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Scandals Hit Chinese AI Unicorn iFlytek

China’s leading artificial intelligence company iFlytek was accused of making a fast buck in real estate investment. The news came to light after CCTV, China’s national television, exposed their dealings.

Oct 26, 2018 by Rebecca Zhang
Scandals Hit Chinese AI Unicorn iFlytek

Image Courtesy: iFlytek

China’s leading artificial intelligence company iFlytek was accused of making a fast buck in real estate investment. The news came to light after CCTV, China’s national television, in the wake of an allegation of faking AI simultaneous translation in a conference this September, raised skepticism on the bubbles of China’s AI industry.

Oriental Horizon, CCTV’s popular investigative news program, exposed earlier this month that iFlytek runs a hotel and villas under construction(The hotel has already been in business, but the villas are still under construction) in an economic development zone, violated nature reserve regulations.

They claimed that the buildings were illegally located in the core area of Yangtze Alligator National Natural Reserve at Jingxian County, central China’s Anhui Province, under the guise of “IT R&D centre”.

The staff working for Guantang, the hotel operated by iFlytek, said in front of a hidden camera that local and provincial level officials stayed in the hotel for meetings. The report increased investors’ concerns about iFlytek’s business model, suspecting the company may source income from real estate investment, instead of AI products.

“IFlytek don’t have real estate business. You should check our annual report. We don’t have any income from the real estate market. If we had invested in real estate, we would have already become rich,” Hu Yu, executive vice-president of iFlytek, told media, after its developers’ conference on October 24.

The company denied that they were aware that the centre is located in a natural reserve, in a statement responding to CCTV’s report. IFlytek said they have suspended the operation of the centre after learning the news and claimed the hotel is just an affiliate facility. The hotel was open to the public to "reduce waste", said the statement.

According to Jingxian County’s government website, the company launched this R&D centre in 2013 with an investment of CNY 120 million (USD 17.6 million), covering around 10 acres.

Founded in 1999, Hefei City-based iFlytek develops voice recognition software and voice-based internet products with deep learning and other advanced technologies.

Last November, the company was enlisted as one of the first four innovative AI platforms supported by the central government along with Baidu, Alibaba and Tencent, China’s biggest tech giants in the hope to propel the country’s AI industry.

It was also ranked No. 6 in “50 smartest companies” of 2017 created by MIT Technology Review.

The CCTV report was the second dispute which iFlytek was drawn into within a month.

On September 21, a Chinese interpreter who worked at 2018 International Forum on Innovation and Emerging Industries Development in Shanghai complained on social media that the company feigned his translation as AI machine translation.

“iFlytek didn’t tell that they just transformed the audio of the interpreter into transcript,” said Bell Wang, the interpreter, in a post on Zhihu, the Chinese version of Quora.

“Technology is innocent, but will attracting capital in the name of technology lead to bogus marketing?” he had said.

IFlytek responded that the company has the technology to support simultaneous translation, but it only provided transcription service for the conference this time.

After being reached by a senior manager of iFlytek, Bell Wang announced in a new post on September 24 that the two sides had clarified the misunderstanding.

But shares of iFlytek have already plunged in the stock market, following the crisis. The price of the company had reached the lowest point of CNY 20.3(USD 3) per share within three weeks from CNY30.87 (USD4.5) on September 21.

The recent controversies added doubts of people on iFlytek’s technology and furthermore, China’s strength in technological innovation. China has launched a series of national industrial policies from “indigenous innovation” to “Made in China 2025” in the last decade.

However, a bunch of companies were accused of swindling government subsidies but failed in delivering corresponding innovation in technology.

It has become gradually common too in recent years that some high-tech companies take land at a low price from the local governments, leveraging the favorable tax and industrial policies issued by the government supporting tech companies.

China's real estate prices have skyrocketed since the government implemented a loose monetary policy in 2008.

For example, the Beijing Genomics Institute (BGI), China’s leading genomics research company, was alleged of developing industrial parks and health cities covered by the name of scientific research in more than ten places all over China this summer.

The market value of iFlytek has dropped from CNY156.5 billion (USD 23.01 billion), the highest point, last November to CNY42 billion (USD 6.18 billion) so far, eroding over 2/3 of its value. Analysts believe that the shrinking value reflects the over-dependence of the firm on subsidies offered by the government.

IFlytek’s first half report of 2018 showed that the subsidies from the government account for 91% of its total pre-tax profit.

The disputes of iFlytek may help break the investment bubbles in the AI industry.

Rebecca Zhang

Rebecca Zhang is a Washington DC-based journalist who focuses on fintech, e-commerce and online education. She can be reached at Rebecca_Zhang@hks18.harvard.edu

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