The US-China AI race: who will win and how can investors profit?

Are we in an AI bubble? 

Craig Baker, Chair of the Alliance Witan investment committee, said: “We don’t think borrowing to invest, on its own, will lead to a bubble. However, if a bubble forms, the existence of leverage will make any collapse more dangerous. The things that will lead to a bubble would potentially be supply meaningfully exceeding demand in the key area of compute, or simply valuations that price in future profitability that far exceeds what will materialise. We are not seeing these things yet, which is why we don’t think we are in a bubble, but we are cautious about the amount of leverage in the system both at the company level and the investor level. 

“We may see periods of over-investment and disappointments among individual companies, but that is different from saying the entire AI opportunity is a bubble. The long-term economic impact is likely to be substantial even if the path proves volatile.”

Dale Nicholls, Portfolio Manager of Fidelity China Special Situations, said: “The scale of investment going into AI infrastructure is clearly significant across markets, and inevitably raises questions around whether we are seeing elements of a bubble. In China, capital expenditure has accelerated materially, particularly among the large internet platforms. 

“Given the significance of the technology, we should expect significant levels of investment. While there is a focus in markets on the scale of the investment and the potential short-term hits to earnings, the key question is what returns will be generated on this investment. It is early days and there clearly will be winners and losers, but initial signs for many of the large platforms are positive. 

“Encouragingly, we are seeing the platforms become more disciplined elsewhere, reducing losses in highly competitive areas such as food delivery while directing more capital towards AI infrastructure, cloud and applications that could strengthen their long-term competitive position. Earnings expectations for the offshore internet sector are also beginning to stabilise as cloud and AI monetisation develops.”

US vs China: who wins the AI race?

Mike Seidenberg, Manager of Allianz Technology Trust, said: “If this market is as big as expected there will be room for multiple countries to win. Both the US and China are very strong in computer science and have governments who encourage company formation, which is a key ingredient, along with large talent pools of qualified workers. 

“To date China has been more of a follower than a leader in technological innovation. The country is very good at improving existing technologies and we are already seeing some of this today. Ultimately it boils down to companies much more than countries, as we have seen with previous secular themes. As an investor I am much more focused at the company level and there are so many innovative companies applying AI to real world use cases right now.”

Linda Lin, Manager of Baillie Gifford China Growth, said: “We do not see AI as a winner-takes-all race. The US may continue to lead in frontier models and advanced computing, while China could lead in making AI cheaper, more widely available and embedded across the economy. The outcome will depend not only on access to chips and power, but also on model efficiency, distribution, adoption and the ability to turn technological progress into sustainable commercial returns.”

Craig Baker, Chair of the Alliance Witan investment committee, said: “I would be cautious about viewing this as a winner-takes-all contest. Both countries have distinct advantages. The US currently leads in frontier models, semiconductor design, software ecosystems and venture capital. It also benefits from an innovation culture that has repeatedly produced globally dominant technology platforms. 

“China’s strengths lie in scale, engineering talent, manufacturing capability, data availability, and a willingness to deploy technologies rapidly across large domestic markets. The outcome will be determined less by who produces the single best model and more by who creates the most productive ecosystem around AI. Success will depend on access to talent, energy, computing resources, semiconductors, capital and the ability to translate technical breakthroughs into widespread commercial adoption.”

Dale Nicholls, Portfolio Manager of Fidelity China Special Situations, said: “I would not frame AI leadership as a simple question of whether China or the US ultimately wins. ‘Winning’ implies there is a finish line and that all cannot benefit from the developments. The two ecosystems have different advantages. 

“The US remains at the frontier in areas such as advanced chips and model development, while China brings enormous manufacturing scale, engineering talent and a very competitive cost base for power and infrastructure. Chinese companies have also demonstrated an ability to innovate around chip constraints and develop domestic alternatives. Importantly, AI investment by Chinese hyperscalers remains considerably below that of their US counterparts, suggesting there is still substantial room for the ecosystem to develop.”

The industries set for the biggest AI disruption

Linda Lin, Manager of Baillie Gifford China Growth, said: “The first wave is likely to be most visible in software, advertising, media, gaming, healthcare and drug discovery, where intelligence is a significant part of the cost base or a straightforward amplifier for revenue. The more profound opportunity may lie in physical AI, including engineering, manufacturing, industrial automation, robotics, autonomous driving and logistics. 

“AI is also reshaping the industries that support its expansion, such as semiconductors, memory, data centres, power and cooling. We think in the medium to long term, AI will also change the way investors should assess a company’s competitive moat, with companies who can leverage their proprietary data and experience via AI having a bigger chance to win.”

Mike Seidenberg, Manager of Allianz Technology Trust, said: “AI is a horizontal technology, meaning it has potential to disrupt almost every vertical industry – similar to the cloud, for example. I would expect this to happen over time. Initially, the industries where it appears to be most applicable are medical, legal and high tech. Like the adoption of other major secular themes in technology, AI will be adopted by almost every business over time in order to garner a competitive advantage or to keep pace with the competition.”

Which companies in your portfolio have the greatest potential to benefit from AI?

Linda Lin, Manager of Baillie Gifford China Growth, said: “ByteDance can deploy new capabilities rapidly across its large consumer platforms and monetise them through advertising, ecommerce, content creation and enterprise services. Its advantage is not simply the quality of its models, but its ability to distribute AI at scale and integrate it into products that users and businesses already use every day.”

Dale Nicholls, Portfolio Manager of Fidelity China Special Situations, said: “Autonomous driving could be one of the nearest-term examples of AI becoming part of everyday life. Pony.ai, which we hold in the portfolio, is well positioned to benefit as robotaxi adoption expands, supported by improving unit economics and a growing number of operating approvals and partnerships.

“At the same time, the AI opportunity is reaching well beyond traditional technology companies. CATL is another good example. Already the world’s largest battery manufacturer and a major beneficiary of the electrification trend, the company is leveraging its capabilities in energy storage systems to capture growing demand from the AI infrastructure buildout. As AI deployment increases electricity requirements, we see opportunities across the wider power ecosystem, including energy generation, transmission, storage and electrical equipment.”

Craig Baker, Chair of the Alliance Witan investment committee, said: “When considering the greatest benefit, it is important to differentiate between whether that benefit is simply to companies’ revenues or whether the benefit is to shareholder returns. 

“The very fact we find this difficult to answer is why we run a diversified portfolio. It is almost impossible to know in advance who will be the biggest winners – history shows the market has been notoriously poor at calling that. The obvious stock everyone talks about is NVIDIA. It has become the foundational supplier of the computing infrastructure required to train and deploy advanced AI models. Its leadership position in accelerated computing extends beyond chips to include software, networking and a broader ecosystem that creates significant competitive advantages. 

“The growth of AI applications across industries continues to drive demand for computing power. While expectations are already high and competition will inevitably increase, NVIDIA remains one of the clearest beneficiaries of sustained AI adoption globally. However, while NVIDIA remains a key enabler of AI, one of the more interesting beneficiaries may be Microsoft. AI has the potential not only to strengthen Azure's competitive position in cloud computing but also to transform productivity software used by hundreds of millions of knowledge workers. Few companies have Microsoft's combination of distribution, enterprise relationships, and ability to monetise AI at scale.

“We should also consider many companies that are being written off as AI losers who may yet turn out to have data or an application that is valuable and boosted by AI and therefore be the most materially mispriced business.”