$15.7 TRILLION

THE AMOUNT OF VALUE THAT GENERATIVE AI COULD ADD TO THE GLOBAL ECONOMY BY 2030

Source: PwC, July 2023

The rapid explosion of generative AI for general use has captured the global imagination with what the technology might enable.

It’s expected to have a profound impact on economic growth by exponentially increasing productivity. That’s because everything today – from culture to consumer products – is a product of intelligence. If the excitement around generative AI proves justified, it may unleash the biggest wave yet of what Joseph Schumpeter, the famed Austrian economist, termed “creative destruction.” AI innovation will refresh the economy by destroying traditional businesses, replacing them with something more productive. For investors, though, the key question is: If generative AI chatbots quickly commoditize intelligence, where will competitive advantage lie in a world of endemic generative AI?

OpenAI expects this growth to drive rapid financial gains; in a 2022 pitch to its private investors, it estimated reaching $200 million of revenue in 2023, rising to $1 billion in 2024.

With rapid adoption across sectors and use cases, the technology is improving exponentially faster at a rate not previously seen. Indeed, a new wave of AI helpers, or agents, like the Microsoft 365 Copilot are being developed to perform complex personal and work tasks without needing close supervision.

Source: Reuters, December 2022

Generative AI quickly became 2023’s stock market sensation, sparking a huge rally mainly in the U.S. for shares in Microsoft and other tech companies poised to benefit.

Despite a bleak backdrop of rising interest rates and possible recession, the price of big U.S. tech companies leapt in the first six months of 2023.

So, too, has the price of the Netherlands’ ASML, a leading supplier of the equipment needed for making the semiconductor chips that generative AI requires, as well as the price of Taiwan Semiconductor.

THE RALLY’S FLIPSIDE

Beyond the big tech companies, there are already signs of companies being disrupted. For instance, the share price of Chegg, the U.S. edtech company, has fallen by two thirds in the first six months of 2023.

It fell by 50% in one day during May after reporting a hit to its business from generative AI, as some students turned to chatbots for answers rather than subscribing to its services.

The sectors most at risk of having work tasks automated could also be those most at risk of losing their competitive advantages.

That puts asset-light intelligence-based businesses like law firms, architecture and engineering at the top of the list, according to Goldman Sachs’ insights into where work is most likely to be automated. Similar businesses to education technology – such as translation and financial advice companies – might also prove to be at risk.

In a world where all businesses have access to generative AI, how do you sustain competitive advantage? The technology looks likely to disrupt, or at least dilute, many existing economic moats – the characteristics of a business that protect it from competition and maintain its profit margins. AI could reshape entire industries and create completely new ones.

Some investors argue that the big tech companies’ generative AI models are becoming increasingly commoditized and may be outcompeted by smaller open-source models – and the first quasi-autonomous agents may be developed by nimble start-ups. After all, the large language models used by chatbots like ChatGPT are available to everyone.

In a generative AI world, two new sources of competitive advantage are emerging – the quality of your data and the quality of your people, especially those with advanced AI skills.

Turning first to data, long-term advantages can come from how a business fine-tunes its large language models.

Of course, AI will not breach all traditional economic moats.

For example, a company that exists in a business where the start-up costs are prohibitive for new entrants would have a formidable competitive advantage. Similarly, a pharmaceutical company with a patent for a miracle drug would still benefit from the exclusive right to market the drug.

If investment in AI leads to competitive advantage, then the U.S. is far ahead of even China, its nearest rival in the race to become leader.

In 2022, the $47.4 billion invested by the U.S. was roughly 3.5 times the amount invested by the next highest country, China, and 11 times the amount invested by the U.K. Notably, all of the big generative AI releases have come from the U.S.

However, there are areas where China pulls ahead. For instance, China dominates industrial robot installations, enabled by AI to collaborate with humans in factories. In 2021, China installed more industrial robots than the rest of the world combined.

What’s more, its citizens are among those who feel most positively about AI products and services. A 2022 IPSOS survey found that 78% of Chinese respondents agreed with the statement that products and services using AI have more benefits than drawbacks. By contrast, only 35% of Americans agreed that products and services using AI have more benefits than drawbacks.

Source: Ipsos, January 2022

Developed countries are likely to adopt generative AI fastest because wages are highest and so they have most incentive, according to McKinsey. But this will only feed into productivity gains if displaced workers find new activities with at least the same economic output.

300 MILLION

Estimated number of jobs lost to AI over a 10-year period

Source: Goldman Sachs, April 2023

The potential for AI to replace humans in the workforce inspired a UK-based thinktank called Onward to advocate for a shift in the burden of taxation from labor to capital.

Source: ONWARD, May 2023

Of course, the huge excitement around generative AI’s potential is as yet untested. There are many reasons why the future of generative AI may not prove as revolutionary as supposed.

Most important is the technology’s limitations. Ask ChatGPT what its IQ is and it answers the following: