Baidu and Xiaomi Reveal a New AI Partnership

Chinese search giant Baidu (NASDAQ: BIDU) recently partnered with Xiaomi, the country's fourth-largest smartphone maker, to invest in new Internet of Things (IoT) and AI-driven technologies. The exact details of the partnership weren't revealed, but the two companies said that they will immediately explore new opportunities in voice recognition, deep learning, and computer vision, as well as new applications for Baidu's virtual assistant platform DuerOS.

What does this partnership mean for Baidu?

Baidu controls about 80% of the online search market in China. Its expanding ecosystem includes the Baidu Wallet payment platform, the iQiyi streaming video service, various online-to-offline (O2O) services on its mobile app, and a wide range of portal sites and cloud storage platforms.

Baidu promotes DuerOS, which adds voice recognition capabilities to a wide range of devices, in the same way Amazon promotes Alexa -- as a multi-platform assistant which tethers users to a sprawling ecosystem. Baidu says that it's currently working with 130 companies to integrate DuerOS into smartphones, smart TV, smartwatches, and home appliances.

Baidu is expanding its ecosystem and its investments in adjacent markets like AI and autonomous cars to counter Tencent (NASDAQOTH: TCEHY), which has become the 800-pound gorilla of Chinese social networking with WeChat, the country's most popular messaging app.

WeChat's evolution into an all-in-one "super app," which offers mobile payments, ride-hailing services, food deliveries, and other e-commerce capabilities, makes it a serious threat to Baidu's search-based ecosystem.

Baidu and Tencent are now locked in an arms race across next-gen markets like IoT gadgets, AI platforms, and autonomous vehicles. Therefore, teaming up with Xiaomi -- which sells not only phones but also other smart-home gadgets -- is a smart way for Baidu to widen its moat against Tencent.

What does this partnership mean for Xiaomi?

Xiaomi was once China's top smartphone maker, but it gradually fell behind its domestic rivals Huawei, Oppo, and Vivo. Huawei offered a wider range of phones across multiple price tiers, Oppo copied Xiaomi's strategy of selling low-margin phones with beefy specs, and Vivo gained ground in the higher-end market with its pricier devices.

In response, Xiaomi aggressively expanded beyond smartphones with mobile accessories, audio devices, smart TVs, various home appliances, wearables, and even connected shoes. It also launched the Xiaomi IoT platform -- a dedicated platform for creating and connecting IoT devices -- which attracted 400 hardware partners.

Xiaomi recently claimed that with 85 million connected devices, the Xiaomi IoT platform is the largest IoT hardware platform in the world. Some of the devices across this platform already use Baidu's DuerOS, so an official partnership was the logical next step.

Xiaomi needs Baidu because its IoT platform needs to be tethered to a cohesive ecosystem, and its own cloud platform (Mi Cloud) is mainly used for storage. By tethering all of its first- and third-party IoT devices to DuerOS, Xiaomi gains access to Baidu's search and cloud ecosystems, and can track device usage more easily through Baidu's analytics tools.

The partnership could also help Xiaomi establish a foothold in the lucrative autonomous-vehicles market, since Baidu is already testing out its own cars and developing an open-source autonomous driving platform (Apollo) with over 70 partners.

The bottom line

The partnership between Baidu and Xiaomi probably won't generate big short-term returns for either company. Baidu still generates most of its revenue from ad sales, and Xiaomi still makes most of its money from phones.

But over the long term, their investments will likely pay off as Baidu's services reach more consumers through Xiaomi's IoT platform, and Xiaomi leverages the appeal of Baidu's services to sell more connected devices. Therefore, this partnership is a clear win-win deal.

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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 Tencent, Amazon, and Baidu. The Motley Fool owns shares of and recommends Amazon and Baidu. The Motley Fool has a disclosure policy.