International | Dec 17 2020
2021 AND BEYOND: TECHNOLOGY REMAINS A KEY GEOPOLITICIAL BATTLEGROUND
Martin Currie sees disruption in semiconductors, robotics and telemedicine
Kim Catechis, Head of Investment Strategy at Martin Currie, the active equity specialist with USD13.8bn in assets under management, says the next decade will likely see increasing efforts to disassociate the two largest economies in the world.
He notes: “Technology is central to this struggle. China’s response will be to accelerate its efforts to cut its dependence on Western technology, while the US is unlikely to drop its currently aggressive stance.
“Heading into 2021, below are some of the areas where we believe technology will be key to the global power struggle.”
SEMICONDUCTORS – THE UNDERRATED KEY
The electronics industry worldwide was worth US$5.2 trillion in 2018, led by China, the US and Japan. The industry is crucial for virtually every sector of the economy and is therefore strategic in its importance. Inconveniently, it totally depends on semiconductors, an underrated but key component, the global market for which was worth US$412 billion in 2019. One of the reasons why the semiconductor supply chain has worked so well over the past 20 years is that after many iterations it has separated itself into well-defined divisions of labour, with companies becoming specialists. The benefits of lower costs and faster development have been shared across the whole chain, across many countries and time zones, resulting in high-quality, competitively priced products for consumers.
One of the key pre-requisites of such a supply chain is, of course, the combination of free trade and freedom of association – meaning the freedom to sign contracts with any corporate anywhere in the world. That has come to an end, as geopolitical objectives are increasingly becoming a source of interference and obstruction.
As a result of this specialisation, there are stages in the supply chain where a single company has a disproportionately dominant position. This creates bottlenecks which are now well understood by governments around the world and we have seen moves by both the US and Japan to block access to certain component parts of the supply chain for geopolitical rationales.
The biggest players in the semiconductor supply chain are based in the United States, South Korea, Japan, Taiwan, the European Union and more recently, China. Given the US moves to block Chinese companies from accessing US intellectual property, the industry structure is being dismantled. Shareholder value is prejudiced and both management teams and investors must think laterally to identify alternative routes around these actions.
ROBOTICS
The global robotics market turnover hit US$50 billion in 2019, including robot systems, software and peripherals, according to the International Federation of Robotics (IRF). The operational stock of 2.7 million industrial robots are dispersed globally with 62% in Asia, 21% in Europe and 17% in the Americas, as of 2019.
Given the extent of the economic decoupling between China and the US that will be continuing into 2021, there will have to be significant investment made in restructuring supply chains as manufacturing relocates from China to other Asian countries, or even back to the US. As that process plays out, there will inevitably have to be a radical adoption of automation technology in all industries, leading to a major disruption of labour markets as the cost and efficiency benefits unfold in many industries. Over the next decade, countries with ageing populations (Japan, China, Germany, Italy, Poland and Czech) have a chance of accelerating the process, as their working populations shrink.
Those with ‘middle aged’ populations (UK, US, Australia, Canada) will have to carefully balance the rate of adoption with retraining and social welfare programmes, to minimise social unrest. The worst affected are the countries with young, less-educated populations and weak government capacity. Bangladesh, Pakistan and India look the most exposed, but Indonesia, Brazil and Mexico also seem ill-equipped for the challenge.
The International Labour Organisation (ILO) estimates that 56% of jobs in the five ASEAN countries of Cambodia, Indonesia, Philippines, Thailand and Vietnam are at high risk from automation.
MEDTECH
The telemedicine market worldwide is estimated at US$45.5 billion in 2019, according to Statista, who project it to nearly quadruple to US$175 billion in 2026. The line between medicine and technology has blurred. In the context of the current geopolitical struggle, health and medical technology is right in the middle of the battlefield. COVID-19 has only served to intensify the focus, as the first country to develop a safe and effective vaccine will clearly strengthen its diplomatic hand and be in a position to influence third parties’ ability to deal with the pandemic. Hence the apparent attempts at hacking scientific research institutes and high-profile companies.
The technology to enable communications is already there – but it remains broadly under-utilised, other than for basic consultations, presumably because of inertia and perceived data-collection limitations. But data collection is not a problem. Many routinely used bracelets measure blood pressure and heartbeat rates to look for arrhythmia; some measure haemoglobin levels to detect anemia.
More importantly, patients have proved acutely sensitive to the potential for their medical records to be compromised. Whether it concerns a medical condition or a medical procedure, most prefer to keep these private. So that means cybersecurity is likely to become extremely important in 2021 and beyond as a tool for building confidence in the telemedicine domain.
QUANTUM COMPUTING
The size of the enterprise quantum computing by industry is still very small, but the breadth of its use is impressive – life sciences, automotive, manufacturing, civil engineering and oil & gas are the biggest users to date. Consensus in the sector is that adoption is accelerating in areas such as material science, chemistry, pharma and drugs – where it will be implemented in drug delivery first, rather than drug discovery. One of the key drivers is optimisation; the other is for natural language processing. As of March 2019, China had outstripped everyone else in terms of government funding for research into quantum computing,7.
Western intelligence agencies are very concerned with China’s explicit commitment to attain a leading position in this field. The view is Beijing is pursuing a civil-military partnership in innovation, research and development – China’s armed forces believes that the next war will be won by the use of technological advances, even in ‘experimental’ fields. If attained, quantum technology leadership will give China an advantage in offensive intelligence operations and encryption.
The resultant advanced weapons systems will increase China’s geopolitical and combat options, threatening the West. This fear guarantees a heightened focus from governments going forward and a space to watch in 2021.
Martin Currie is an active equity specialist, crafting high-conviction portfolios for client-focused solutions. Investment excellence is at the heart of our business. Central to this philosophy is a stock-driven approach, based on in-depth fundamental research, active ownership of companies and skilled portfolio construction. As part of Franklin Templeton, we also have the backing of one of the world’s largest asset management firms.
Content included in this article is not by association the view of FNArena (see our disclaimer).
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