After the excitement over ChatGPT, investors are on the lookout for the next major development in artificial intelligence. We believe that could be edge AI – the tech that allows algorithms to run directly on smart phones or computers without the need for an Internet connection.
AI is already drawing in billions of dollars of new investment while its commercial applications are multiplying. Edge AI devices have the potential to become indispensable smart assistants, able to write emails, make hotel reservations, summarise voice calls, plan your meal and more.
By running without Internet, edge AI devices will also allow users to make the most of AI functionality without compromising personal data, as well as perform tasks faster. This improves cyber security and reduces latency.
Forecast penetration rate for AI PCs and AI smart phones, %
Source: IDC, Canalys
Less obvious but no less important, many of the most attractive investment opportunities arising from edge AI can be found in the emerging markets of Asia. This technology was top of the agenda at the recent trade show Computex in Taiwan and Apple's Worldwide Developer Conference (WWDC).
We have identified three key investment opportunities in edge AI: the device makers, the component makers and the manufacturers of an advanced breed of computer “brains” (known as central processing units, or CPUs).
Emerging Asia’s technology industry is well-placed to capitalise on all three of these, opening up interesting opportunities for EM equity investors.
As consumers replace their existing devices with more powerful AI-enabled versions, smart phone and PC manufacturers will clearly benefit. These beneficiaries include a number of established Asian companies. The penetration of AI smart phones is forecast to more than triple from 16 per cent in 2024 to 54 per cent in 2028; the jump for AI PCs will be even more spectacular, from 2 per cent to 85 per cent (see Fig. 1).
That, in turn, will require significant upgrades in the hardware – a trend that manufacturers of phone and computer components can capitalise on. Currently only 12 per cent of US tech giant Apple’s existing devices meet the hardware requirements of their “Apple Intelligence” AI function. This suggests that a majority of Apple users will need to upgrade to more powerful Apple devices in order to enjoy the new AI functions.
The first crucial area for upgrades is the inclusion of neural processing units (NPUs), which are designed to speed up machine learning operations. Companies like MediaTek have already seen the prices for their AI-enabled processors jump by over 20 per cent. That will also directly benefit companies like TSMC, in whose factories the processors are manufactured.
More data requires upgraded memory. Microsoft's newly launched Co-Pilot+ for AI PCs has a minimum system requirement of 16GB of DRAM, compared to the mainstream 10GB DRAM in recent years. This presents a growth opportunity for memory makers like Samsung Electronics and SK Hynix.
Another significant investment trend, observed at Computex, is growing demand for Windows laptops powered by CPUs which use ARM processing architecture. This architecture is known for being power efficient, which had made it popular in smart phones and servers. Now, with AI’s demands for processing power, the ARM-based processors are expanding to PCs. Laptops using this new breed of CPUs are expected to offer 30-50 per cent additional battery life compared to Intel/AMD’s x86-based laptops. Morgan Stanley estimates ARM-CPUs will be installed in one in five Windows PCs sold in 2028, from zero today (see Fig. 2).
Asian companies are waking up to the opportunity: MediaTek is expected to launch a powerful ARM-based CPU aimed at AI PCs later this year, in partnership with Nvidia.
Forecast shipment volumes for AI PCs and Windows on ARM (WoA) PCs, mln units
Source: Gartner, IDC, Morgan Stanley Research estimates
As the world embraces edge AI, emerging Asian companies are well-placed to be at the forefront of the revolution – from the devices themselves to the processors and the memory that power them. They also offer growing market share in key segments and more attractive valuations than many of their developed market rivals. For example, TSMC now has 60 per cent of the global chip manufacturing market share, and a virtual monopoly in high end chips for AI devices. When it comes to valuations, TSMC and Mediatek are trading at 20-times forward P/E, compared with US’s semiconductor index at 30 times and Nvidia at 45 times.
We believe this is an opportunity EM equity investors cannot afford to ignore.
