Chinese tech giants Alibaba Group Holding Ltd (NYSE:BABA) and Tencent Holdings Ltd (OTC:TCEHY) are significantly increasing their investments in artificial intelligence startups, despite a general decrease in their overall investments.

What Happened: Since 2023, Alibaba and Tencent have directed 40% and 30% of their deals in China, respectively, toward AI startups, marking record-high investments in the sector for both companies, reported The Wall Street Journal on Wednesday.

Despite these challenges, both companies have identified AI as a strategic priority. They aim to leverage the technology to strengthen their market influence and technological edge.

This renewed focus on AI is seen as a move to drive profits and expand their cloud services, which offer access to AI computing power and foundational AI models developed in-house. Wei Sun, senior analyst at market research firm Counterpoint Research stated "Investment in AI startups is a strategic effort to strengthen their technological edge and expand market influence," according to the report.

"Generative AI holds massive business potential, and no tech giant would want to miss the opportunity," Charlie Dai, an analyst at market research company Forrester said, according to the report. "Investing in leading startups, even [ones that have already received investment from] competitors, will help tech giants to grasp the opportunities as much as they can."

Alibaba and Tencent have been instrumental in the growth of six Chinese AI startups, each valued at over $1 billion. These startups, known as China's "Little Artificial-Intelligence Dragons," have received significant funding from both companies.

Why It Matters: The increased investment in AI startups by Alibaba and Tencent is a significant development in the global AI landscape. This move comes at a time when Asian startups are challenging the dominance of NVIDIA Corp. (NASDAQ:NVDA) in the AI chip market by developing more energy-efficient and cost-effective chips for specific AI applications.

Alibaba, in particular, has been heavily investing in generative AI, claiming that its new AI models outperform Meta Platforms Inc.'s (NASDAQ:META) Llama 3 in specific tasks. The company is also set to launch an AI-powered conversational sourcing engine in September to enhance the buying and selling of goods online.

Furthermore, SoftBank Group (OTC:SFTBY) recently acquired UK-based chipmaker Graphcore to bolster its AI capabilities. This acquisition highlights the growing importance of AI infrastructure, including semiconductors and systems, in the tech industry.

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This story was generated using Benzinga Neuro and edited by Kaustubh Bagalkote