Technology Author: Yingwei Fu Editor: Luke Sheehan Jan 01, 2021 07:38 PM (GMT+8)

The diversity of AI applications now asks for a middleware to integrate and realize big AI application.

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Founded in 2015, CloudWalk has been crowned one of 'China’s AI Four Dragons' for over three years. The other three 'AI Dragons' are SenseTime, Yitu and Megvii; Yitu submitted its prospectus to Shanghai Stock Exchange (SSE) in November 2020, one month earlier than CloudWalk. AI giants finally cluster on the Star Market.

Unlike a time before 2019, when AI was a hot spot for young founders and opportunity speculators, the field entered a cool-down phase lasting the past two years. The financing investment count decreased sharply from a peak in 2018 of 755 AI-related investments valued at CNY 125 billion to 2019's 492 AI investment deals valued at CNY 87 billion. The most valuable AI unicorn SenseTime has not announced a new financing round since its 2018's billion-dollar round led by SoftBank's Vision Fund. On the contrary, CloudWalk seems not influenced by the cooling atmosphere: it received a CNY 1.8 billion Pre-IPO round in 2020.

From a research institute to a company

Traced back to CloudWalk's foundation, the company is a spin-off project from Chinese Academy of Sciences Chongqing Institute (CASCI). Zhou Xi, the founder of CloudWalk, was introduced to CASCI via the 'Hundred Talents Program' in 2011 and he led the facial recognition team, which is the precedent of CloudWalk. Zhou obtained the doctorate degree from University of Illinois Urban Champaign and worked for IBM, Microsoft and NEC prior to joining CASCI.

Different to other AI companies, CloudWalk received only yuan funding and a significant share of its stakeholders are industry guidance fund or state-owned fund. Chinese companies that receive dollar fund need to build VIE structure, but the complex structure may bring legal uncertainties to these companies. Comparatively, CloudWalk is a national-security-friendly AI firm, especially one dealing with massive biometrics data.

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Spun off from CASCI's facial recognition lab, CloudWalk started from the same tech and gradually made its name tied with SenseTime, Yitu and Megvii. Similarly, AI computer vision companies tried the public security field. 'AI Dragons' have been in the 'smart security' competition: customized surveillance system networks with a central 'brain' that can alert suspicious or unusual activities, monitor the street, identify criminals at large and so other functions.

From surveillance to operation system

The smart security and smart city gradually field became crowded when more AI CV firms stepped into play while AI's sluggish commercialization progress rained on AI investors' parade. The cooling investment heat marked the end of AI investment mania but also a start of AI industry's divergence.

Previously introduced by EqualOcean, Yitu Technology currently emphasizes the improvement of AI computing power by innovating on AI chips – a more fundamental and physical layer of the AI industry. CloudWalk also chose to contribute on an essential part of AI – the AI operation system (AIOS). Like Windows for PC users, AIOS is for AI users. The company's AIOS is named CloudWalk OS (CWOS).

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OS provides an environment to make user interact with machine and allow software to communicate with each other. AIOS serves for the same function, providing a place to allow user control AI programs and integrate varied AI software into one place. AIOS in China is a relatively new area while AI's rise occurred in the past five years. AI can recognize images, sound and text – then extract information from these media for further analysis and actions. Multi-modal input and output ask an interface to allow interoperation among them. AIOS appears to serve the goal. TensorFlow by Google, Cognitive Services by Microsoft, Pytorch by Facebook and Psyclone AIOS are the most used AIOS in the world. Thanks to these middleware apps, developers and users are able to align distributed AI systems.

AIOS is also an attractive solution for companies that need to manage several AI programs designed for using unique functions simultaneously. For instance, a city may have several AI solutions to manage security, traffic, civil governance and so on and different solutions may need to interact with each other to keep information on the same page and perform analysis with multi-dimensional info integrally.

CloudWalk has shifted the strategy focus from AI solutions to CWOS, so has the business focus. Complex, interactive and powerful AI functions need an OS to converge them into the same network for large-scale applications. Significance of an OS can tell from Microsoft's initial success, and CloudWalk's mirror attempts. CWOS is by far an AIOS forerunner in China. Other Chinese companies have been actively exploring opportunities in the fields and launch their products like Baidu (BIDU:NASDAQ)'s DuerOS and 4Paradigm's Sage AIOS.

However, revenue from CWOS is gaining heft with more revenue coming from AI solutions. The transition takes time, both for the company and for the popularization of AIOS in industries. Making an AIOS is a strategic move as an OS provides a foundation for all software that run on it – similar to how Windows shaped the PC software world.

CloudWalk's financials

Influenced by the pandemic amid the first half of 2020, CloudWalk generated over CNY 220.96 million revenue, less than 1/3 of 2019's revenue.

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CloudWalk's software revenue is the CWOS sales, accounting 47% of the total revenue in 1H2020, and combination revenue is the sales from AI solutions that integrated hardware, software and services. Since the foundation, AI solution has long been the dominant source of income for the firm. Nevertheless, with the development of CWOS, the share from AI solutions has been shrinking since 2018 and up to 1H2020, only half of the revenue came from this part.

Compared with Yitu, CloudWalk was more vulnerable when exposed to the pandemic. The difference might be attributed to the weight of AI solution in sales. AI solution's implementation process may require a project team on site to tailor the product. The pandemic made business travel impossible during the quarantine. CloudWalk's AI solution sales in 1H2020 is less than 1/4 of the number in 2019. The portion of sales from software unexpectedly rose to 47% because of the decreased sales of AI solution. With the recovering economy, the company can foresee a greater growth of AI solution sales in the second half.

While the income was severely impacted by the pandemic, CloudWalk's input in R&D kept expanding. From 2017 to 2019, the R&D expenses scaled at a 3-year CAGR 176%. In 2019, over CNY 454 million was used to develop products, eight-folded the expenses in 2017. The coronavirus impeded the company's operation but the R&D rolled on. In the first half of 2020, the R&D to revenue ration surpassed 110%.

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Up to mid-2020, CloudWalk had over 1,700 employees and 50% of them were R&D personnel located. The company has built five R&D centers in South China. For AI companies, consistently investing in R&D helps them to keep competency in the market – make better product and improve service experience. But the endless input in R&D still needs a positive outcome to finance back, or the huge costs will drag the firm into an embarrassed position. Yet, the AI market is at an early stage and the company's growth curve seems able to sustain its development.

Sales expenses climbed up annually for a period but decreased in the first half of 2020 when the coronavirus swept over China. Management and administrative expenses grew steadily but surged in 2019 because of the employee share incentive plan: over CNY 1.3 billion was credited to employees in 2019.

CloudWalk is not a profitable company currently and the same are other notable AI companies like Yitu and SenseTime. High operation expenses, especially tech-related costs, are symbolic among AI companies, while the AI market is too young to see the reward of the innovative technology. Investors who invest in AI now are betting on an AI-enhanced future and those AI companies in the market are the foundation builders.

'China Tech Attack' and AI business

Since 2018, the tech war between China and the US has worsened – both countries rolled out blacklists to ban business and communication in certain tech fields. CloudWalk has been put on the US' blacklist along with other AI firms like SenseTime and iFlytek. The ban in a short-term cannot see big influence on these AI companies as their business focus is on China. However, in the long run, the breakdown in AI technology communication may hinder both parties' tech development, where lacks synergy.

Instead of setting foot in the US market under the uncertain time, Chinese AI companies are making efforts to seek opportunities in other regions like Southeast Asia and the Middle East. International businesses entered a slow mode in 2020 but AI's function in assisting government to contain coronavirus is obvious. From disease diagnosis to the infection chain track, AI application improves efficiency and wins time for decision makers to react.

The application of AI amid the pandemic is a tip of an iceberg – the future will reveal more of AI's capability. Even at an early stage, AI has developed various vertical application for different scenarios and industries ranging from retailing, manufacturing, transportation and so on. As countries are making technology the national strategic development goal, AI-related tech wars are making AI's development tricky, with more uncertainties and less synergy.

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