Silicon Valley Shaken by China’s Free AI OffensiveAlphabet Inc.BATS:GOOGActivTradesSilicon Valley Shaken by China’s Free AI Offensive By Ion Jauregui – Analyst at ActivTrades Artificial intelligence is undergoing its first major geopolitical fracture. While OpenAI strengthens its infrastructure by renting servers from Google Cloud, China’s advance with free generative models threatens to redefine the balance of power in the sector. Names like Qwen, InternLM, Yi, Baichuan, ChatGLM, or Ernie Bot (from Baidu), as well as initiatives backed by Tencent, Alibaba or iFlytek, are emerging strongly. Many of these open-source models already match — and in some tasks outperform — DeepSeek and compete with giants like GPT-4. A new global chessboard is being drawn with direct consequences for Alphabet, owner of Gemini and the same cloud service now supporting its main rival. Google’s parent company has once again bared its teeth. Alphabet published second-quarter 2025 results that comfortably beat market expectations. Revenues are rising, profitability is solid, and its financial strength allows it to buy back shares at a dizzying pace. But behind all the shine, one shadow remains: its bet on artificial intelligence, Gemini, still hasn’t taken off compared to ChatGPT — and now faces a tsunami of free AI coming from China. China’s Free AI Offensive: Intelligence for All (Without Paying) The latest developments unveiled by Beijing are setting off alarms in Silicon Valley. Models like InternLM2, Qwen2, and Yi are not only distributed freely but show results equivalent or superior to paid models in key natural language tasks. Trained with massive corpora and backed directly or indirectly by the state, these AIs are designed to scale in universities, startups, and local companies, replacing Western software at no cost and with open licenses. The open-source ecosystem, combined with a local (albeit limited) chip market, allows China to reduce dependence on the West while exporting influence to emerging markets like Central Asia, Africa, or Latin America. Xi Jinping Hits the Brakes… or Does He? Since Xi Jinping’s speech calling for “moderation” in public investment in sectors like AI or electric vehicles, the message seems more like an attempt to control bubbles than halt progress. The president was clear: “Not the entire country should be building cars or processing data.” With irony, he labeled local governors as “three-pat officials”: one on the head to get the idea, one on the chest to sell it, and one on the backside to run when it blows up. Elegantly Brutal Comment. Behind the humor lies a serious backdrop: inflated bubbles, centers without qualified staff or functioning chips, and falsified sales data. This isn’t surprising given China’s price wars in the auto sector and shady practices inflating sales through vehicles insured before actual purchase, which has triggered a wave of new regulations and controls. This war has spread to AI, with centers being built without skilled personnel or working chips. According to Xi, unchecked growth is not worth it if it means excessive corporate and state debt. OpenAI Rents Google Servers: Strategic Move or Dependence? In an unexpected twist, OpenAI has started using Google Cloud infrastructure. The paradox is clear: Google, a direct rival with Gemini, is now supporting the race leader. The move seems pragmatic: OpenAI needs scale, and Google has one of the world’s most powerful cloud networks. This could translate into meaningful revenue for Alphabet, at the cost of ceding leadership perception in AI. From a strategic standpoint, integrating into OpenAI’s service ecosystem could win Alphabet a long-term technological and economic victory by boosting cloud revenues and indirectly funding Gemini. Alphabet Analysis (GOOGL) 🤖 Gemini, the Eternal Contender? The paradox is clear: by using Google Cloud — one of the world’s most powerful cloud services — OpenAI generates income for Alphabet. Meanwhile, Alphabet still struggles to differentiate itself in generative artificial intelligence. Gemini continues searching for its place. Despite being one of Alphabet’s boldest bets, its progress has been slow and adoption lukewarm, and it hasn’t yet delivered significant returns on its own. Gemini has yet to achieve massive direct monetization. While integrations with Google Workspace — Gmail, Docs, and the Android ecosystem — are gaining visibility, user perception is still dominated by OpenAI. And now, with the emergence of free Chinese AIs, Gemini may be pushed aside even in markets where Alphabet aimed to lead digital transformation, like India, South America, or parts of Eastern Europe. This alliance with OpenAI may have a mixed impact: positive on revenues, but negative for perceptions of technological leadership. Meanwhile, the market is watching open-source models like Qwen2, InternLM2, and Yi from China — all free — gain traction in sectors once reserved for the West. In the short term, this may seem like a trade-off, but from a strategic viewpoint, it could be one of Alphabet’s key long-term business moves. Alphabet has historically invested in competitors and made key acquisitions to reinforce its ecosystem — this could be one of those strategic bets, helping to fund Gemini’s path toward long-term tech leadership. Especially considering that in Q1, it increased R&D spending — particularly in AI and quantum computing — and that the cloud business must sustain its operating profitability (which grew 25% in Q1), this move could provide essential capital for this critical business vertical. Alphabet posted $33.8 billion in Q1 revenue, with total operating margins around 28%. AI as a future lever: Gemini 2.5 Pro and AI Overviews, already with 1.5 billion monthly users, could be catalysts accelerating multiple products. A (Nearly) Perfect Quarter Alphabet posted $93.84 billion in revenue in Q2 2025, a year-on-year growth of +10.7%. Net income reached $26.5 billion, with estimated EPS at $2.18. Operating margins improved to 34% (up from 32.4% in Q2 2024), reflecting more efficient management, while other Big Tech players have opted for cuts. One key standout was Google Cloud, which grew over 25% YoY ($12–13.1B), consolidating its profitability and strengthening its role as Alphabet’s second-largest revenue stream behind advertising. Is Advertising Still the Engine? Ad revenues rose by a solid +8.5%, reaching nearly $67 billion, with YouTube and Google Search leading the recovery (~$52–53B). Alphabet shows that even in disruptive times, its model continues generating cash. Regulatory Risks Growing antitrust pressure (Chrome, search case) with upcoming decisions could impact its business model and valuation. Massive Buyback and Strong Cash Position Alphabet isn’t just earning — it’s returning value to shareholders. The company announced a $70 billion share buyback, showing confidence in its future. Its cash position remains one of the strongest in the sector. Technical Analysis (Updated) Yesterday’s closing price was $191.37, within the consolidation zone from early 2025 that took the stock to its all-time high of $208.21. The upward channel seems to be testing a strong resistance zone, and the RSI is showing overbought conditions at 72.66%. The golden cross identified on June 30 remains intact. The strong trading zone around the point of control at $166.67 appears to act as support for the recent rally, indicating a positive bias. Key supports lie around the 200-day moving average ($172.9) and the 50-day moving average ($168). A convincing close above $194–195 may lead to further gains, while losing the $172.9–168 zone could suggest a correction due to high speculation or partial institutional sell-offs. Conclusion: Train Wreck or Calculated Strategy? The dominance of artificial intelligence is no longer just a game between American giants. China has entered the arena with a radical strategy: offering free, functional models to the world. The emergence of these state-backed models will force Silicon Valley to respond through moves like this one. Alphabet finds itself at a crossroads. Its financial strength and cloud business give it tactical advantages — even while renting infrastructure to its rivals — although this may dilute its presence as a developer. Still, its big AI bet appears to be advancing more slowly than many hoped. Alphabet’s strategy of participating in its rival’s business could be seen as weakness… or as a long-term masterstroke. Everything will depend on whether Gemini can reach the level of sophistication, adoption, and monetization that its ambition promises. Until then, the global AI landscape has become more complex, more competitive… and more Eastern. ******************************************************************************************* The information provided does not constitute investment research. The material has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and such should be considered a marketing communication. 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