UBS predicts shift in AI profit share from upstream to downstream internet platforms in 2-3 years
Quick Look
UBS analysts predict that despite current macro headwinds causing investor caution on AI spending by Chinese tech giants, internet platforms with large data and user bases will capture a larger share of AI profits in two to three years as capacity constraints ease and pricing power shifts downstream.
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Why It Matters
Chinese tech giants have been increasing AI-related capital expenditures in recent quarters, impacting free cash flows, amid a weak macroeconomic environment that has made investors cautious about aggressive AI spending.
Internet platforms with vast data and large user bases will capture a larger share of artificial intelligence profits in two to three years, even though macro headwinds have temporarily fuelled investor caution over aggressive AI spending by Chinese tech giants, UBS analysts said.
Investors have been cautious over a weak macro environment in the second half of the year, and greater AI spending for hardware and infrastructure would drag down short-term profits, but the industry’s power balance was set to flip soon, according to Kenneth Fong, head of China internet research at UBS.
“This is all about the cycle. Now the capacity constraint is on the upstream... so [they] capture a big chunk of the whole profit pool,” Fong said in an interview on Tuesday on the sidelines of a UBS event in Shenzhen.
“But two to three years down the road after the capacity constraint eases, the pricing power will shift to the downstream, where they have the distribution capability, data and users,” Fong noted. “The internet company will start to work again.”
To strengthen their AI war chest, Chinese tech giants have been ramping up their capital expenditures in the past quarter, at the expense of their free cash flows.
What to Watch
AI outlook — possibilities, not facts
Internet platforms with large data and user bases will capture a larger share of AI profits in two to three years
Likely · Within years
Open Questions
- Which specific internet platforms are expected to gain the most from the downstream profit shift?
- How will global AI chip manufacturers respond to the anticipated shift in pricing power?
- What metrics will indicate that the capacity constraint in AI upstream has eased?
