Chinese AI chatbot firm Xiao-I eyes global market after Nasdaq IPO on ChatGPT fever

When Yuan Hui launched his company’s first chatbot two decades ago, the world had yet to catch up on the potential of conversational artificial intelligence (AI).

Today, Shanghai-based Xiao-I is worth more than US$400 million, listed on the Nasdaq, and gunning for a global market finally waking up to the technological prowess of ChatGPT and similar services.

For Xiao-I chairman and chief executive Yuan, who sat down for an interview with the South China Morning Post in May, fresh from his company’s US$39 million initial public offering (IPO) in March, it all began with a speech by Microsoft co-founder Bill Gates.

As a marketing employee at the US tech giant, Yuan attended a conference in Atlanta, where he heard the billionaire entrepreneur speak. Inspired by Gates’ experience, Yuan quit his job a year later and founded Xiao-I in 2001.

The idea of developing a chatbot came to Yuan in 2003, when the severe acute respiratory syndrome (SARS) outbreak hit China. “At that time, many people could not leave their homes, which contributed to the popularity of instant messaging tools such as MSN and [Tencent Holdings-owned] QQ,” he said.

“One boring night, when I found no one to chat with on the messengers, I felt I could work on a chatbot that I could talk to at any time, on any topic.”

In January 2004, Xiao-I released what it called the world’s first chatbot, which could be accessed via MSN, QQ and other major messengers. It proved highly popular among users. By 2007, Microsoft’s MSN designated Xiao-I as its only partner in robots. By 2008, the number of users of Xiao-I products surpassed 100 million globally.

But there was one problem: The company had trouble finding a way to earn money from its technology. Consumers were happy to use its chatbot for free, but if they had to pay for it, Xiao-I would need to come up with something much better.

“I think the development of artificial general intelligence at the time was still far from what people expected, as what we wanted to see was Transformers with self-awareness,” Yuan said, referring to the shape-shifting alien robots from the popular media franchise created by toy firms Hasbro and Takara Tomy. “So when our product could not meet user demand, it had little value for commercialisation.”

Yuan decided to take another approach: Step back from the consumer market and focus solely on serving business clients. It was not an easy decision, but the pivot seemed to work.

“We started with the call centre business because it was a service that was widely offered by various industries,” Yuan said. The company began with telecommunications network operators, expanded to banks and securities firms, and eventually sold its products to government agencies and e-commerce companies.

When a user sends questions to the WeChat account of China Merchants Bank, for example, it will bring up an AI chatbot called “Little Zhao”, which is able to answer basic inquiries.

So far, Xiao-I has served more than 1,000 business clients across over 50 industries, mostly based in mainland China, Yuan said. They include the country’s three major telecoms network operators, its largest commercial banks, and Big Tech companies such as JD.com and Huawei Technologies.

In 2021, Xiao-I generated US$32.5 million in revenue, up nearly 135 per cent from 2020, according to its IPO prospectus. It managed to turn a US$3.4 million profit, after recording a net loss of US$7.1 million the previous year.

Xiao-I is backed by Alibaba Group Holding, owner of the South China Morning Post.

After US start-up OpenAI’s ChatGPT took the world by storm late last year, Xiao-I plans to further expand its foothold in the enterprise market, according to Yuan. He said the firm will also explore new opportunities in the consumer market.

The company last year quadrupled its research and development budget to US$24 million from 2021, but posted a loss even though its revenue rose 48 per cent to a record high of US$48.2 million.

Yuan said he was frequently asked by investors about ChatGPT during the company’s IPO road show.

“In the past 10 or 20 years, when we spoke about AI, we were talking about applications in certain vertical industries, which were carried out gradually on a small scale,” he said.

“But with the support of large [language] models, people now see that AI has the ability to generalise – meaning we will soon enter a stage where the technology can be adopted by hundreds or thousands of industries at the same time.”

A large language model (LLM) is a deep-learning algorithm that can recognise, summarise, translate, predict and generate text and other content based on knowledge gained from massive data sets.

“I think AI’s benefits in reducing costs and improving efficiency in all walks of life may far exceed those in the first three industrial revolutions,” Yuan said.

ChatGPT has also significantly raised the expectations of clients, according to Yuan.

“In the beginning, customers expected just one question and one answer at a time. Later, they asked for more complex, multi-round interactions,” Yuan said. “Now, they expect a chatbot like ChatGPT to provide more natural and complete services based on large AI models.”

Xiao-I will launch its own LLM in June, according to Yuan, along with “brand new applications”. With the IPO proceeds, he said Xiao-I is also looking at international expansion.

Yuan aims to have Xiao-I sales outside mainland China to account for over 50 per cent of the company’s total revenue in the next five years, up from around 10 per cent at present.

“The curtains have been drawn: we are standing at the beginning of a golden decade for AI,” he said.

This article was first published on SCMP.