1、+GENERATIVE AI:Fall 2023For professional investors only.All investments involve risk,including possible loss of capital.OUTFRONTFINDING THE COMPETITIVE EDGE AMID CREATIVE DESTRUCTION2 GENERATIVE AI|PGIMThe rapid explosion of generative AI for general use has captured the global imagination with what
2、 the technology might enable.Its expected to have a profound impact on economic growth by exponentially increasing productivity.Thats because everything today from culture to consumer products is a product of intelligence.If the excitement around generative AI proves justified,it may unleash the big
3、gest wave yet of what Joseph Schumpeter,the famed Austrian economist,termed“creative destruction.”AI innovation will refresh the economy by destroying traditional businesses,replacing them with something more productive.For investors,though,the key question is:If generative AI chatbots quickly commo
4、ditize intelligence,where will competitive advantage lie in a world of endemic generative AI?Source:PwC,July 2023$15.7 TRILLIONTHE AMOUNT OF VALUE THAT GENERATIVE AI COULD ADD TO THE GLOBAL ECONOMY BY 2030INTRODUCTIONCHAPTER 1 2023S AI RALLY ANTICIPATES A RAPIDLY APPROACHING FUTURE4 GENERATIVE AI|PG
5、IMCHAPTER 1 2023S AI RALLY ANTICIPATES A RAPIDLY APPROACHING FUTURE*Metas Threads microblogging app has since surpassed it by reaching 100 million users in five days.Accelerated Adoption-Number of Days to Reach 100 Million UsersDays to 1MDays to 10MDays to 100MNetflixTwitterFacebookInstagramChatGPT6
6、1854160819037337Source:Reuters,July 2023When ChatGPT-3,the first generative AI chatbot,was launched by Microsoft-backed OpenAI in November 2022,it quickly became the fastest-growing app ever,attracting an estimated 100 million users within two months.5 GENERATIVE AI|PGIMOpenAI expects this growth to
7、 drive rapid financial gains;in a 2022 pitch to its private investors,it estimated reaching$200 million of revenue in 2023,rising to$1 billion in 2024.With rapid adoption across sectors and use cases,the technology is improving exponentially faster at a rate not previously seen.Indeed,a new wave of
8、AI helpers,or agents,like the Microsoft 365 Copilot are being developed to perform complex personal and work tasks without needing close supervision.Source:Reuters,December 2022Source:Open AI 1,Feb.2019 2,Nov.2019 3,Sept.2020,Semafor,March 2023,Google,July 2023Rapid Growth of GPT ModelsParameters ar
9、e one of the defining characteristics of AI models.They determine how the model processes the data and how it generates predictions.6 GENERATIVE AI|PGIMSource:“GPT-4 Passes the Bar Exam,”Katz,Bommarito,Gao,Arredondo.March 2023 How GPT Models Performed on the Multiple-Choice Multistate Bar Examinatio
10、n(MBE)But rather than just incorporating more and more data,can generative AI autonomously outperform humans at the most economically valuable work,as outlined in the OpenAI charter?And when?Researchers have put GPT to the test,literally,to measure performance against prospective lawyers.Random Gues
11、singAverage MBE Passing RangeQ1 2019Q4 2022Q1 2023GPT=3.5GPT-4NCBE10%20%30%40%50%60%70%80%0%Correct RateStudent Avg.(NCBE BarNow)GPT-4ChatGPTGPT-3.5davinci001curie001babbage001ada001GPT-27 GENERATIVE AI|PGIMGenerative AI quickly became 2023s stock market sensation,sparking a huge rally mainly in the
12、 U.S.for shares in Microsoft and other tech companies poised to benefit.So,too,has the price of the Netherlands ASML,a leading supplier of the equipment needed for making the semiconductor chips that generative AI requires,as well as the price of Taiwan Semiconductor.Source:RefinitivFor illustration
13、 purpose only.All investments involve risk,including the possible loss of capital.For illustration purpose only.All investments involve risk,including the possible loss of capital.U.S.Tech Stock RallyDespite a bleak backdrop of rising interest rates and possible recession,the price of big U.S.tech c
14、ompanies leapt in the first six months of 2023.ASML Holding N.V.U.S.:NYSETaiwan Semiconductor Manufacturing Co.Ltd.ADRU.S.:NYSESource:Refinitiv$500$600$700$800Jun 23Jul 23Aug 23Mar 23Feb 23Jan 23Apr 23May 23Jun 23Jul 23Aug 23Mar 23Feb 23Jan 23Apr 23May 23$60$80$100$120$300$100$50008/25/2307/23/2306/
15、19/2305/17/2304/13/2303/11/2302/06/2301/03/23NVDAMSFTMETAAAPLAMZNGOOGORCL0$400$200Close Price8 GENERATIVE AI|PGIMBeyond the big tech companies,there are already signs of companies being disrupted.For instance,the share price of Chegg,the U.S.edtech company,has fallen by two thirds in the first six m
16、onths of 2023.THE RALLYS FLIPSIDEIt fell by 50%in one day during May after reporting a hit to its business from generative AI,as some students turned to chatbots for answers rather than subscribing to its services.Cheggs AI ReckoningU.S.:NYSESource:Refinitiv$18$6$300$24$1208/25/2307/23/2306/19/2305/
17、17/2304/13/2303/11/2302/06/2301/03/23For illustration purpose only.All investments involve risk,including the possible loss of capital.9 GENERATIVE AI|PGIMThe sectors most at risk of having work tasks automated could also be those most at risk of losing their competitive advantages.Source:Goldman Sa
18、chs GIR,April 2023Share of Industry Employment Exposed to Automation by AI in the U.S.That puts asset-light intelligence-based businesses like law firms,architecture and engineering at the top of the list,according to Goldman Sachs insights into where work is most likely to be automated.Similar busi
19、nesses to education technology such as translation and financial advice companies might also prove to be at risk.4644373635333231292828282726261912119641All industriesOffice&admin supportLegalArchitecture&engineeringLife,physical,social sciBusiness&financial opsCommunity&social serviceManagementSale
20、s&relatedComputer&mathematicalFarming,fishing,forestryProtective serviceHC practitioners&technicalEdu instruction&libraryHealthcare supportArt,dsgn,ent,sport,mediaPersonal care&serviceFood prep&serving Transport&material movingProductionConstruction&extractionInstallation,maint,repairBdg&grounds cle
21、an/maint10%20%30%40%50%0%CHAPTER 2 SUSTAINABLE COMPETITIVE ADVANTAGE IN AN AI WORLD11 GENERATIVE AI|PGIMCHAPTER 2 SUSTAINABLE COMPETITIVE ADVANTAGE IN AN AI WORLDIn a world where all businesses have access to generative AI,how do you sustain competitive advantage?The technology looks likely to disru
22、pt,or at least dilute,many existing economic moats the characteristics of a business that protect it from competition and maintain its profit margins.AI could reshape entire industries and create completely new ones.Some investors argue that the big tech companies generative AI models are becoming i
23、ncreasingly commoditized and may be outcompeted by smaller open-source models and the first quasi-autonomous agents may be developed by nimble start-ups.After all,the large language models used by chatbots like ChatGPT are available to everyone.In a generative AI world,two new sources of competitive
24、 advantage are emerging the quality of your data and the quality of your people,especially those with advanced AI skills.Turning first to data,long-term advantages can come from how a business fine-tunes its large language models.12 GENERATIVE AI|PGIMOne of the reasons that data is very critical to
25、artificial intelligence,and machine learning in general,is that the models themselves are useless without data.There are sometimes trillions of parameters that need to be estimated,and unless you have enough data to train the models,the output is not going to be useful at all.So data is really criti
26、cal and people and firms that have large amounts of proprietary data are going to be at a clear advantage in this space.”GEORGE PATTERSON Chief Investment Officer,PGIM Quantitative Solutions13 GENERATIVE AI|PGIMSometimes the data doesnt need to be proprietary just very hard to gather.If,for example,
27、you wanted to use an AI program to automatically identify building materials from photographic images,you would need to take photos of hundreds of thousands of structures and map those structures to the relevant building materials,according to Deloitte.Most of the work in building the AI program wou
28、ld go into gathering and organizing the data.Its not proprietary but the scale of the effort involved acts as a barrier to entry.Source:Deloitte,2023Turning to people,employees with AI skills who can help a business fine-tune data or integrate AI into its processes can also create a competitive adva
29、ntage.The U.S.saw nearly 800,000 AI-related job openings in 2022,according to the Stanford Institute for Human-Centered Artificial Intelligences 2023 AI Index Report.And in March 2023,LinkedIn reported that there were just over 100,000 jobs on its site that mentioned artificial intelligence in the j
30、ob description.Cost to fine-tune a large language model to complete a complex legal classification according to a model by Snorkel AI that equips organizations to build AI models.Such an application could save hours of a lawyers time,which can cost up to$500 per hour.Fine-tuning data for an existing
31、 open-source or paid model is inexpensive.$1,915-$7,418Source:Boston Consulting Group,March 202314 GENERATIVE AI|PGIMOf course,AI will not breach all traditional economic moats.For example,a company that exists in a business where the start-up costs are prohibitive for new entrants would have a form
32、idable competitive advantage.Similarly,a pharmaceutical company with a patent for a miracle drug would still benefit from the exclusive right to market the drug.Source:Lightcast,2022|Chart:2023 AI Index ReportAI Job Postings(%of All Job Postings)by Geographic Area,2014-222.05%,United States1.45%,Can
33、ada1.33%,Spain1.23%,Australia1.20%,Sweden1.16%,Switzerland1.14%,United Kingdom1.01%,Netherlands0.98%,Germany0.89%,Austria0.86%,Belgium0.84%,France0.72%,Italy0.45%,New Zealand00.50%1.00%1.50%2.00%202220212020201920182017201620152014AI Job Postings(%of All Job Postings)15 GENERATIVE AI|PGIMThe big com
34、panies who are already very,very powerful,who also have access to a lot of data,its likely that these big tech firms will only grow bigger,more powerful with fewer employees.They can do the same work with fewer employees because they use the same technology.So they will become leaner and smaller,but
35、 also a lot more powerful.And then on the other end,we have the open-source approach.That might also be a company coming from left field.So its very difficult to see where this will go.”MARK VAN RIJMENAM Strategic futuristCHAPTER 3 WHICH COUNTRIES ARE GAINING COMPETITIVE ADVANTAGE?17 GENERATIVE AI|P
36、GIMCHAPTER 3 WHICH COUNTRIES ARE GAINING COMPETITIVE ADVANTAGE?If investment in AI leads to competitive advantage,then the U.S.is far ahead of even China,its nearest rival in the race to become leader.In 2022,the$47.4 billion invested by the U.S.was roughly 3.5 times the amount invested by the next
37、highest country,China,and 11 times the amount invested by the U.K.Notably,all of the big generative AI releases have come from the U.S.Source:NetBase Quid,2022|Chart:2023 AI Index ReportPrivate Investment in AI by Geographic Area,2022Total Investment(in Billions of U.S.Dollars)5045403530252010501.13
38、0.610.721.041.351.521.771.832.353.103.243.244.3713.4147.3615FinlandJapanSwitzerlandSingaporeAustraliaArgentinaFranceCanadaGermanySouth KoreaIsraelUnited KingdomIndiaChinaUnited States18 GENERATIVE AI|PGIMTheres no question that the initial breakthroughs and the current leadership as of 2023 in gener
39、ative AI technology is really with the U.S.Why?In part,when you look at some of the other biggest players in the world that are trying to compete,for instance,for some of the Chinese launch language models,there is far less Internet data in Chinese language.So unless they want to build their launch
40、language models in English,theyre starting off with a linguistical disadvantage and a volume disadvantage in the amount of data available to train their models.“And then there is more likelihood of intrusion and heavy-handed regulation in a country like China than there would be in the U.S.But of co
41、urse,its contingent on regulation being able to strike a good balance between protecting the public but allowing the development of this very powerful new technology.”RAJ SHANTManaging Director,Jennison Associates19 GENERATIVE AI|PGIMHowever,there are areas where China pulls ahead.For instance,China
42、 dominates industrial robot installations,enabled by AI to collaborate with humans in factories.In 2021,China installed more industrial robots than the rest of the world combined.Whats more,its citizens are among those who feel most positively about AI products and services.A 2022 IPSOS survey found
43、 that 78%of Chinese respondents agreed with the statement that products and services using AI have more benefits than drawbacks.By contrast,only 35%of Americans agreed that products and services using AI have more benefits than drawbacks.Source:Ipsos,January 2022Positive Sentiment Toward Products an
44、d Services Using AI by CountrySource:Ipsos20 GENERATIVE AI|PGIM300 MILLIONEstimated number of jobs lost to AI over a 10-year periodSource:Goldman Sachs,April 2023The potential for AI to replace humans in the workforce inspired a UK-based think tank called Onward to advocate for a shift in the burden
45、 of taxation from labor to capital.Source:ONWARD,May 2023Developed countries are likely to adopt generative AI fastest because wages are highest and so they have most incentive,according to McKinsey.But this will only feed into productivity gains if displaced workers find new activities with at leas
46、t the same economic output.CHAPTER 4 POSSIBLE DRAGS TO DISRUPTIONCHAPTER 4 POSSIBLE DRAGS TO DISRUPTIONOf course,the huge excitement around generative AIs potential is as yet untested.There are many reasons why the future of generative AI may not prove as revolutionary as supposed.ChatGPT does not h
47、ave an IQ in the traditional sense.IQ is a measure of human intelligence,which is assessed through various tests that evaluate cognitive abilities such as reasoning,problem-solving and critical thinking.As an AI language model,ChatGPT doesnt possess human-like intelligence or consciousness.Its perfo
48、rmance is primarily based on pattern recognition and statistical analysis of text data from a wide range of sources.While ChatGPT can generate responses that may appear intelligent,it does not have a personal IQ score as it lacks subjective experience and self-awareness.”CHATGPTChat Generative Pre-T
49、rained TransformerWhat is your IQ?Most important is the technologys limitations.Ask ChatGPT what its IQ is and it answers the following:24 GENERATIVE AI|PGIMTurning to specific problems,its fair to say that generative AI has an intellectual property problem.Theres a flurry of lawsuits accusing gener
50、ative AI companies of breaching copyright.Among them,three artists have sued Stability AI,Midjourney and DeviantArt in San Francisco for alleged unauthorized copying of their work to train their systems.Whats more,amid existential fears about machine super-intelligence and job losses,there is regula