Alibaba, BYD Ride High on 'DeepSeek Effect'

Amid all the noise about tariffs, and the extra 10% U.S. import duty on Chinese goods, we shouldn’t lose sight of the fact that Hong Kong stocks have continued their strong run.

Hang Seng index heavyweights Alibaba Group Holding BABA (HK:9988) and BYD BYDDY (HK:1211) are together riding high Wednesday. That adds to a run that has seen both stocks shoot up more than 40% apiece so far this year, as Chinese tech promises to do more, for cheap.

Alibaba has leapt 8.5% Wednesday in Hong Kong trade on a report that it is working with Apple AAPL to bring Artificial Intelligence to Chinese smartphones via its Qwen AI system.

Warren Buffett-backed BYD, meanwhile, is up 7.4% on Wednesday. That takes the stock to a second day of record highs, after the company held a showcase for its autonomous-driving technology at its Shenzhen headquarters on Monday evening.

BYD unveiled its “God’s Eye” driver-assistance system, which will come on all models selling for C¥100,000 (US$13,682) and above. What’s more, three cheaper models will now feature the tech, with the cheapest its Seagull model selling at C¥69,800 (US$9,550).

Alibaba and BYD are the top performers driving the Hang Seng 2.6% higher Wednesday alongside their affiliates. I should note I do have a small stake in BYD but no holding, at least for now, in Alibaba.

On the index, Alibaba’s online pharmacy and health clinic Ali Health Information Technology ALBBY (HK:0241) was Wednesday’s top performer, up 10.8%. Not to be outdone, BYD’s smartphone-parts spinout BYD Electronic BYDIY (HK:0285) shot up 10.0%, good for second place.

Tesla TSLA shares sank 6.3% on the effect on Tuesday. BYD had been offering the autonomous tech only on models selling for US$30,000 or above, to match Tesla’s offer of self-driving systems on Chinese cars priced from US$32,000.

So BYD’s move will pressure both margins and sales for Tesla. China is Tesla’s second-largest market behind the United States, with sales in China up 8.8% in 2024 to 657,000 cars, or 36.7% of global sales.

Sitting here in Hong Kong, I can tell you that as of last year, there’s been a sudden proliferation of cars on the roads from BYD and rival Chinese makers such as SAIC Motor (SH:600104) and Great Wall Motor GWLLY (HK:2333), successfully rebranding itself simply as GWM.

Where Tesla models are typically competing with the likes of BMW and Mercedes-Benz for space on Hong Kong roads, the Chinese makers produce budget models that are stealing market share from Japanese and Korean brands.

Much as DeepSeek is threatening to produce AI systems at a fraction of the cost of Western rivals, now BYD is promising to democratize autonomous driving in extremely wallet-friendly cars.

Alibaba shares are jumping because of Apple’s apparent endorsement of its own AI system.

I highlighted Qwen at the end of January, with Alibaba’s team reporting its Quwen2.5-Max has been posting performance that outdoes Chinese rival DeepSeek-V3, not to mention OpenAI’s GPT-4o and the Meta Platforms system Llama-3.1.

Now The Information is reporting that Alibaba has inked a deal with Apple to apply Qwen to iPhones in China. With most Western software barred from functioning behind the “Bamboo Curtain,” Apple is not able to use its Apple Intelligence AI system in local phones.

Both companies stand to gain. Apple chooses its partners very carefully, so other companies both inside and outside China may look to team with Alibaba on AI. Meanwhile, Apple is looking to regain ground it has been losing to Chinese competitors.

Apple has lost what was a commanding lead in the China market. Its Q4 2024 sales were down 25.1% compared with the same time in 2023, according to industry tracker Canalys.

Chinese consumers no longer view Chinese brands as inferior to iPhones, thanks to heavy investment in apps, hardware, and camera technology. Likewise, Tesla is no longer the gold standard in electric vehicles in China. BYD has supercheap models but is also working on a supercar, the Yangwang U9. The U9 posted an unofficial lap on the Nürburgring that makes it the fastest Chinese production car, just adrift of the time for the all-electric Porsche Taycan Turbo GT.

Thanks to a price cut on iPhone sales leading into the end of the year, Apple saw 13.1 million sales in Q4, which was still good for top spot, but only very narrowly ahead of the 12.9 million units shipped by both Vivo and Huawei. For 2024 as a whole, both Vivo at 49.3 million units and Huawei at 46.0 million outstripped Apple, with 42.9 million smartphone sales in China.

Since a dip in Chinese shares one week before U.S. President Donald Trump took office, Hong Kong stocks have taken off. The main message investors have gleaned from the flurry of White House announcements has been: "Hey, a 10% extra tariff on Chinese goods is far better than we expected." Then there’s been the “DeepSeek effect” since it introduced its chatbot in late January.

Alibaba shares have raced up 45.7% since that January 13 low. BYD shares are up 41.3% in exactly the same timeframe.

The Hong Kong market was frequently the world’s worst-performing index until last year, when its China listings, in particular, lifted it to Asia’s strongest showing for 2024. That rally looks set to continue on the back of Chinese tech, tariffs be damned. 

At the time of publication, McMillan had a position in BYD.