Why Did Baidu's Stock Price Dip in the Afternoon?

On December 19, the A-shares of the artificial intelligence sector in China experienced a major surge, with numerous stocks hitting the daily limit increase of 20%. Concurrently, Hong Kong-listed companies like Weimob Group and Youzan saw their stock prices skyrocket as positive sentiment swept through the marketYet, amidst this wave of enthusiasm, a surprising counter-narrative unfolded as Baidu, a prominent early player in the AI industry, faced a significant decline, plummeting over six percent at one point before ultimately closing down by 4.16%. This unexpected downturn has sparked discussions in financial circles, raising questions about the sustainability and future of AI firms in the market.

Baidu’s drop in share price can be attributed to two major factorsFirstly, the company’s investment in Jidu Automobile has come under fire after the latter faced severe operational challenges

Secondly, market rumors suggested that Apple was in preliminary talks with Tencent and ByteDance regarding the integration of their AI models into the iPhone, but Baidu appeared to be sidelined in this high-stakes conversationThe implications of being excluded from such a pivotal technology partnership could be detrimental to Baidu’s market positioning.

Jidu Automotive, the brainchild of Baidu and Geely, has recently made headlines for all the wrong reasonsThe company has faced an existential crisis, leaving numerous employees in a precarious situation with delayed salaries and unpaid dues to suppliersThe anxiety among vehicle owners about the future of their cars has only added to the turmoilReports indicate that Jidu has accumulated a staggering financial deficit of 7 billion yuan (approximately 1 billion US dollars) and has consequently ceased its vehicle production operations, raising alarms about its viability in the competitive automotive landscape.

The collapse of Jidu has thrust both Baidu and Geely into the public's critical eye

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In a response to the unfolding crisis, both companies issued a joint statement pledging to address employee concerns and uphold their commitments to vehicle customersThis statement highlighted their collective responsibility to ensure that employees receive owed social security payments and necessary support during this tumultuous period.

Social media recently unveiled a leaked document detailing an aftermath plan aimed at addressing the plight of Jidu’s employeesThis plan outlines several key elements: employees will receive compensation adhering to an “N+1” formula, social insurance and housing fund contributions will be covered until December 2024, positions will be retained for employees on maternity or medical leave, and Baidu and Geely will finance a special account to ensure salary payments until January 2025—all under government supervisionSuch measures indicate an effort to mitigate the fallout from Jidu’s operational crisis and to rebuild trust among stakeholders.

Reports suggest that on December 12, Baidu and Geely initiated a process to pay November’s social insurance for Jidu employees, reflecting their immediate response to the crisis

From its inception to its dramatic decline, Jidu’s journey has taken a considerable toll on Baidu’s resources and focus, making it a regrettable investment from Baidu’s standpointEvaluating Jidu’s development, Baidu has poured substantial capital into the venture over three years, positioning Jidu as a potential pioneer in smart automotive technology.

In the fiscal report of 2023, Baidu disclosed that it invested a total of $564 million in Jidu, comprised of common and preferred stock purchases in 2022 and the acquisition of warrants in 2023. Although Baidu ultimately secured a 51.14% stake in Jidu, they lack effective control over the company, raising concerns about their ability to steer its growthAs for any outstanding debts owed by Jidu, Baidu clarified that a 600 million yuan loan used for operational funding was fully repaid in January 2023, negating any direct financial obligation moving forward.

Despite these assurances, insights from various key sources have revealed that Jidu is burdened by a staggering debt pile estimated at 7 billion yuan overall

This debt includes 900 million yuan to Baidu, 2.6 billion yuan to Geely, 1.1 billion yuan in bank debts, and additional 2.4 billion yuan owed to other suppliersAs Baidu grapples with Jidu’s financial repercussions, the company also faces its own pressures as it navigates a challenging economic landscape, particularly in the autonomous driving market, where capital burn rates remain high.

In the third quarter of 2023, Baidu reported total revenues of 33.557 billion yuan, a decline of 3% compared to the previous year, signaling an ongoing weakness in its online marketing divisionWhile Baidu’s expenditure in AI research and development continues to climb, its overall profitability remains unimpressiveThe net profit attributable to Baidu for this quarter stood at 7.632 billion yuan, marking a 14% year-on-year increaseAdjusted EBITDA faced an 8% decline, settling at approximately 8.733 billion yuan.

Industry professionals contend that Baidu's core challenge lies in transforming its remarkable technological capabilities into tangible commercial success