share of more than 70% in China in the voice recognition sector.   © Getty Images

USTC was established in Beijing in 1958 but was moved out of the capital during the Cultural Revolution, when education, science and intellectual values as a whole were under attack. It eventually found a home in Hefei, an inland city in eastern China.

The university boasts a number of graduates who have become scientists or founders of tech companies. Zhang Yaqin, its most prominent graduate, entered the university at age 12, earning bachelor's and master's degrees. (He completed his Ph.D. at The George Washington University at 23.) Zhang served as the chairman of Microsoft Asia-Pacific R&D Group and now is president of Baidu. Lenovo Group CEO Yang Yuanqing also studied at USTC's graduate school.

BIG CONNECTIONS The roughly 3,000 employees at iFlytek's headquarters have an average age of 27, and 60% are engineers who majored in cutting-edge technologies at USTC or other science-focused universities.

The company also has won recognition around the world. At the 11th International Workshop on Spoken Language Translation in the U.S. in 2014, iFlytek took first place in English-Chinese and Chinese-English translation technology, beating top-level universities and research institutions, including MIT and Japan's National Institute of Information and Communications Technology. It also ranked No. 1 in a machine translation contest hosted by the National Institute of Standards and Technology in the U.S. in 2015.

Most voice recognition services by iFlytek are provided through the internet, and these systems understand text by using AI and big data analysis.

In addition to Mandarin, voice recognition services are available in regional Chinese dialects, including Cantonese and Shanghainese, and the company says it has achieved an accuracy level of more than 95%. The number of smartphones and other devices using iFlytek's voice recognition technology has exceeded 1.2 billion.

IFlytek's client list includes many prominent Chinese companies. In addition to internet conglomerates Tencent, Alibaba and JD.com, its telecom customers include China Mobile -- the largest shareholder in iFlytek, with a 12.9% stake as of September -- China Unicom and China Telecom, which use iFlytek's technology in their call-center operations.

Liu Qingfeng, chairman of iFlytek, attends CCTV's China Economic Person of the Year Award, in December 2013 in Beijing.   © Getty Images

Other clients include smartphone makers Huawei, Xiaomi, Lenovo and ZTE; consumer electronics makers Haier, TCL, Hisense and Skyworth; insurance companies People's Insurance Company of China and Ping An Insurance (Group); and banks, including Bank of China (BOC), Industrial & Commercial Bank of China (ICBC), China Construction Bank (CCB) and Bank of Communications.

IFlytek's long client list allows it to access enormous amounts of data, and its collaborative relationships with the Chinese government and the Communist Party help it further improve its technological strength.

In November, the Chinese government set up a special task force to promote its next-generation AI development plan and appointed iFlytek to take the lead in the advancement of voice recognition technological applications. The company also set up an industry alliance with the Ministry of Industry and Information Technology to support AI-related startups.

SECURITY CONCERNS According to Chinese media, iFlytek AI has been used in criminal investigations, indictments and trials through work with more than 400 courts and 200 prosecutor's offices around China. AI has been used in language analysis in Sichuan Province, the Tibet Autonomous Region and the Xinjiang Uighur Autonomous Region.

In an open letter dated Aug. 2 and addressed to Chairman Liu, Arvind Ganesan, director of Human Rights Watch's business and human rights division, requested details of the company's "mass automated voice recognition and monitoring system," a pilot program to monitor phone conversations, its "business relationship" with the Ministry of Public Security, and its human rights policies. In an October report, the U.S.-based Human Rights Watch said iFlytek had not responded. Liu is a member of the National People's Congress, a rubber stamp legislature but one that carries prestige and influence in the country.

Speaking with the Nikkei Asian Review at the CES event, Hu Yu, iFlytek's executive president, acknowledged its work with the government.

"As a Chinese company, one of our customers is the Chinese government," Hu said, adding that the company "cannot decide" on how its technology is used. "Apple also sells its products to the U.S. military."

"What we can do is to provide our technology," Hu said. "Our customers will decide how to do that. We have some relationship with them in national projects, but we are not in charge of that."

IFlytek invests about 25% of its sales into R&D, which is the primary focus of its overseas businesses. In 2016, it opened an office in Silicon Valley. It has also started a joint study with the Georgia Institute of Technology, though the details have not been fully disclosed.

Before teaming with Nvidia, iFlytek had already been accelerating the development of its voice recognition technology in collaboration with IBM and Intel. Its voice recognition technology is now available in English, Japanese, Spanish, French and Korean.

In the auto industry, iFlytek has formed partnerships with Toyota Motor, Daimler, BMW and Volkswagen, but these deals are primarily for car navigation systems for vehicles sold in China. It now is considering seeking tie-ups for systems in cars sold globally.

The company's presence in China is evident, but it is a different story outside the country. Google, Microsoft and Apple are the global leaders in voice recognition technology, while iFlytek's market share has yet to reach double digits.

Unlike at home, iFlytek is not able to receive any preferential treatment and support from foreign governments. In addition, many overseas clients remain cautious about Chinese companies.

At iFlytek's headquarters, another sign is displayed prominently: "Let the world hear our voices."

Whether those voices are heard abroad will be the real test of iFlytek's strength.

Nikkei staff writer Kim Jaewon in Las Vegas contributed to this story.

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