While technology has existed for some years, it appears we're now at the inflection point, with the emergence of the likes of ChatGPT bringing AI to the general consumer.
The inflection point for the commercial adoption of AI has largely been achieved due to two factors: the availability of data and lower computing costs thanks to semiconductor advancements. These advancements have made AI more accessible and affordable, opening up the technology to companies beyond Big Tech. This should allow EM countries to reap the benefits of years of research while also leveraging their agility to adapt and innovate.
Leapfrogging into the AI era
AI is similar in many ways to how mobile phones revolutionized communication 20-30 years ago, particularly in EM. This leap in technology allowed EM countries to bypass the need for widespread, expensive communications infrastructure. This led to a profound impact on productivity and connectivity. It also opened up many countries, with rural areas previously disconnected suddenly part of the global conversation.
EM countries' lack of legacy infrastructure should provide an opportunity to move more quickly than may be the case in developed market countries.
The AI revolution in EM can be seen as the next leapfrogging opportunity. EM countries' lack of legacy infrastructure should provide an opportunity to move more quickly than may be the case in developed market countries. For example, businesses in EM can design optimal data center architecture without the constraints of reconfiguring existing systems. Data centers are also poised to shift from providing storage to providing computing power, creating sizeable opportunities for businesses in the sector. Generative AI is tipped to revolutionize several industries, with applications ranging from automating mundane tasks like minute-taking in meetings to groundbreaking innovations in healthcare. EM companies' ability to embrace these opportunities could be transformational.
The evolving supply chain in EM
DM companies like Nvidia may have dominated the headlines as the first wave of investment opportunity centers around computing power. However, there's a secondary role that is equally as interesting regarding the wider technology supply chain that will be used to improve existing infrastructure to leverage the developments in AI. For example, data centers are transforming to handle the huge increase in data that has come with AI.
Part of the way this data traffic is controlled is through data switches. These play the role of a traffic light on a data highway and are mainly produced by companies in EM. With the huge increase in traffic, companies will need to extend these lanes, while the traffic lights (i.e., data switches) will have to be faster and smarter to control the increased load. This example is indicative of a broader long-term structural trend for technology supply chains in which EM companies play a crucial role.
AI's value beyond Big Tech
Shifting focus from the supply chain to companies that can harness AI tools, we must consider the potential distribution of AI's created value. Initially, big tech firms in the US might accrue significant benefits due to their substantial investments. However, as AI becomes more accessible and its applications more widely understood, its benefits are expected to cascade across industries and companies of all sizes. For example, AI was initially not expected to be creative but has since shown its capabilities across industries such as gaming, entertainment, and advertising. This allows these businesses to refocus their resources on tasks that have a greater return on investment.
AI's impact on growth in China
China's more muted growth in recent years may be reignited by the increases in productivity that AI is demonstrating. However, with the US tightening chip exports, questions arise about the impact on China's technological advancement. While the short-term effects may be softened due to adequate inventory levels, the long-term picture is more complex. Should the export restrictions persist, it may hinder China's ability to keep pace with AI developments due to technological gaps.
...recent developments like the launch of a Huawei phone, despite severe restrictions, hint at the resilience and advancing capabilities of China's onshore technology.
That said, recent developments like the launch of a Huawei phone, despite severe restrictions, hint at the resilience and advancing capabilities of China's onshore technology. This suggests not only a drive towards localization but also a testament to China's ability to innovate within constraints.
The AI revolution in EM is characterized by unique opportunities and challenges. As AI adoption becomes more widespread and affordable, emerging markets are poised to harness its transformative potential across diverse industries. True, export restrictions and supply chain issues may pose short-term challenges. However, the drive for self-sufficiency and local innovation positions emerging markets for long-term success in the AI era.
The evolving landscape presents exciting investment opportunities and underscores the importance of adapting to this AI-driven future.
Article adapted from a recent episode of our Emerging Markets Equities Podcast, “How emerging markets are driving the next generation of infrastructure”, hosted by Nick Robinson.