Should tech investors switch on or reboot during this year’s spate of elections? We examine the far-reaching consequences for markets of fracturing in tech supply chains, generative AI and social media.
Should tech investors switch on or reboot during this year’s spate of elections? We examine the far-reaching consequences for markets of fracturing in tech supply chains, generative AI and social media.
August 2024
2024, ‘super election year’, is set against a backdrop of tectonic technological and geopolitical shifts that pose significant challenges for policymakers.
Technology supply chains are now at the heart of the relationship between the US and China, raising questions about how quickly a decoupling could roll back the pace of globalisation, if not reverse it. This debate is now more about ‘when’, not ‘if’.
It’s the first major election year since the widespread introduction of generative AI, and old concerns about the impact of a surge in misinformation are more pronounced than ever, reshaping democracy. Generative AI tools can significantly impact misinformation.
Artificial intelligence (AI) is also changing the future of work, already affecting job growth in certain subsectors. Policymakers face tough decisions around protecting jobs versus the long-term competitiveness of their economies.
Finally, energy-intensive infrastructure will add yet another variable to the global geopolitics of energy, with power supply under increasing pressure. Data centres are projected to account for more than 10% of power supply needs in major economies before the end of this decade.1
In this article, we address these issues, one by one.
In the last election, there was a sentiment which verged on one-upmanship between the candidates, which has ultimately accelerated the devolution of the global supply chain.
1. Tech supply issues harm global exchange
US-China tech trade tensions, initiated during Donald Trump’s presidency from 2016 to 2020, have become a fixture of American foreign policy, with Democrats and Republicans largely in agreement. In the last election, there was a sentiment which verged on one-upmanship between the candidates, which has ultimately accelerated the devolution of the global supply chain.
The cadence of tightening rules every six months has become routine. However, the looming question is what a potential Trump 2.0 administration would mean. Would he escalate the trade conflict further? The uncertainty lies in how markets will react to each party’s rhetoric. An “America First” Republican policy versus a relatively more collaborative approach with Europe from Democrats has significant implications. For instance, the competition between BYD and Tesla is heating up, particularly in Europe, the Middle East and Africa (EMEA) rather than their home markets. The direction the US takes could influence how friendly EMEA remains toward Chinese-designed and built products.
Today, China is accelerating its pace of self-reliance in semiconductor production, while the US jostles with its stance of restricting exports, but equally not alienating customers. As one Washington pundit explained to me, the US has to balance its approach. On the one hand, they don’t want China to use the latest chips, on the other, the US doesn’t want to alienate China to the point where the country entirely stops being a consumer. Today, 30%+ of semiconductor manufacturing equipment2 and 30%+ of semiconductor chips are shipped to China3, so the US wants their custom – just with a five-year-plus lag in Moore’s law competency.
This decoupling is incrementally inflationary for the entire tech sector, as politics works against what economies of scale would suggest.
Companies are preparing for the possibility that US and Chinese tech supply chains could decouple. Apple is increasingly manufacturing its latest products in Vietnam and India. Overall, this decoupling is incrementally inflationary for the entire tech sector, as politics works against what economies of scale would suggest. There is a reason why chip manufacturing and smartphone production have evolved to be concentrated in certain regions of excellence, driven by capitalism. Taiwan Semiconductor Manufacturing Company Limited (TSMC) has consistently worked towards a leadership position in semiconductor chip manufacturing over more than three decades. Diversifying production in the US is unlikely to provide the same economies of scale or be viable on any timescale relatable to a presidential term in office.
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Each country sees areas like semiconductor production and AI capabilities as critical as military self-sufficiency.
Finally, semiconductor production is increasingly a sovereignty issue, leading to over $100 billion of government funding through the Creating Helpful Incentives to Produce Semiconductors (CHIPS) and Science Act in the US, and a similar move in Europe to increase chip manufacturing capabilities. Each country sees areas like semiconductor production and AI capabilities as critical as military self-sufficiency. From semi-cap equipment to NVIDIA graphics processing units (GPUs), we are increasingly seeing companies call out ‘sovereign demand’. The semiconductor industry’s Washington lobbying budget alone has grown 2.5x.4
2. There are new ways for misinformation to go viral
Back in 2018, Massachusetts Institute of Technology (MIT) researchers concluded that false news travels six times faster than real news on social media platforms like Twitter, especially as fake news tends to be much more sensational.5 This has been a serious risk for undermining free and fair elections. Since then, policymakers and social media companies have done much to weed out fake news and reduce the velocity of such cascading effects – such as pushing for authenticity.
MIT researchers concluded that false news travels six times faster than real news on social media platforms.
From using technology and humans to authenticate information to limiting unauthenticated information or WhatsApp forwards, readers are now more sceptical of social media news. However, these policies are not without controversy, with political parties collectively calling out tech companies as ‘kingmakers’ since their algorithms choose what content is served to the audience and when. Initially, social-media algorithms were designed to serve content that got the most reactions (likes, comments, reposts, etc.), leading to significant polarisation of content and political views (often with fake news). As these social-media algorithms have been redesigned to slow down the pace, they have in multiple scenarios limited credible political information as well, potentially impacting electoral outcomes – a wobbly tightrope to balance on for social-media players.
Figure 3. Fake news travels 12x faster and deeper than the truth
Source: Science Adviser. Available here: https://www.science.org/doi/10.1126/science.aap9559 and https://www.linkedin.com/pulse/pervasive-nature-fake-news-neil-bage/
Concerns about the impact of a surge in misinformation are more pronounced than ever.
To top these issues, there is a new challenge today: 2024 is the first major election year since the widespread introduction of generative AI, and concerns about the impact of a surge in misinformation are more pronounced than ever. AI-generated videos could easily confound humans, let alone technology, in distinguishing real videos from deep fakes.6
Figure 4.
Differentiating between misinformation and real information is not trivial, and either way, big tech companies need to limit the usage of their platforms to attain this.
Social media’s role in spreading misinformation is a bipartisan concern in Washington. This poses a serious risk to democracy, a fact that regulators and politicians are acutely aware of. The recent actions by the EU, ahead of its parliamentary elections, underscore the seriousness of this issue.7
Given the current geopolitical landscape, there are multiple incentives to influence the US elections. Big tech companies, encompassing social media, search engines, YouTube, and messaging platforms, have a significant role to play. Their responsibilities in curbing misinformation are clearer than ever. However, differentiating between misinformation and real information is not trivial, and either way, big tech companies need to limit the usage of their platforms to attain this, i.e., take a complete financial hit.
Businesses need to rework their monetisation strategies, ultimately changing the nature of work itself.
3. AI eats work, politicians panic
The tech industry is undergoing a once-in-a-decade platform shift driven by AI advancements. This shift has profound implications not just for the technology sector but also for all adjacent industries. Businesses need to rework their monetisation strategies, ultimately changing the nature of work itself. With high inflation and macroeconomic uncertainty, the benefits and risks of AI are at the forefront of every policymaker’s mind. History informs us that such technological shifts may disrupt some near-term profit pools but, over the long term, generate much larger new profit pools. On one hand, limiting technological development may protect some jobs in the near term but could handicap the region on a global competitive scale.
History is littered with examples of Luddites protecting jobs in the near term, only to ultimately lose competitiveness in the long term – from hand weaving to mobile internet. These are core decisions on which policymakers will be judged over decades, not months.
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Unlike previous technological advancements, the government now wields more power in determining AI’s growth potential.
4. Providers have all the power
AI’s rapid development brings with it both opportunities and challenges. The need for new power plants to support data centres and access to data underscores Washington’s influence over this platform shift. Unlike previous technological advancements, the government now wields more power in determining AI’s growth potential. AI is already projected to account for about 10% of power needs in major western economies before the end of this decade.8 So significant is the demand for NVIDIA GPUs today that, in a recent meeting, its Chief Financial Officer (CFO) mentioned that 70 sovereigns had visited the company headquarters to gain access to its chips. And the UK’s usually protracted procurement policies were all but lifted to invest in a £300 million supercomputer in Cambridge.9
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During political elections, we tend to see many more security attacks. This time will be no different.
Overarching these factors is also the increased importance of cybersecurity, especially given the new Securities Exchange Commission (SEC) laws around reporting cyber breaches within four business days.10 During political elections, we tend to see many more security attacks. This time will be no different, with ‘state actors’, ‘white knights’, and pure ‘internet pirates’ using this rise in internet traffic as an opportunity to disable, overwhelm, or penetrate government and large enterprises.
Conclusion: time to be nimble
The elections this year, and the subsequent policies around technological governance will have a long-lasting impact on not just the near-term technological roadmap but also the longer-term competitiveness of these economies – impacts that will easily outlast the terms of these leaders. Active stock-picking in technology security has changed materially over the last decade. There is now a need for a thorough examination of policy implications in addition to pure fundamental analysis, as the sector becomes increasingly foundational to economic growth and geopolitical stability.
Investors can find opportunities by looking at:
- Benefactors of the tech supply-chain devolution. For example, innovators within the Chinese semiconductor supply chain and the increasing inefficiency within the semiconductor manufacturing footprint. The provision of more fab equipment for localised semiconductor manufacturing presents further investment opportunities
- Cybersecurity companies that help fight misinformation and fraud through behavioural analysis, as well as identifying companies with weak controls that are at risk of losing business. Investors may wish to consider whether social-media companies are maintaining a deep dialogue with policymakers, so that they remain on the right side of political sentiment around controlling misinformation
- Companies that have been on the front foot in repositioning their employees to benefit from productivity gains and generate margin gains for their employee base, as well as developing higher value roles
- And finally, the semiconductor industry is working feverishly to solve for the power/ performance hurdle. This means developing new technology and processes for manufacturing to help the industry navigate power issues
1. Source: https://www.semianalysis.com/p/ai-datacenter-energy-dilemma-race and https://iea.blob.core.windows.net/assets/6b2fd954-2017-408e-bf08-952fdd62118a/Electricity2024-Analysisandforecastto2026.pdf
2. Source: Gartner
3. Source: https://www.wsts.org/61/MARKET-STATISTICS
4. Source: https://www.opensecrets.org/federal-lobbying/clients/summary?id=D000056599
5. https://www.science.org/doi/10.1126/science.aap9559
6. Source: https://www.euronews.com/next/2024/06/08/ai-chatbots-intentionally-spreading-election-related-disinformation-study-finds
7. Source: https://www.ukri.org/news/300-million-to-launch-first-phase-of-new-ai-research-resource/
8. Source: https://www.semianalysis.com/p/ai-datacenter-energy-dilemma-race
9. Source: https://www.ukri.org/news/300-million-to-launch-first-phase-of-new-ai-research-resource/
10. Source: https://www.sec.gov/newsroom/press-releases/2023-139
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