Why Anthropic has a major China problem ahead of its blockbuster IPO

Anthropic, an AI company, is facing significant challenges ahead of its anticipated IPO due to the growing popularity of Chinese artificial intelligence models, according to research firm Hedgeye Risk Management. Felix Wang, the firm's managing director and global tech sector head, warns that Chinese competition is a major factor to consider when evaluating Anthropic.

The company's latest reported financial figures show a 50% increase in revenue to US$16.8 billion in the third quarter, but this marks a slowdown compared to the explosive growth of the first half of the year. Despite this quarter-on-quarter growth, the revenue decline reflects the intensifying competition from cheaper Chinese alternatives such as Z.ai and DeepSeek.

These Chinese models have managed to grow sales while steadily raising prices, making them more competitive despite trailing US models by only a few months in terms of capabilities. The situation has led to investor jitters, with sell-offs of AI chipmakers including Nvidia and Intel in recent days. Moreover, Anthropic is grappling with the resurgence of domestic rival OpenAI, which has seen increased demand for its coding tool Codex and new flagship model GPT-6 Astra.

The company's attempts to defend against model distillation, a practice where Chinese firms allegedly improve their models using Anthropic's outputs, have led to a 5-7% hit to revenue. As Anthropic prepares for its IPO, analysts are questioning whether Chinese models can sustain their competitive edge against US rivals, and whether Anthropic's crackdown will force Chinese firms to invest more in research and development, hurting their margins.