The Chinese AI Challenge: Is Competition a Risk for US Tech?
Artificial intelligence remains one of the most significant investment themes in global markets. The extraordinary growth in companies such as Nvidia, Microsoft, Alphabet, Amazon and Meta have been driven by expectations that AI will transform productivity and create enormous new revenue opportunities.
However, an important change is occurring: the competitive landscape is broadening, particularly with the emergence of Chinese AI companies.
The development of DeepSeek was an early indication that highly capable AI models could potentially be developed with substantially less computing power and at much lower costs than previously assumed. Chinese companies such as Alibaba and Moonshot AI are continuing to invest heavily in AI, increasing the prospect of a more competitive global AI market.
For investors, the issue is not whether AI will be successful. The more important question is how much of the economic value created by AI will ultimately accrue to today's market leaders.
The economics of AI could change
The current investment cycle has been heavily focused on infrastructure. Technology companies are committing enormous amounts of capital to data centres, semiconductors and computing capacity.
This has created significant beneficiaries, particularly across the US semiconductor and technology sectors.
But if AI models become more efficient and competition drives down the cost of AI services, the economics could change.
Lower AI costs should accelerate adoption — which is positive for the economy. However, greater competition could also reduce pricing power and profit margins for companies currently valued on the assumption of exceptionally strong and sustained growth.
This creates a potentially important disconnect between AI adoption and investment returns. AI can become more successful while the returns earned by particular AI companies decline as competition increases.
Valuation increases the risk
This matters because expectations for US technology companies are already extremely high.
Many of the largest companies in the US market are trading at valuations that require continued strong earnings growth to justify current prices. The concentration of the market in a relatively small number of mega-cap technology companies also means investors can have substantial exposure to the same underlying AI theme without necessarily realising it.
When valuations are modest, strong earnings growth can provide a margin of safety.
When valuations are elevated, the opposite can occur: even good results can disappoint if they fall short of what the market has already priced in.
The risk therefore isn't necessarily that US technology companies will perform badly. It is that they may perform very well, but not well enough to justify today's expectations.
What does this mean for portfolios?
We don't believe the emergence of Chinese AI is a reason to abandon US technology.
The US retains significant competitive advantages in semiconductor design, cloud computing, software, research, capital markets and global technology platforms. Many of these businesses are highly profitable and have substantial balance sheet strength.
Instead, we see it as another reason to avoid becoming overly concentrated in one investment theme.
For diversified investors, the potential for increased AI competition reinforces the value of global diversification, valuation discipline and exposure to businesses that can benefit from AI adoption without relying entirely on AI-related valuation expansion.
Our view
The AI investment opportunity remains compelling, but the easy part of the story may be behind us.
The next stage is likely to involve greater competition, falling costs and a much broader range of winners and losers.
For investors, this means looking beyond the headline growth in AI and asking a more fundamental question:
At today's valuation, how much of that future growth are we already paying for?
AI may prove to be one of the most transformative technologies of our lifetime. But transformational technologies do not guarantee exceptional investment returns from every company exposed to them.
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