24.03 Liontrust Global Innovation Report - The Rise of AI 04.24 - Flipbook - Page 21
VALUE CAPTURE
Innovation can enable companies to build formidable barriers,
driving profitability. Giants of innovation this century such as Apple
and Google trip off the tongue, but many other niche innovative
champions have also achieved massive profitability. Indeed,
the technology sector, arguably the most innovative sector in the
market, has the highest free cash flow margins and returns on
invested capital of any sector.
The key question for AI and value capture is whether it will prove
to level the playing field between the best companies and the
rest or enable the best to accelerate further ahead. We strongly
believe that while many if not most companies will become more
productive through AI, the biggest gains by far will be reaped
by the best companies, strengthening barriers to competition and
profitability. AI will not prove a saviour to companies on the wrong
side of innovation, hoping to turn the tide.
There are three reasons for this. First, AI will likely exhibit increasing
returns to scale and experience because efficacy thrives above all
on learning from data and experience. For this reason,
we have investments in leaders in their niches with
significant scale and data advantages, such
as Airbnb, Spotify and Uber.
Second, even if everyone had the same data, they would not all
use it. We agree with economic historians such as Nick Crafts who
view AI in the historical lineage of general purpose technologies –
major innovations such as steam, electricity and personal computers
that impact most sectors of the economy and give rise to powerful
ripples of many further, smaller and more specific innovations.
What is special about general purpose technologies is that while
they deliver incremental gains for most companies, they deliver
massive gains for the most committed companies that are prepared
to reorganise themselves around the technologies.
Most companies will simply not do this because the vested interests of
management are too strong. Fundamentally, AI automates decision
making and will have the biggest impact for companies when it
makes or helps make the biggest decisions. Only companies led by
exceptional management with very strong technological capabilities
and a genuinely innovative culture will capitalise.
Third, AI is not just a significant innovation, but a tool for
innovation itself. This will favour the competitive
advantage of innovative companies, boosting
the productivity of their innovative efforts
relative to their peers. Continual
innovation is the strongest barrier to
competition of all.
The rise of AI: Technology and Innovation Report - 21
