The AI Race: US vs. China in the Battle for Technological Dominance
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The AI race between the US and China
Vladimir Putin said in 2017 that whoever becomes the leader in AI will become the ruler of the world. Russian leaders are experienced in hyperbolic language, so this prediction should naturally be discounted, but AI will likely play a crucial role in the great power competition of the future.
Reading articles about technology and AI from those years around 2017, it is clear that the world thought China was either leading the AI race or at least had the speed to overtake the US in a few years. Surprisingly, it turned out, that the US was leading everyone else, as AI systems such as OpenAI’s GPT-4 and Google’s Bard are crushing AI systems from China across many benchmark tests.
As we described in our previous Quarterly Outlook, the future will be dictated by what we call the fragmentation game, which is essentially a strategic geopolitical dynamic fragmenting the world into regions with a higher degree of independence and with national security interests driving policies around four pillars: defence, energy, technology, and commodities. The fragmentation game is mostly a game evolving around how the physical world operates and it is a game in which Europe and the US are aiming to reduce China’s role in their respective supply chains. While it causes headwinds for China, it creates tailwinds for other countries, which is well crystalised in our chart showing Chinese equity market performance vs those countries that are benefitting.
Inside the fragmentation game framework, semiconductors also play a crucial role because they are the very foundation for AI chips. The capital expenditures on semiconductors will create an investment boom in the US and Europe over the next decade, as the regions will increase domestic production to limit dependencies on Asia. This dynamic will benefit semiconductor equipment makers as their revenue figures are linked to capital expenditures on semiconductors. Regardless of the rollercoaster experience investors will have with AI stocks, one thing is certain: this technology will be an important technological battleground between the US and China, and many opportunities and threats will arise in the years to come.
