A sanctioned Chinese firm says cheaper models can still win

China’s artificial intelligence race has no finish line. DeepSeek, Moonshot AI, Alibaba and even consumer electronics firm Xiaomi have all dropped new models in recent weeks, jostling for position on leaderboards.

From native AI startups to platform giants, companies across the sector face growing pressure to innovate, expand their user base and find paths to generate revenue. At the same time, they must manage steep research and development costs alongside rising expenses for computing power and hardware.

SenseTime, one of China’s early AI companies, has pivoted to stay relevant in the generative AI era. Long known for facial and image recognition, the company now develops multimodal systems that can combine text, audio and visual data.

Founded in Hong Kong in 2014, SenseTime has faced U.S. sanctions over allegations related to surveillance of Muslim minorities in Xinjiang, which it has denied.

Its latest model, SenseNova U1, integrates language and vision processing into a single system, improving speed and efficiency by removing the need to translate different modes.

SenseTime is betting on cost efficiency as a competitive edge. The company has taken cues from DeepSeek’s approach of delivering high-performing models under financial and technological constraints, according to cofounder and chief scientist Lin Dahua.

While ChatGPT Images 2.0, an artificial intelligence tool from OpenAI that generates images from text prompts, produces “exquisite and beautiful” results, SenseNova U1 costs ten times less, Lin said.

“You may not need the top model in many cases when it can handle most tasks,” Lin told CNBC. “There is still a gap between us and the international frontier models like OpenAI’s GPT Image 2 and (Gemini’s) Nano Banana, but our cost is much lower – it’s very efficient.”

With limited overlap between U.S. and Chinese AI markets, the real competition may be closer to home.

ByteDance’s AI video model Seedance posed a competitive concern at first, Lin said. SenseTime has since integrated some of its capabilities into its short-video tool Seko, allowing it to combine Seedance’s background generation with its own audio functions.

Technology is only half the battle, with business models becoming increasingly important. OpenAI’s reported miss on revenue and user targets, according to The Wall Street Journal, signals risks for Chinese and American players alike, Jefferies said in an April 28 note.

Pure-play AI model companies face a tough equation: low customer loyalty, limited differentiation, a crowded field and high training costs, Jefferies said.

Large internet platforms, by contrast, have stronger cash flow, access to user data and established customer bases to sell AI applications to, the bank added.

In China, platform companies, including Alibaba, Tencent and ByteDance, can use their core businesses to subsidize AI development and enhance existing operations, said Vey-Sern Ling, a senior equity advisor at UBP.

“They are obviously in a better position than the standalone ones, which continue to be loss-making,” Ling added, while noting that heavy AI spending has weighed on profits even at larger players like Alibaba and Kuaishou.

To stand apart, SenseTime has combined large AI models, applications and infrastructure to improve service quality while lowering costs per use, Lin said. Many of its products target enterprise clients, who often demand higher-quality services, are willing to pay more and less likely to switch providers.

SenseTime narrowed its net loss by 58.6% last year and reported positive EBITDA in the second half for the first time since listing in 2021 – a trajectory investors will keep watching closely. Lin said the company’s AI costs are “manageable” and largely focused on making models more efficient.

Pricing strategies vary across the sector.

Some companies, including DeepSeek, have recently slashed prices and offered discounts to attract users. Others such as Zhipu have raised them – signaling a push to commercialize advanced models.

The cloud units of Alibaba and Baidu have also lifted prices amid surging demand for AI computing power. ByteDance is planning a subscription service for certain features of its popular AI chatbot Doubao.

“Price wars might serve a strategic function in short-term promotions, but sustainability in the long run depends on differentiated value,” Lin said.

Analysts say some AI companies may be following a familiar playbook given China’s massive market: bleed cash to gain market share before raising prices later to monetize.

“They cannot keep subsidizing the usage of AI because it’s very expensive,” UBP’s Ling said.

“Either they can paint a picture of huge future usage and demand and help investors understand that near-term losses are acceptable. Or they have to start monetizing much sooner.”

Facing U.S. export and investment restrictions, SenseTime has focused its international expansion on markets such as Southeast and North Asia, the Middle East, and more recently, Brazil.

The U.S.-Israeli war on Iran has caused short-term disruptions, impacting flights and interactions, but Lin said the company’s long-term strategy in the region is unchanged.

Cost-efficiency and practical utility matter as much in overseas markets.

“Oftentimes, the reason behind repeat buying is not about the technology being particularly advanced, but providing the best service at a competitive price,” Lin said.