An automated future

In his first ‘Spengler’ column for the Asia Times, written at the start of the new millennium, economic strategist David Goldman argued that the boom in internet stocks was not a bubble. Instead the internet represented a genuine sea change in the world and an opportunity to earn vast sums of money via asset light business models.

His claim that we would all ultimately end up like the business magnate Howard Hughes, zombified and sitting at home all day streaming videos, does not seem completely accurate but still feels depressingly prescient.

As that suggests, Goldman was both wrong and right. The Dot Com boom was a bubble and many companies went out of business or, with Cisco probably being the most famous example, saw massive devaluations as it burst. But it is hard to argue that the internet has not drastically changed the way in which we live our lives and provided an opportunity for the ‘winners’ in the sector to rake in huge amounts of money.

Almost a quarter of a century on, there are many people in the tech world that want us to believe advances in artificial intelligence (AI) represent the same turning point that mass adoption of the internet did two decades ago.

They have good reason to do so. Earnings at the major tech companies, like Google and Meta, have fallen – even if they have often been superior to what analysts were estimating. Along with cutting staff and ramping up huge share buyback programmes, the prospect of AI driving whole new business lines looks suspiciously like an attempt to maintain higher valuations.

That is to take a more sceptical view. But rather than being a simple play designed to keep share prices jacked up, perhaps AI does represent a genuine paradigm shift in the way humans live their lives, even if it’s not as dramatic as is being portrayed. Leaving aside the bluster surrounding Chat GPT and some of the high valuations we’re seeing in listed and unlisted firms, there is something to be said for the idea that AI-like technology could help deal with the global labour shortage.

For example, Chinese firm Huawei unveiled a new port facility in Tianjin at the end of last year that allows shipping containers to be scanned and transported with almost no human labour involved. Readers may think this was designed to cater to Chinese authorities’ neurotic covid policies. But marketing materials from Huawei imply that a key driver was a labour shortage that made it difficult to find port workers.

This maps on to a point that the managers at Allianz Technology Trust (ATT) have been making for years now, namely that past labour shortages have led to higher investment in technology R&D, as companies look to automate processes rather than find workers capable of performing them. ATT manager Mike Seidenberg noted in a presentation at the end of last year that spending on R&D, as a percentage of GDP, is forecast to rise from 3.6% in 2015 to 5.5% in 2045.

Looking at ATT’s portfolio, the trust is arguably best set up to benefit from this process, assuming it actually takes place, via its holdings in semiconductor companies. Nvidia, TSMC and ON Semiconductor are all top 10 holdings for the firm. Given Nvidia’s most recent update, in which it forecast earnings for its current quarter will be $11bn, far ahead of the $7bn analyst estimates and heavily fuelled by investments in AI chips, there is an argument to be made that these companies will be able to benefit from a wave of automation investment, with less downside risk than direct holdings in more speculative ventures.

What provides further support to the labour shortage angle is the Japanese experience. Readers probably need little reminding of Japan’s population problems. However, this is arguably what has turned them into a leader in robotics and automated manufacturing. According to the International Federation of Robotics, Japan produced 45% of the world’s industrial robots in 2022 and has the highest number of industrial robots, relative to the number of workers, in the world.

It is probably unsurprising then, that automation processes feature heavily in many Japanese portfolios. As my colleague Ryan Lightfoot-Aminoff wrote here back in March, when looking at China’s demographic travails, one of the key themes in the JPMorgan Japanese (JFJ) portfolio is automation, with Keyence – a producer of automated manufacturing technology – its largest holding.

Does this mean we’ll all end up plodding the streets alongside automated streetsweepers and chatting to large language model-infused robots? Probably not. But the Japanese experience is at least one sign that a labour shortage could fuel more investments in technology aimed at automation. Whether this will bring about changes akin to what we’ve seen over the past three decades remains to be seen.

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