American tech companies should "worry a little bit" about the subsidies their Chinese competitors receive from their government in the AI race, Microsoft President Brad Smith told CNBC.
As competition between U.S. and Chinese companies intensifies to develop the most advanced models, Smith said that the U.S. has "an advantage in terms of access to the most powerful chips in the world" and "other technology innovation."
But, speaking in an interview on the sidelines of the AI Impact Summit in New Delhi, India, he also said: "I do think we always have to think about, maybe even worry a little bit about Chinese subsidies."
Chinese AI companies have been supported by their government with measures such as a multi-billion-dollar national investment fund and vouchers for cheaper energy for their computing needs. Smith's warning comes after Chinese firms released a slew of models over the past two weeks, and their lower-cost AI models could be attractive in developing nations.
Smith said subsidies from Beijing to Chinese companies were "the fundamental approach that China successfully took to disrupt the telecommunications market," when state money and support helped companies like Huawei and ZTE expand.
"Some American companies disappeared. European companies like Ericsson and Nokia were thrown on the defensive," Smith added.
Smith said data centers from Chinese firms Huawei and Alibaba exist around the world and "it will not be difficult for China to subsidize those."
"I think for the rest of us, we have to compete with that, and we have to be good at competing with that, with the support of our governments," Smith said.
CNBC approached Alibaba and Huawei for comment about whether they have accepted Chinese state subsidies but had not received a response as this article went live.
Alibaba's cloud computing division, through which it sells its AI services, operates globally. But outside China, it doesn't always build data centers, instead partnering with other infrastructure players.
How China supports its tech companies
Beijing launched a 60.06 billion yuan ($8.42 billion) national AI fund last year to invest in early-stage projects.
Cities across the country, from Shanghai to the tech hub of Shenzhen, have offered "vouchers" to reduce the cost for companies looking to rent computing power.
Cheap energy has been another advantage for Chinese companies that are trying to build out the power-hungry infrastructure needed to train and run AI models.
Microsoft on Wednesday said it was on pace to invest $50 billion by the end of the decade to help bring AI to developing countries in the "Global South," which includes investments in infrastructure and reskilling.
Rory Green, TS Lombard's chief China economist, told CNBC this week that a "China tech sphere" could easily form in developing countries.
"For these economies, I think the choice is fairly simple, and you could see easily a world where maybe most of the world's population is running on a Chinese tech stack in five to 10 years' time," Green said.
