Global power shifts: Geopolitical darwinism in the age of artificial intelligence

With the global environment experiencing intensification of key structural trends such as climate change, rapid population growth, ageing demographics, urban explosion and the evolution of Artificial Intelligence (“AI”), the geopolitical landscape shaping global competitiveness is changing. In particular, AI will in our view shape the “geopolitical Darwinism game” over the next 20 years and must be very closely followed by investors. In fact Russian President Putin recently said that “whoever becomes the leader in this sphere will become the ruler of the world”¹.

China has already set a target to become a world leader in AI by 2030². China’s motivations are real and clear and should not be underestimated. About 50% of China’s economic activity could be automated given the fast progression of narrow AI³. This combined with a rapidly ageing population projected to grow by 71% over 2015-2050 and increasing life expectancy, China is facing a large pension gap.

This gap is projected to increase from USD11trillion in 2015 to close to USD120trillion in 2050 - approximately 30% of the world’s estimated pension gap of USD400trillion⁴. It is therefore essential for the world’s second largest economy to align its strategy and reap benefits from AI.

Given AI’s potential, a new “arms race” is a possibility. To assess how different global players are equipped to compete in this race, four major factors should be assessed.

• First is the availability of data essential to machine learning and feeding AI. In this area, China with over 740 million internet users in “one country” has the largest competitive advantage. The US is also in a good place with about 290 million users⁵. An important consideration is how easily companies can access this data; we believe the cost of data will increase over the next decade in contrast to it being “free” now.
• Second, a favourable ecosystem is beneficial. For example, regulation regarding data usage and the ability for it to be referenced will be key competitive differentiators as will privacy laws and the cost of data. Here too China shows positive attributes.
• Next is the level of technological skill and competitiveness. Interestingly, China produces twice as many graduates a year as the US. In particular, the growth of engineering students has been incredibly fast and in 2015 the top five highest paying graduate jobs were all tech-related, leading the way to attract more talent⁶. In 2015, Chinese scientists were already one of the largest academic contributors to AI with a global share of 43% of top papers in the field⁷ and over 16,000 patents. In 2016, China revealed it had built one of the fastest super computers, the Sunway TaihuLight Supercomputer, with the capability to make 93 quadrillion calculations a second, entirely powered by Chinese made processors⁸. China, however, remains vulnerable in the semiconductor space despite many attempted efforts to build the industry; it still imports over USD200billion worth of chips every year (larger than its oil imports). Catching up in the semiconductor space is therefore a top strategic priority for China and at the heart of the trade debate with the US.
• Finally the availability of sufficient capital to fund research in AI and related fields is a key determinant of success in this area. Again, China is gaining competitive advantage; it just slashed taxes for chip makers and plans to invest as much as USD32billion in this space.

Given the above and the size of investment required to be AI-competitive, we believe we are moving towards a polarised world dominated by China and the US. We may then see a world where smaller and weaker countries need to align with larger ones and protectionist inclinations intensify to safeguard intellectual property.

The role of governments might also need to evolve with the integration of narrow AI into society. As the use of AI increases, it will impact the employment landscape dramatically and possibly much faster than most expect. A recent study suggested that up to 50% of current job roles could disappear by 2025⁹, as will many companies and industries. The ability to handle and anticipate such changes and their impact will be a key component of geopolitical stability and relative power in the world.

Going forward, a large part of government functions will be serviced by AI in the form of “government as a service”. As a result, governments that understand the ramifications of AI and invest in training their people or encourage companies to do so for their employees will be at an advantage over time. Strong and responsible global leaders with a strategic and long-term vision will have to step up and manage these challenges to ensure worldwide stability. If countries cannot elect such visionaries, it is possible that a higher percentage of countries fall prey to dictatorship or populism.

Despite the possible dramatic geopolitical shifts in the coming years, AI will introduce new investment opportunities for investors as well as the options for enhanced processes and tools for asset managers. The changes generated by the AI revolution combined with genomics, nanotechnology and quantum computing are vast and point to Asia as a relative winner.

Moreover, another important factor is the ongoing growth of Asia’s capital markets. By 2027, Asia could become the top equity market region¹⁰; Asia’s market capitalisation, led by China/Hong Kong, could double to USD 56trillion overtaking the US and Canada. Asia ex Japan’s bond markets could hit USD10trillion which is the size of the Japan bond market. Mutual funds assets could total USD13trillion and insurance assets USD20trillion. In all of these projections, the game changer is the rapid growth projected for China.

We believe the 21^st century will be “Asia’s century” shaped by economic, financial and geopolitical factors outlined above. Asset managers with the resources in place to build global and regional strategies that invest in these thematic trends will benefit from this evolving landscape.