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3 Ways Baidu Plans to Make a Comeback in China

Baidu (NASDAQ: BIDU) was once considered a conservative play on China's growing tech industry since it owned the country's top search engine and a wide moat of popular portals and apps. However, Baidu's stock tumbled about 40% over the past 12 months as the economic slowdown in China, aggressive competition in the ad market, and a paradigm shift from traditional search engines throttled its growth.

China's economic slowdown caused many domestic companies to slash their ad budgets and pivot their spending toward higher-growth platforms like ByteDance's TikTok and Toutiao. As a result, ByteDance recently overtook Baidu as the second-largest digital advertising platform in China after Alibaba (NYSE: BABA), according to consultancy firm R3.

The introduction of in-app search engines in Toutiao, Alibaba's UC Browser, and Tencent's (OTC: TCEHY) WeChat also challenged Baidu's search engine. Sogou (NYSE: SOGO) also gained ground by integrating voice searches into its popular mobile keyboard. Meanwhile, Baidu's growing dependence on iQiyi for revenue growth crushed its margins because the streaming video unit was still unprofitable.

Image source: Getty Images.

Those headwinds are fierce, but Baidu isn't sitting around and waiting for these rivals to render it obsolete. Let's examine three key ways Baidu could still mount a comeback in China.

1. AI and voice search

Baidu launched its artificial intelligence (AI)-powered voice assistant, DuerOS, in 2015. The service -- which lets users conduct online searches or access skills like deliveries, ride-hailing services, streaming media, and more -- now powers a sprawling ecosystem of mobile apps, connected cars, home appliances, and smart speakers.

Baidu's total number of DuerOS users hit 100 million last August, doubled to 200 million in January and doubled again to 400 million in July. Last quarter, it stated that monthly voice queries on DuerOS more than quadrupled year-over-year to 4.2 billion.

Much of that growth came from Baidu's Xiaodu smart speakers, which currently lead the Chinese market and rank second in the global market after Amazon (NASDAQ: AMZN), according to Canalys. Thirty companies -- including Lenovo, Xiaomi, Vivo, HTC, and Foxconn -- now integrate DuerOS into their hardware devices.

Baidu generates less than 1% of its revenue from smart speakers, but DuerOS could expand its reach far beyond PC and mobile searches. It will also fend off disruptive challengers like Sogou, which reached 464 million monthly active users (MAUs) with its voice-enabled Mobile Keyboard app last quarter.

Image source: Getty Images.

2. Connected cars

Baidu launched Apollo, an open-source platform for connected and driverless cars, in 2017. The program now hasover 100 global partners, including Ford, Toyota, and Intel, and has secured 150 autonomous driving licenses across China.

It recently launched its first robotaxi fleet of 45 vehicles in Changsha, Hunan. During last quarter's conference call with analysts, Baidu CEO Robin Li stated that "hundreds of passengers" took robotaxi rides in the first 30 days, and that the initial feedback was "quite positive."

Apollo doesn't generate any meaningful revenue for Baidu yet, but its leading position in this nascent market -- which is tethered to its AI and DuerOS platforms -- ensures that it will remain a top ecosystem player when more driverless cars hit public roads.

3. Mini programs and Baidu Cloud

Tencent launched its first "Mini Programs" for WeChat three years ago. Those mini-apps corralled users into WeChat's walls and reduced their dependence on mobile app stores and competing apps like Baidu. WeChat's number of Mini Programs topped one million last year and reached 300 million daily active users (DAUs) last quarter.

Baidu struck back by launching its own Mini Program platform for the Baidu app last July. Last quarter Baidu stated that DAUs on its mobile app rose 25% annually to 189 million, while MAUs on its Mini Programs surged 157% to 290 million. Those robust growth rates indicate there's room for Baidu and Tencent's Mini Program platforms to grow without trampling each other.

Baidu also has a firm foothold in China's cloud platform market, which grew 86% last year, according to IDC. Baidu controlled 8% of that market at the beginning of the year, according to Canalys, putting it in fourth place behind Alibaba, Tencent, and Amazon.

Baidu Cloud currently generates less than 1% of the company's revenue, but it claimed that that revenue grew more than 70% year-over-year last quarter. That growth could continue as Baidu tethers more parts of its ecosystem -- including DuerOS, Apollo, its Mini Programs, and new AI tools -- to that platform.

The key takeaways

Baidu's core advertising business is still on the ropes, but it isn't out of moves yet. Baidu clearly realizes that it needs to expand its business beyond its core search engine, and it's making promising moves which might lead to a full-blown comeback over the next few years.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Leo Sun owns shares of Amazon, Baidu, Ford, and Tencent Holdings. The Motley Fool owns shares of and recommends Amazon, Baidu, and Tencent Holdings. The Motley Fool recommends Intel and iQiyi and recommends the following options: short January 2020 $50 calls on Intel. The Motley Fool has a disclosure policy.


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