Key Takeaways:

  • Kuaishou’s Kling spinoff reflects a growing trend of tech giants seeking massive standalone valuations for their AI units to fund rapid development
  • A recent light aircraft crash in Beijing has exposed the severe safety risks of China’s heavily hyped low-altitude economy, likely triggering intense regulatory scrutiny

image credit: Bamboo Works

China’s technology landscape contains a tale of two vastly different frontier sectors. On one hand, we’re witnessing an astronomical rush into AI, underscored by a massive new strategic spinoff plan. On the other, an actual small plane crash has brought the heavily hyped low-altitude economy firmly back to earth. While both of these lie at the cutting edge of innovation, they’re currently on completely different trajectories.

We’ll start with the high-flying AI sector. Kuaishou (1024.HK) is preparing a major strategic move to spin off Kling, its AI video unit. The short video operator announced it will bring in around 20 new investors to support the service. This group will pump around 20.5 billion yuan — or nearly $3 billion — into Kling in exchange for 17% of the company, valuing the AI unit at around $18 billion. Kuaishou will continue to hold a majority 68% stake, while the remainder will go into various incentive plans.

The rationale here is simple: It’s all about money. Anything related to AI requires a tremendous amount of investment. While Kuaishou is already public and could theoretically do a follow-on offering to raise such funds, investors wouldn’t necessarily be interested pumping more capital into the parent company. But a pure AI play? Given the current technological climate, that could appear to many investors as the most valuable investment of their lifetimes.

By raising money specifically for the AI-related business, Kuaishou can deliver a much higher valuation than it would get for the company as a whole. And as long as it retains a substantial 68% majority, it’s a meaningful way to raise the capital needed to build that business as quickly as possible. In this sector, you want to move fast and keep potential competitors in the rear-view mirror. Without enough money, moving fast is impossible.

Interestingly, this spinoff includes a clause stating that private investors are entitled to a refund if Kling doesn’t go public by 2031. While five years down the road might not seem long to some, in terms of AI, that’s like an eternity. In the U.S., major players like OpenAI and Anthropic want to move to market with IPOs very quickly. It’s too soon to tell exactly how attractive a Kling IPO will be, as the company could either become wildly successful or be entirely out of business by then.

We believe there are going to be more companies doing this. This is one of the first times we’ve seen this sort of spinoff for an AI company with a wealthy parent, mirroring discussions we’ve seen surrounding Baidu (NASDAQ:BIDU) (9888.HK) spinning off and separately listing its AI chip unit. Even highly capitalized giants like Alibaba (NYSE:BABA) (9988.HK) or Tencent (0700.HK) might eventually follow suit. They may not financially need to, but at some point, the market might offer such a high standalone valuation for their AI businesses that it becomes an offer they simply can’t refuse.

Grounding the low-altitude economy

While AI soars, China’s low-altitude economy is facing a major setback. The sector was already quite slow to lift off despite massive industry and government hype, and a recent incident in Beijing has only deepened those troubles.

On June 26, a light aircraft crashed into Beijing’s tallest skyscraper, Citic Tower, known to locals as China Zun. The crash killed the pilot and injured 13 people on the ground. While Beijing hasn’t said much publicly, we think central leaders are likely quite alarmed that this type of accident could happen in such highly restricted airspace. The pilot reportedly received his license a few years ago and was known to have mental issues.

This is undeniably bad news for the makers of electric vertical takeoff and landing aircraft (eVTOLs), that were already facing commercialization difficulties. EHang (NASDAQ:EH), the only publicly traded Chinese company in this space so far, scored a huge milestone last year when it became the first to win a type certificate for its eVTOLs from China’s aviation regulator. Its stock initially shot up, but has since fallen back to earth as people realize the skies won’t be filled with flying taxis anytime soon.

The Chinese government has long pushed this industry, liking the high-tech aspect that enhances China’s global reputation. But putting flying objects into crowded urban environments is a massive risk. We understand that this emerging business needs tremendous amounts of regulation. Historically, aviation everywhere has been extremely regulated, requiring regular physical and mental fitness tests for pilots.

There’s a massive disconnect between the hype — delivering packages and conducting building inspections by drone, and offering air taxi services — and reality. On the ground in China, there are very few products actually in use. Like helicopters in the U.S. that occasionally suffer mechanical or human failures despite a century of development, eVTOLs rely on mechanics that can fail. Putting tens of thousands of these objects into the hands of people with varying levels of flying and maintenance skills could be a recipe for disaster. The technology does have valid applications, such as delivering goods faster to inaccessible countryside locations. But mass urban commercialization is currently an illusion best left for the movies. For now, we’ll have to wait a little longer for the Jetsons to come to China.

Benzinga Disclaimer: This article is from an unpaid external contributor. It does not represent Benzinga’s reporting and has not been edited for content or accuracy.