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CNBC Interview with Ya-Qin Zhang, President of Baidu from the World Economic Forum 2018

Following are excerpts from a CNBC interview Ya-Qin Zhang, President of Baidu and CNBC's Arjun Kharpal from the World Economic Forum 2018.

AK: Ya-Qin, Baidu has spoken a lot about artificial intelligence AI. This is a big shift for the company to become an AI first company, what are your ambitions this year with AI?

YQ: Obviously AI is a big thing for Baidu and for China and for the industry. You know we believe this is the engine of the forth industrial revolution. Last year we made a major strategic shift towards AI.
First we announced a opt-in system, which is conversational AI-platform one which has actually got a lot of adoption in the past year. And the second is to release an open platform for autonomous driving. And Autonomous Driving obviously it's a huge industry and it's going to transform in a very different way in the next 10-15 years. So we want to be become the envy of autonomous driving and the third of course is the Baidu cloud and this will be a vehicle for us to reach the business customers. So it is for a conversation platform, for Cars and for business.

AK: And let's dig into some of that DuerOS is of course is one of your operating systems around voice recognition.

YQ: Yes.

AK: You released a smart speaker recently that the operating system in it. Is your strategy to license this across many devices across the world similar to what Amazon has done with the Alexa in the U.S. and other areas of the world.

YQ: Yes. Yes. DuerOS Is kind of the Alexa of China, Google's system China. And obviously it's optimized for Chinese and it has more capability in terms of the system integration. But our strategy is to work with our partners to create a voice based ecosystem. And obviously we have a reference design, we have a high end product with Razor H which has actually gained a lot of traction for us.
But overall our strategy is a partnership in China and around the world.

AK: AND how is this going to go beyond China as well? Obviously it was you know conceived with it with the Chinese language in mind.

YQ: Yeah.

AK: Do you expect to expand this into other regions? Is the U.S. region looking out for this particular technology.

YQ: Yeah, if you look at the technology and the algorithms, the machine learning, speech recognition are far afield recognition detection, this is actually universal it goes beyond language. And so our first, of course, market is China because we have a lot of data. And our second stop actually is Japan.
In Japan we have the largest input methods. In fact 70 percent of the people in Japan use that input.
So we also have a tremendous amount of data terms of conversation, syntax. So we're going to release a product in Japan very soon. It will be a bit different but hopefully in the next few years we can reach more countries and there are a number of partners we work with.

AK: So you are in the process of acquiring the data and machine learning in order to build the voice technology there.

YQ: That's right. And you know without data the rest is hard because all the machine learning technology leverage data and computing

AK: And can you give me a sense of how the developers have taken this? How many developers you have onboard developing for DuerOS. Is there a retraction at the moment?

YQ: Yeah, we really pleased with the momentum and acceptance of the platform and we have over 120 major partners in China and outside of China. There are thousands of thousands of developers working to make this into their product. And actually if you look at all the essential automation home appliance companies are adopting DuerOS in different ways. For example the Hair refrigerator, the TCL television and a number of smart speakers. So we are really pleased with the momentum.

AK: In the third quarter of last year, I was just looking through your financials -- about 80 percent of revenue is still coming from the core advertising business. You know the rules around that have changed in China. When do we see the real shift to AI begin to impact the results as well? For example the 80 percent in the third quarter was AD revenue in the next five years what does that figure become?

YQ: We have had some challenges, regulatory challenges. Back in 2016 and in the last year we turned the corner.In fact, the third quarter you mentioned our revenue increased 29 percent and our net profit increased 69% percent. Indeed 80 percent of our revenue will come from advertising.
I think that's fine.As the self, it's a huge market and it's growing pretty fast in China and the rest of the world. Before Baidu we look had just new Products. For example Baidu cloud. And just last year our revenue increased the four times and our customers increase by about 10. And also there's a new business called the live feeds which actually is more information content delivered to you according to your preference. And you know it's more customized content.We started that product last year, the first year we have a run rate of over a billion dollars.So we see a new source of revenue and then we see new business and product taking place, taking off in the next few years.

AK: And how big do you expect your cloud business to be then in the next five years.

YQ: Yeah I can't disclose any numbers but I see a tremendous energy and momentum.

AK: And driverless cars is another area, of course, that is a very big focus for you guys Apollo 2.0.

YQ: Yes.

AK: The new system for the driverless cars you released as well really really recently. When do you expect the first car using the Apollo system go into mass production?

YQ: Yeah. So Apollo 2.0 has elements 4 level 3 and Level 4. Level 3 is autonomous driving but with a driver in the seat and Level 4 is of course driverless. And you know we we look at the engagement from the carmakers they have different plans. And the first L4 minibus actually going to get to market this year by King Long which is the second largest bus manufacturer in China. And then we see three of L3 products in the next two years, for example Bejing automotive.
There are few other major carmakers and we will work with the carmakers to commercialize as soon as possible. But overall it will take them time to get to mass market. And we are, at least China will be faster than any other country in the world. Because you know if you look at Chinese consumers are very open minded about autonomous driving. About 92% of Chinese consumers say if their cars is like this, then I'm gonna take one or buy one. And actually in U.S. it's about 52 percent. Europe is 40 percent. So different countries react differently with this new technology. But it is tremendously impactful to the industry and also has a tremendous social benefits; reducing accidents and save lives.

AK: And Level 5 when that comes, presumably that comes with upgrades to the Apollo system.
What's that timeline for that? Do you anticipate?

YQ: Yeah that will take some time. And also in terms of definition our L4 is like L5 and which …. And I think even for L5 it will probably happened with a more constrained environment, and probably now with part of the course, for example the first of four car rollout is the minibus, with more constrained routes and we have a street sweeping car vehicle that itself is very different from the passenger cars. Passenger cars actually have a lot more requirements and liability. Right now they are in the Olympic Park, if you visit! Our vehicle is doing the work to cleaning the park

AK: In terms, you know one other interesting thing that came out of CES earlier this year was the partnership with Nvidia to create this autonomous cars system for the Chinese market

YQ: Right…

AK: Do you have customers lined up for that at the moment? Are you expecting some cars to go into production with that system this year?

YQ: Yeah, well if I look at all the carmakers I mentioned they will use Apollo and they will probably use a chips or a systems from our partners. So in China we work with a number of partners including Intel and Nvidia and outside of China we actually tried to expand this to global market. We work with Microsoft for example using their car service to cover more footprint. And we worked with Tom Tom for high definition mapping. There is a tremendous amount of partnership going on. In China obviously we have the strongest momentum and traction.

AK: Glad you mentioned mapping as well. Because that is a key component for driverless cars.
That's the area HD mapping that you're particularly strong at

YQ: yes

AK: As well. How big a business do you envisage the mapping site alone becoming for Baidu?

YQ: High definition mapping is a necessity for L3 and L4 and Baidu is in a unique position because we have a leading positioning on mapping. And actually we take that leadership to high definition mapping. Last year we believe we already covered all the highways, freeways about 300,000 kilometers. So this will be a big business because all cars will need high definition mapping. For us high definition mapping technology, licensing and data service will be a key element of monetization.

AK: Can you give me a figure on how big it is?

YQ: I Don't have the numbers.

AK: But let's move on to a little bit around around the content, original content, video content for Baidu through iQiyi . You know we've seen in recent quarters an increased cost for content, is original content really the key focus this year for Baidu?

YQ: Yeah. Well if you look at that there's a search or provider, providing services, content is core.
For AI. So iQiyi is the leading Video application in China. We have four hundred million monthly active users. Indeed the authentic content, original content became a critical differentiator and we'll continue to invest on that and in fact we are also producing our own content.

AK: Yeah, this is what I was talking about. Is a lot of the focus going to be in producing your own original content, much like you see in the US market

YQ: Netflix

AK: Netflix – that kind of strategy.

YQ: Yes. So there will be a syndicated content. Content that we produce and also it's a mix of advertising and subscription and we see a huge increase in the membership in addition to advertising revenue.

AK: How many members does iQiyi have at the moment then?

YQ: I do not have the numbers, I have to get back to you.

AK: Will your content strategy really focus around Chinese content or are you looking to invest in perhaps in some Western content that you could bring over to China as well?

YQ: Right now we have Chinese content. We also license Content from Hollywood and from other countries. And I believe the oracle, the Wall Street Journal iQiyi paid a huge amount of money to license content from Hollywood which is good. And I think Chinese is fully recognizing the value of copyright and original content. And I used to work for Microsoft and for 16 years software copyright has always been a challenge. And China made tremendous strides in the last few years. Right now I think content are too expensive.

AK: This is the point, Can you give me a sense of how much you're planning to spend on your own content this year. What are you targeting or can you give me a sense how much that is going to increase versus last year?

YQ: Yeah well you know I can't give you a specific number. But obviously we want to increase our investment but our revenue will also increase proportionally so overall you know we have a commitment to our shareholders and making sure we continue to deliver on revenue and the profit commitments.

As I mentioned before, the last quarter release we actually had a very encouraging results both in terms of revenue growth and profit growth. And for 2018 and 19 we commit, continue to commit, invest significant R and D business in the meantime making sure our core business aswell you know very stable and healthy.

AK: Are you able to give any indication as to a percentage increase as to what you might expect?

YQ: Yeah, yeah. I can't give a specific number because you know, we are a listed company, NASDAQ

AK: Netflix is an interesting company because because you partnered with them as well, bringing some of their content over to china, through a partnership with iQiyi. Is there more to come on the Netflix front? Will you continue to look for opportunities with Netflix.

YQ: Yes, Netflix or other companies and our head of content Is working hard to bring more content to China and to produce more content. More authentic content.

AK: So expect to see more Netflix films coming over to China this year.

YQ: You'll see a lot more exciting deals.

AK: And one other thing I have to ask you around iQiyi. There has been reports around an IPO of this business in order to generate some money alone for this business. Are we to expect that this year. How far are you in the process around an IPO for iQiyi?

YQ: Again, I cannot comment on this particular issue but iQiyi if you look at the growth it's quite impressive. Right now, it's one of the largest top five applications in China. And it will grow in a very significant percentage. So I … also it is a critical part of the overall Baidu ecosystem. You know the search itself, AI all needs content and video is becoming a big part of internet. I think in China we're over 70 percent of the continent's data is video. You know there's some long video or short or micro micro version of the video it just taken off in a huge way.

AK: And let's move on a little bit to some of your research also focus on the U.S. market you've opened up some R&D centers. How crucial has this been for some of your development over in the U.S. with with driverless cars.

YQ: Yeah, fine, we are a global company, so we obviously want to find talent in U.S. and around the world. So we started the R&D center in Silicon Valley actually five years ago. But last year we made significant changes and so they're actually responsible for a lot of our innovation in autonomous driving and machine learning algorithms and security and we will increase the investment this year.
We also set up a new center in Seattle to work on … called AI and also things possibly like quantum computing. So overall we will expand our R&D ourside of China and our R&D investment overall over about 15 percent of our revenue. We'll continue to do that.

AK: There's over 200 people in your Silicon Valley R&D center Is that going to become bigger this year? If s, by how much?

YQ: Yeah we said, Yeah it will be bigger this year. I haven't checked the numbers but we look at an increase of somewhere between 50 to 100 people. And that's not a top down thing, you know when we find more talent we will put more people in there. Same thing with the Seattle R&D center.

AK: You said you reinvest 15% into your R&D - How much of your investing into driverless cars?

YQ: No, I don't have a clear division, but a big portion of this 15 percent in AI. And the car is part of the overall AI investment.

But I don't have a specific number.

AK: When you look at your product portfolio which is huge from search to content, to AI, is the US presence really about the R&D focus or could you look to expand some of your other products into the U.S. market.

YQ: Yeah. So U.S. is obviously a base for R&D, for Talent. There's also a place we're going to expand our product.For example I know we have a matrix of mobile apps whether it's photo enhancement or file management or some of the tools. Already we have over 20 million users in US. We plan to, special for 2018-19 we will try to expand Apollo to the US and our partners. It will take some time, but obviously it's a critical market for us right now.

AK: And another one where you've seen some large Chinese tech companies move over to the US, particularly around the cloud area to, where there is a lot of competition, but a lot of opportunity as well.

YQ: Yes.

AK: Is Baidu cloud as well a potential product you could move into the U.S.?

YQ: For the foreseeable future we will focus on the China market for Baidu cloud, in the long term anything is possible. But Right now our efforts are focused on what I call the ABC, AI, Big Data, Cloud. We try to become the smartest cloud in China and then we talk about scale outside of China.

AK: And just one final one. Are you worried about any of the political environment in the U.S. we've seen the government blocks some key deals. ANT financial MoneyGram for example there's been a bit of an increase in anti Chinese sentiment as well. Does any of that worry you as you look to increase your investment in the U.S.? And bring new products as well to market, around the Trump administration.

YQ: Yeah I am concerned. And you know some of the anti-China, anti-globalisation sentiment.
It is a detrimental to China, it is detrimental to the U.S. and the rest of the world. And so I actually don't have specific deals blocked, you know, by this. But overall I believe you no borders in technology and talent or treaties, you know, there should not be friction on cross-border treaties and the Talent flow.

AK: If this kind of sentiment continues, would it make you think twice about further investing into perhaps R&D in the U.S. or and maybe look to other markets where, you know, the environment is a little bit more favorable?

YQ: I'm optimistic. I don't think the current policy or sentiment will last. America is a country.
It benefits from all the talent, the global talent and global technology, and I think it will continue to thrive that way. But you know if the short term setback comes back, we would together to fight against that sentiment, rhetoric.

AK: Ya-Qin Zhang President of Baidu Thank you very much for joining me today.