Disruptive technologies are pacing the 3D Reset and reshaping almost every industry
Understanding the impact innovative technologies like AI are having on the broad economy and within various sectors will be key to identifying the opportunities they create.
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Today, disruptive technologies are changing almost every industry. They are having a positive impact for the companies that can embrace innovation and a negative impact for firms with suddenly outdated products or services that cannot compete in a radically altered marketplace.
At Schroders, we think disruptive innovation is influencing each of the major long-term trends that have brought a new economic regime in the post-pandemic world. These trends are demographic change, decarbonization and deglobalization – what we collectively call the “3D Reset.” Each of these trends creates inflationary pressures that will likely lead to a “higher for longer” interest rate environment.
Disruption, effectively a fourth “D” that is intricately linked to the three others, is having myriad and often unpredictable impacts on the global economy. Technologies like artificial intelligence (AI) and robotics, for example, are creating greater efficiencies, but they are also presenting considerable, large-scale challenges related to:
managing and ensuring the quality of the data that AI applications draw on1
addressing the needs of displaced workers2
establishing regulatory guidelines for a rapidly evolving technology whose full potential implications are not fully understood yet.3
AI constitutes the fifth industrial revolution
The technological breakthrough delivering the greatest impact today is generative AI. Excitement over AI contributed to the rebound that the US stock market experienced in 2023. While fiscal stimulus may have helped prevent the US recession that so many analysts had been calling for, high expectations for the potential of AI seemed to be what caused equity investors to not worry excessively about continued inflation, weak manufacturing activity and higher interest rates.
We believe generative AI represents a fifth industrial revolution. Today’s machines are delivering an advancement in human progress that is entirely distinct from all the other major leaps forward. The previous industrial revolutions – the steam engine and trains of the mid-18th century; the automobiles, phones and lightbulbs of the late 18th and early 19th centuries; and the computers and then the internet in the second half of the 20th century – all made physical labor easier. Today’s innovation, for the first time, assists with cognitive labor.
These new applications for technology are also making a major impact on a much quicker timetable. For example, it took Uber nearly six years to reach 100 million users. ChatGPT did the same in only two months.
Exhibit 1: How long it took for popular apps to reach 100 million users
Source: Visual Capitalist, July 2023.
The breadth of technological innovation’s impact will keep expanding until it reaches a milestone that may be difficult to contemplate now. By 2040-2050, according to the futurist Ray Kurzweil, the artificial intelligence boom will culminate in “technological singularity,” the point at which a smartphone will have the same cognitive processing power as all humans on the planet combined.
AI and robotics are helping to address a major demographic shift
A key demographic change impacting the global economy is the shrinking working-age population. Not all countries are experiencing this – with India being one notable exception – but the aging populations of many Western European countries, China and Japan are bringing a significant decline in their numbers of workers. Having a smaller pool of human labor can slow the growth of companies and economies, and the competition for the best talent can bring wage hikes that propel overall inflation higher.
Automation and robotics are helping to address this challenge. Automation removes the need for humans to perform routine tasks like inputting data or responding to standard e-mail queries, while robotics has transformed manufacturing. Generative AI is already providing the next wave of innovation by performing the cognitive processes of traditional “white-collar” jobs, such as data analysis, problem-solving and decision-making. The productivity gains these technologies can deliver are helping to offset some of the impediments to growth and the inflationary pressures that the global shortage of workers has created.
(To learn more on this topic, read: “3D Reset: labor shortages to drive investment in technology.”)
Disruptive technologies do create demographic-related challenges, however. To keep pace in today’s technology-oriented society, people need access to high-speed internet connections and devices to get them online. These resources are more limited in lower-income households and rural areas. While the US has taken steps to increase broadband availability and there are global initiatives to support internet access through smartphones for more communities, additional steps may be necessary to ensure that disruptive technologies do not exacerbate inequalities across populations.
(For more information on these issues, read “AI revolution: what’s the impact on connectivity, education and health?”)
Innovation is key to the global decarbonization effort
As countries around the world accelerate their response to climate change, disruptive technologies are playing a key role in the transition from fossil fuels to greener sources. Efforts to decarbonize are occurring on multiple fronts, including two of the most important ones, transportation and power generation. Together, these two sectors account for half of the world’s carbon emissions today.
Within the transportation sector, the increasing adoption of EVs has disrupted the automobile industry, while helping to reduce the world’s dependence on fossil fuels. Still, more infrastructure is needed. The International Energy Agency (IEA) estimates that more than 13 million public chargers will have to be built by 2030, up from 3.5 million today, to support the forecasted growth in EVs. Creating that infrastructure will require capital investments of $150 billion-$200 billion, according to the IEA.
Electricity-powered engines are not viable for heavy transport sectors, like aviation, trucking and shipping, but multiple innovations such as green hydrogen and sustainable aviation fuel could help the decarbonization efforts in these hard-to-abate sectors.
With power generation, renewable energy sources like wind and solar now provide only about 20% of the world’s energy. To meet decarbonization goals, that number must rise to 85%. Technological innovations, such as longer blades and higher towers for wind turbines and more efficient solar cell designs, have greatly reduced the cost of renewable energy sources and made them competitive with natural gas, coal and oil. That will help keep renewables a viable option as the demand for power continues to increase.
At every step along the way, these disruptive innovations are bringing a combination of opportunities and challenges. For example, the competition among data centers for more energy to power their AI applications could spur higher prices for both traditional and renewable energy. Any resulting spike in energy prices could push overall inflation higher and impede economic growth. At the same time, higher energy prices could help finance the buildout of the renewable facilities that are needed to power the AI revolution.
(For more on this topic, read “Power-hungry AI applications are demanding a significant expansion in global energy capacity.”)
Deglobalization is possible because manufacturing has been disrupted
The pandemic revealed how vulnerable supply chains were and the considerable risks that come from being heavily dependent on faraway vendors. More companies are now looking to nearshore or onshore their vendor relationships. In yet another example of how disruptive innovation and 3D Reset trends are interlinked, the technologies that are transforming many sectors are making it easier for the world to deglobalize. The availability of lower-cost labor in foreign markets was one of the major initial drivers of globalization. Today, manufacturers in countries that were considered to have high labor costs are using automation, robotics and AI to significantly lower their labor expenses and attract customers who want suppliers that are closer to home.
Technology, like other sectors, is also being affected as heightened geopolitical tensions accelerate the shift toward deglobalization. With the need for greater cybersecurity, countries do not want to be heavily reliant on foreign, and potentially adversarial, sources for their tech capabilities that are important to economic security and resilience. That has led more countries to try to develop their innovations, like AI applications, domestically. The CHIPS and Science Act in the United States provided a prime example of this, as the US government wanted to ensure that the semiconductors that are key to a wide swath of industries are being developed and manufactured within the United States.
Disruption is expanding the opportunities in private markets
The AI revolution is creating many opportunities in private markets. Many of the companies developing the most innovative AI applications for use across various sectors, including energy and biotechnology, are startups in the seed or early-phase venture capital round of financing. These early-stage investments also benefit from a disciplined fundraising that often results in more conservative entry valuations. Still, gaining access to the opportunities among these lower middle-market companies requires working with an investment manager that has significant experience in this space and strong relationships with the general partners who operate in this market.
While AI will make existing technology and software “smarter” and have a long-term impact across all industries, we expect it will also have second-order impacts on many other sectors. Real estate and infrastructure markets are two prime examples.
The boom in AI-focused startups could also increase demand for office space in established tech hubs like Silicon Valley and emerging ones like Toronto and Paris. At the same time, this boom might reduce demand for office space in locations that do not provide sufficient access to workers with technology-related skills.
On both the real estate and infrastructure fronts, the substantial data-processing requirements of AI are reinvigorating the demand for data centers. That has created considerable tailwinds for this industry, as new data centers are being constructed and existing facilities are being expanded. Furthermore, AI’s massive compute appetite needs substantial energy resources, that we see as an opportunity for infrastructure investments, particularly in renewable energy.
Conclusion: Understanding the connections is critical
For investors, it will continue to be essential to understand all the positive and negative impacts of disruption. None of these transformations can be viewed in isolation. Disruptive technologies must be understood in the broader context of other key trends reshaping the global economy.
References:
1 Source: “Data Quality in AI: Challenges, Importance & Best Practices in ‘24”, AIMultiple Research, Updated 1/3/24
2 Source: “3 ways companies can mitigate the risk of AI in the workplace,” World Economic Forum, 1/16/24
3 Source: “The complex patchwork of US AI regulation has already arrived,” CIO, 4/5/24
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