Chinese artificial intelligence (AI) startups have been securing a greater share of funding deals in the industry in recent years, but the total value of these investments has actually been dropping amid a cooling venture capital landscape and political uncertainty about the ongoing tech and trade war with the US.

China’s AI startups have seen a fall in funding as a technology rift between the world’s two largest economies rips apart early-stage deals. (Pictures: Reuters)

Last year, Chinese AI startups closed 13% of global funding deals, up from 4% in 2014. In comparison, their US counterparts still had the greatest share of deals worldwide but their share has been declining in the last five years, from 71% in 2014 to 39% in 2019, according to a report by tech-market intelligence firm CB Insights published on Wednesday.

However, the amount raised by Chinese startups accounted for only 11% of total funds raised by AI startups worldwide in 2019, down from 21% the previous year. Meanwhile, AI startups in the US accounted for 64% last year, a slight increase from 60% the previous year.

The global AI sector had a record year in 2019, with US$26.6 billion being poured into the sector across 2,235 deals, up from US$22.1 billion across 1,940 deals the year before, according to CB Insights.

This means that Chinese AI startups raised slightly more than US$2.9 billion in 2019, compared to about US$4.7 billion the year before, while US AI startups raised US$17 billion last year, compared to roughly US$13.3 billion the year before.

The fall in funding for China’s AI startups comes as a technology rift between the world’s two largest economies rips apart early-stage deals, with a separate report this month predicting that US venture investment in China for 2019 would plunge to a six-year low.

After a peak in 2017, when Chinese AI startups overtook US companies according to CB Insights numbers — accounting for 48% of the total funds raised compared to the latter’s 38% — investor interest in the sector has also been cooling.

“Investors are much more cautious now, especially after the second half of 2018 as we sensed a bubble – most AI projects haven't produced strong performance,” Chris Lai, a partner at Beijing-based Shunwei Capital, said. “We haven't seen many AI applications that are beyond imagination, most are used in surveillance cameras.”

Still, some Chinese AI startups are gaining prominence, giving hope to the country’s ambitions to become a world leader in the field by 2030. Beijing-based chip designer Horizon Robotics, for example, was one of 24 AI startups worldwide to reach unicorn status last year, joining the ranks of privately held companies valued at over US$1 billion.

The US$750-million financing raised in May by China's Megvii, more commonly known for its facial recognition brand Face++, and Horizon's US$600 million funding were the second- and third-largest funding rounds among AI startups last year. Still, most companies that had raised more than US$100 million in mega fundraising rounds were from the US, according to the CB Insights report.

Going forward, investor interest in China is likely to shift from research-and-development stage projects to the application and commercialization of the technology, Lai said, adding that one of the most watched areas will be the integration of AI with vision and hearing applications, such as smart home appliances.