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Mon 13 Jan 2020 05:11 PM

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Alexander Ruchti, Analyst at Julius Baer: How investors can participate in the rise of artificial intelligence

Artificial intelligence can be beneficial to corporations by either boosting revenues or cutting costs or doing both

Alexander Ruchti, Analyst at Julius Baer: How investors can participate in the rise of artificial intelligence

Alexander Ruchti is a Next Generation Research Analyst at Julius Baer

PricewaterhouseCoopers (PwC) estimates that AI is going to add $15.7 trillion to the global economy by 2030, both through business-process automation and augmentation, as well as through increased consumer demand, as the result of higher-quality AI-enhanced products and services. To put this into perspective, $15.7 trillion is more than the entire GDP of China today. Often the first thing that comes to people’s minds when thinking about artificial intelligence are bi-pedal machines that think/talk/act in the same way that humans do. This is very unlikely to happen even in the next decade.

The AI revolution will not materialise through flashy futuristic concepts like self-aware walking robots. The AI revolution is playing out in a far more pragmatic and less utopian way. Artificial intelligence is not magic, it is mathematics. There are two main questions that determine the main beneficiaries of AI technology. First, to what degree does a company benefit from the insights generated from information? The less value that a company or industry currently derives from the data it collects, the more potential it often has. Second, how well is the company positioned to deploy AI solutions efficiently to a large extent? Thus far, most industries do not seem to be using their data as efficiently as they potentially could.

To boil the strength of AI down to one sentence: AI is extremely good at seeing patterns in data much more quickly than human beings, often blazingly fast, particularly those that humans potentially overlook and without expecting a salary or getting tired.

One key aspect about the AI revolution that makes it so extraordinary is the fact that it provides tools that have the potential to substantially add value in most industries and not just a single one. From the facial recognition technology utilised by security firms to first-line support chat-bots of banks and autonomous driving technology for car manufacturers, artificial intelligence has been dubbed a general-purpose technology (GPT). GPTs not only have the potential to alter the economic landscape significantly but also the structure of society. Other examples of GPTs are the steam engine, electricity, the printing press, railroads and the internet.

Artificial intelligence can be beneficial to corporations by either boosting revenues or cutting costs or doing both. Boosting revenues can happen by increasing the efficiency of the existing offering. For example, it is likely that Facebook’s and Google’s algorithms are going to become more efficient in targeting their users with advertisements that will result in product purchases. Boosting revenues can also happen from offering additional new services, such as Salesforce now starting an artificial-intelligence-based smart CRM (customer relationship management) assistant that predicts when clients might be most receptive to sales pitches.

Corporate cost-cutting benefits due to AI are, to a large extent, going to come from a lower reliance on human workers in certain professions, which will result in lower labour costs. Most financial cost-cutting benefits due to lower labour-cost demands are likely to be many years away. Besides a reduction in labour-cost demands, AI is also likely to lead to improvements in supply-chain management and working-capital management. Being digitally native is key to reaping strong benefits from applying artificial intelligence solutions.

Overall, according to our assessments, companies that are more digitally native are likely to reap the benefits from AI solutions earlier than those that have a more limited background in information technology. The reason for this is that they are likely to already have a better understanding of both the technology behind AI solutions as well as their own corporate infrastructure to create added value.

Large-scale artificial-intelligence solutions require dedicated hardware solutions consisting of storage and computational capabilities. Many firms will not want to build and maintain those capabilities by themselves due to a lack of expertise or time and cost constraints. They are likely to be much more willing to pay the necessary operating costs by employing an AI-enabled cloud-computing provider rather than being burdened by the large capital costs of building the required AI solution in-house.

Artificial intelligence has experienced multiple periods of extreme hype and severe disillusionment, but we project that the time for AI has finally come when substantial long-term investments will not only continue but will also accelerate to fuel the current rise of AI.

In conclusion, there are three ways in which investors can participate in the rise of artificial intelligence. The first is through investing in companies for which advances in AI mean improvements in their value-creation process, so called strategic AI adopters. The second way is through investing in companies that offer AI-empowered cloud-computing solutions, since not all companies that will want to deploy AI solutions will simultaneously want to shoulder the costs of building the necessary infrastructure. The third way is through investing in companies that produce the actual hardware through which AI solutions are trained and inferenced.

Alexander Ruchti is a Next Generation Research Analyst at Julius Baer

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