It took just 2 months for ChatGPT to reach 100 million users. That's 15 times quicker than instagram. It's a sign that we’re gonna need more chips. And not just any chips. The ones that we don't have in unlimited quantity today. So where are they going to come from?
Cause and effect can be hard to discern. In the case of deglobalisation, the breakdown of fluid supply chains led corporations to reweigh the balance of increased costs against increased control. On-shoring, near-shoring and diversifying away from China to ASEAN, India, or Mexico have dominated long-term strategy meetings.
On the political front, the U.S. has also taken major steps to reduce it's dependence on China in a world shifting to clean energy. Plus boost it's position for the research, design and manufacturing of advanced chips. The Inflation Reduction Act (IRA) and the U.S. CHIPS and Science Act have dollarized the political rhetoric behind onshoring, and the deglobalisaton trend further. And China is doing the same, for all the same reasons.
Today, the world is moving and changing fast. The unparalleled initial success of chatGPT provides another quantification of the thirst for new applications driven by A.I.. Consumers want A.I., which means corporations need more chips. But the chips required for the integration of data generation, manipulation and comprehension into the next generation of consumer goods, industrial processes and data centres need even higher bandwidth. The world needs advanced chips.
The manufacturing of advanced chips rely on an interdependent chain of companies spread across the globe. Each company monopolises the intellectual property and know how required to fulfil their role in final product. But these firms are not easily replicable, either by China or the U.S.. It will take time. The question is how long?
The amount of money being directed to chip hegemony is astounding. And the amount of commitment to gaining that control has only been compounded by a chip demand that has now shifted noticeably outwards in parallel with increasing military budgets across the world.
So whilst the catalyst for the deglobalisation mantra was COVID and clean energy related, the latest boost has come from the possibilities of Artificial Intelligence.
For investors, the opportunities and risks are potentially two sigma events. Inside RFPnetworks many institutional investors are trying to understanding and quantify the trade-off as part of their research process:
On the returns side, investment managers note that the applications of artificial intelligence are almost infinite. Identifying private equity managers that can invest pre-IPO into companies that are tapping into the semiconductor value chain, could bring outsized rewards.
On the risks side, investment managers point to one potential black swan event: China's ambitions surrounding Taiwan could bring the entire global semi-conductor value chain down overnight. The impact on public equities that rely on chips - which firm doesn't - would be catastrophic for portfolios. Is deglobalisation a hedge? This may be far fetched. But the idea itself highlights once again how deglobalisation will impact portfolios in ways investors had not predicted. As will artificial intelligence.
