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Introducing Baidu

In this article, we introduce internet giant Baidu (百度)(NASDAQ: BIDU)(HKEX: 9888). Although commonly nicknamed as "China's Google", Baidu is more than just a search engine company with additional business segments spanning cloud computing, autonomous driving, maps, smart home devices and online streaming.


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Corporate History

Baidu was founded in 2000 as a search engine similarly to Google and went public on NASDAQ (NASDAQ: BIDU) in 2005.

During its initial decade, Baidu focused predominantly on expanding search-related functionalities through in-house developments and acquisitions, including the notable acquisition of Qunar (去哪儿), an online travel search services provider (similar to Expedia and Agoda) which was later acquired from Baidu by Ctrip. Over the next decade, Baidu started diversifying outwards into non-search related business areas, including cloud computing, online video streaming, financial technology, and autonomous driving. Notable events include the controlling interest acquisition of video streaming platform iQIYI in 2012 (which later went public on NASDAQ in 2018 with ticker NASDAQ: IQ), the launch of autonomous driving Apollo (阿波罗) project in 2017, and the 2018 divestiture of Baidu's financial services business arm Du Xiaoman Financial (度小满金融), which provides consumer credit, wealth management, payments and other financial services similarly to Alibaba's Ant Group. As of 2021, Baidu is Du Xiaoman's largest shareholder and accounts for Du Xiaoman as an equity method investment.

In November 2020, Baidu entered into an agreement with social media platform company JOYY (欢聚集团) to acquire the latter's online livestream business YY Live. As of the present, news have surfaced of Baidu restructuring YY Live, although the Chinese regulators have yet to formally approve the acquisition.

Baidu had a secondary listing on the Hong Kong Stock Exchange (HKEX: 9888) in 2021.

Business Segments

Baidu has two operating business segments: Baidu Core and iQIYI.

Baidu Core

The Baidu Core segment comprises of four sub-segments: Mobile Ecosystem, AI Cloud, Autonomous Driving, and Other Growth Initiatives.

Mobile Ecosystem

Baidu's mobile ecosystem is described as a platform centered around the flagship Baidu application and other related products where users, creators, service providers, and merchants can interact. The flagship Baidu application has a search function (similar to Google search) and a feed function (similar to Facebook feed), while other products include Haokan (好看), a short video platform similar to TikTok, online encyclopedia Baidu Wiki (百度百科), online community forum (similar to Quora and Chinese competitor Zhihu - 知乎) Baidu Knows (百度知道), online social media forum Baidu Post (百度贴吧), content creator media network Baijiahao (百家号) where users can share articles, photos and videos, and a Managed Page product where users can employ pre-made mobile website templates and avoid the hassle of developing and maintaining their own websites. Additionally, Baidu also has a network of partners as part of Baidu Union (百度联盟) where Baidu's online marketing services customers can have their links advertised on Baidu Union partner websites.

Baidu alternates between reporting an average monthly user number and average daily user number for the flagship Baidu App in each year. As of December 2021, there were 622 million monthly average users and 218 million daily average users on the Baidu App, up from 544 million monthly active users in 2020 and 195 million daily active users in 2019.

AI Cloud

Baidu offers a comprehensive set of cloud services and solutions spanning all three types of service categories in the cloud computing industry (see below), with clients comprising of corporate enterprises, public sector entities, and personal cloud users.

Cloud computing services across the industry are available at three different levels:

  1. Infrastracture-as-a-service (IaaS), which provides an alternative to on-site infrastructure so companies can remotely rent storage and networking facilities at a lower cost than if they were to build and maintain one on-site

  2. Platform-as-a-service (PaaS), which provides hardware and software tools that developers can use to develop software applications

  3. Software-as-a-service (SaaS), which provides pre-developed software for end users to use, typically at a cost such as a monthly or yearly subscription fee

Generally speaking, profit margins are highest for SaaS, followed by PaaS and lastly IaaS.

Intelligent Driving

Baidu's Intelligent Driving sub-segment refers to the company's Apollo (阿波罗) autonomous driving project and Jidu Auto (集度), an electric vehicle joint venture with Geely.

Apollo is an autonomous driving project launched in 2017 that provides partner automakers with self-driving services including high definition maps, a navigation pilot program, and an automated valet parking functionality. As of 2021, Baidu's partner network for Apollo spans 30 different automakers, including large players such as GM, Ford, Toyota, and Great Wall Motor. In 2021, Baidu expanded the Apollo project to launch a fully autonomous robotaxi fleet while adhering to safety-related regulatory restrictions.

Jidu Auto is an electric vehicle joint venture founded by Baidu and Geely in 2021. Photos of the joint venture's first car model, the ROBO-01, have been released, although the car has yet to be sold on a large scale.

Jidu Auto ROBO-01
Jidu Auto ROBO-01 (Source: Jidu Auto)

Other Growth Initiatives

Baidu's Other Growth Initiatives include DuerOS Smart Assistant (小度助手), Baidu Health (百度健康), and Baidu Maps (百度地图).

DuerOS Smart Assistant is a smart assistant for the Chinese language, similar to Apple's Siri and Amazon's Alexa. DuerOS can be used with in-house brand Xiaodu (小度) smart home devices and earphones as well as third-party smart phones, while DuerOS for Auto is also available for use with automobiles.

Baidu Health is a family of products that allow healthcare professionals and hospitals to connect with patients, host online consultations and distribute prescriptions, manage appointment scheduling and implement monitoring of treatment plans, as well as livestream seminars and publish informational videos.

Baidu Maps is a mobile application with map services including point of interest search, route planning, precise navigation, and real-time traffic condition information. Baidu Maps also has a taxi-hailing service.

Note: Baidu Maps and Alibaba's Amap (高德地图) are the two main mobile map applications used in China.


iQIYI is an online streaming platform with both original and licensed content similar to Netflix. Baidu does not provide a consistent user number metric for iQIYI from year to year, with variations including the number of daily average users, the number of monthly average users, the number of subscribing members including and excluding trial subscriptions, and the average daily number of subscribing members. In 2021, iQIYI had 101.6 million subscribing members, down from 110.3 million in 2020.

Financial Overview

We now turn to a financial overview of Baidu.

#1: Baidu's Revenue And Income Grew Unevenly During 2017-2021

Baidu's total revenue increased unevenly over the past five years, with a large jump from RMB84.8 billion in 2017 to RMB102.3 billion in 2018 due to increases in revenue from online marketing, cloud computing, and a growing iQIYI membership subscription base, followed by a slight increase in 2019, stagnation in 2020 due to the COVID pandemic, and growth resumption in 2021 with a particular increase in demand for online marketing as economic normality resumed in China. As of the end of 2021, more than 97% of Baidu's total revenues were generated in China.

Note: although management attributes the stagnation in 2020 revenue growth to the COVID pandemic, we note that competitor Tencent recorded an increase in online advertising revenue in both 2020 and 2021 (see here).

Baidu's operating profit and net income also grew unevenly over the past five years, with a particular drop in net income in 2019 due to a non-cash impairment loss on the company's equity investment in, and lower operating profit and net income in 2021 due to higher research and development expenses and lower Other Income.

Baidu Revenue and Income
Data Sources: Baidu Annual Reports

Note: Baidu does not directly report a gross profit metric. We calculate Gross Profit by subtracting the reported Cost of Revenue from Total Revenue, although Baidu classifies Cost of Revenue as an operating expense.

#2: Baidu's Gross Profit Margin Is Relatively Stable, While Operating and Net Profit Margins Fluctuate Significantly

Baidu's gross profit margin is relatively stable over the past five years at 48% to 49% with the exception of 2019, during which the company had a proportionally large increase in hardware and cloud costs of goods sold and content, traffic acquisition, and bandwidth costs, which lowered Baidu's gross profit margin to 41.5% for the year. In contrast, Baidu's operating and net profit margins are relatively volatile.

Baidu Profit Margins
Data Sources: Baidu Annual Reports

#3: Baidu's Total Revenue Is Dominated By Revenue From Baidu Core

Baidu's total revenue is predominantly driven by revenue generated from the Baidu Core segment, with Baidu Core businesses contributing approximately three times the revenue amount generated by the iQIYI segment in 2021.

Baidu Revenue Breakdown By Segment
Data Sources: Baidu Annual Reports

Note: the sum of the two segments' revenues exceeds the company's Total Revenue in each year as Baidu's segment revenue breakdown does not take into account Intersegment Elimination, which is reported separately

#4: Baidu Core's Revenues Are Dominated By Online Marketing Services

A revenue breakdown of the Baidu Core segment is available starting in 2018. As shown below, Baidu Core revenue is primarily driven by Online Marketing Services, which is predominantly generated by pay-for-performance advertising and Baidu's Managed Page product. Cloud Services are the second largest driver of revenue, followed by other services in the Baidu Core segment.

We note that revenue from Interest Income Earned From Provision of Financial Services comes from Baidu's Du Xiaoman (度小满) financial arm divested in 2018.

Baidu Core Segment Revenue Breakdown
Data Sources: Baidu Annual Reports

Note: the above revenue numbers provided by Baidu do not take into account intersegment elimination

#5: iQIYI's Revenues Are Generated By Online Advertising And Membership Services

Similarly, Baidu provides a revenue breakdown of the iQIYI segment starting in 2018. As shown below, iQIYI's revenues are driven the most by fees generated from Membership Services and subsequently Online Advertising Services, followed by revenue generated by Content Distribution (e.g. licensing revenue from distributing iQIYI's licensed content) and other services such as online games, livestreaming, and online literature.

iQIYI Segment Revenue Breakdown
Data Sources: Baidu Annual Reports

Note: the above revenue numbers provided by Baidu do not take into account intersegment elimination

#6: Baidu Core Drives Baidu's Operating Profit, While iQIYI Fails To Be Profitable

Over the past five years, the Baidu Core segment has been driving Baidu's company-level operating profit, while iQIYI consistently generates negative operating profit.

Baidu Operating Profit Breakdown By Segment
Data Sources: Baidu Annual Reports

Note: the sum of the two segments' operating profits exceeds the company's Operating Profit in each year as Baidu's segment profit breakdown does not take into account the Intersegment Elimination reported separately

The Future of Baidu

Management intends to continue growing Baidu using the Baidu Core segment (comprising predominantly of the Baidu Mobile Ecosystem, AI Cloud, and Intelligent Driving) as the company's growth engine, although no particularly specific plans are detailed. Rather unsurprisingly, no mentions are made of the loss-making iQIYI segment in relation to Baidu's future. We discuss the three Baidu Core drivers of growth further below.

#1: The Baidu Mobile Ecosystem Faces Intense Competition Across Various Products

One of our biggest concerns regarding the future of Baidu is the level of competition the company is facing as well as the observation that Baidu does not seem to maintain a dominant market role in its various Baidu Core product sectors. One key remark to make here is that Chinese internet users have distinct habits that can differ from those of users in other regions where other search engines are dominant, with Chinese users typically preferring to use specific platforms in different scenarios. For example, Chinese users are more likely to search directly on e-commerce platforms (e.g. Taobao, JD, and Pinduoduo) when browsing for products (as opposed to searching on Google and clicking on the search results that pop up) or search directly on Zhihu (知乎), a Chinese version of Quora, for specific queries, meaning that the Baidu flagship application does not receive as much traffic as would be expected compared with search engines in other markets such as Google. Additionally, Baidu's other products are not particularly popular among Chinese users, with Baidu's short video platform Haokan (好看) losing to Douyin (抖音) (the mainland Chinese counterpart of TikTok) and Kuaishou (快手) (a similar platform popular in more rural areas), and online community forum Baidu Knows (百度知道) losing to Zhihu (知乎).

#2: Baidu Faces Private/Public Sector Cloud Rivals And Potential Industry Constraints

Within the domestic cloud computing industry, Baidu faces competition from private sector players such as Alibaba, Tencent, and Huawei, as well as state-owned public sector telecom companies such as China Unicom (中国联通), China Mobile (中国移动), and China Telecom (中国电信). Public sector entities in China typically prefer contracting cloud computing projects to state-owned companies or private sector companies with strong political connections such as Huawei, while in the private sector realm client companies typically prefer private cloud providers (which are relatively more cost-efficient than public ones), of which Alibaba holds the leading technological position. Moreover, as mentioned in our previous discussions in other articles, it may be difficult for Chinese cloud providers to grow and dominate at the international level due to political and regulatory reasons (for example, following national security investigations in the US, TikTok migrated its services from Alibaba Cloud to what is presumably an American cloud provider in 2021). Nevertheless, we think it is possible for Chinese cloud companies to grow further at the regional level, such as by expanding to Southeast Asia.

Note: large American cloud players (e.g. Google, Microsoft, and Amazon) do not operate cloud computing businesses in China.

#3: Autonomous Driving Is Still An Early Stage Industry With Significant Uncertainty

Although Baidu is one of the market leaders in autonomous driving development in China, the industry is still in a very nascent stage, and we think it is difficult to predict the eventual success or failure of this business sub-segment.


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