The Transformative Power of Generative AI: Insights from RBC Capital Markets

October 15, 2024
Frédérique Carrier
Managing Director, Head of Investment Strategy
RBC Europe Limited

Artificial intelligence (AI), particularly its latest evolution known as generative artificial intelligence (GenAI), is poised to revolutionize the way we live, work, and interact. In a recent Global Insight Special Report titled “Generative AI: Enablers and Adopters,” we examined the burgeoning ecosystem surrounding GenAI. This article delves deeper into the specific impacts that AI and GenAI are already having across various industries, as well as their potential to spawn entirely new sectors.

Technology Businesses

Software

RBC Capital Markets posits that software and internet companies are at the cusp of a disruptive transformation, with GenAI presenting both enticing opportunities and heightened risks, particularly in cybersecurity.

Revenue Growth and Pricing Power

Software vendors that strategically leverage GenAI technology stand to experience accelerated revenue growth and improved margins over the next three to five years. A significant factor driving this potential is enhanced pricing power. Companies are now offering standalone GenAI products at an additional cost per user, and customers are increasingly willing to invest in solutions that promise a higher return on investment. For instance, Microsoft’s Copilot integrates GenAI into its suite of products, with tailored pricing plans for individuals and enterprises alike. In Q2 2024, GitHub Copilot, another Microsoft innovation, boasted 1.3 million individual subscribers and over 50,000 business subscribers.

Enhancing Developer Productivity

GenAI is set to transform the productivity landscape for software developers. A recent study by McKinsey & Company indicates that developers can complete coding tasks up to twice as quickly when utilizing GenAI tools. This acceleration is expected to lead to faster product launches, enhanced features, and ultimately, a higher return on investment. However, human oversight remains crucial for identifying bugs and errors in the code.

Automation of Basic Tasks

The automation of low-level tasks in customer service and data collection is another area where GenAI can optimize operations. By freeing up human resources from mundane tasks, companies can redirect their workforce towards strategic roles that significantly impact profitability and competitiveness.

Cybersecurity Considerations

While GenAI offers numerous benefits, it also amplifies the need for robust cybersecurity measures. The National Cybersecurity Center (NCC) warns that AI will likely escalate both the volume and impact of cyberattacks in the coming years. The accessibility of AI tools has lowered the barriers for novice cybercriminals, intensifying the global ransomware threat.

Internet Companies

In the realm of internet businesses, GenAI is expected to have a profound impact on digital marketing. The technology is set to revolutionize content creation across various channels, from text to video, while facilitating deeper analysis of technical issues. Personalized platforms powered by GenAI, augmented reality, and virtual reality are anticipated to create entirely new types of interactions and experiences.

For example, imagine a virtual personal shopper that uses augmented reality to show customers how clothing items would look on them in real time. Such platforms could analyze user behavior and preferences to curate a customized shopping experience, including tailored promotions based on past purchases.

Energy, Utilities, and Infrastructure

Growing Energy Demand

The demand for energy is projected to surge, driven by the proliferation of data centers essential for AI and GenAI services. GenAI requires significantly more computing power than traditional machine learning, necessitating vast data sets and advanced processing capabilities.

Natural Gas Power Generation

As data center operators prioritize reliable electricity supplies amidst a growing focus on sustainability, incremental gas generation will be crucial. Unlike renewable sources, gas power plants can quickly respond to supply shortages and fluctuating demand.

Infrastructure Expansion

To support increased gas generation, expansions in natural gas infrastructure—such as pipelines and storage facilities—are essential. The U.S. has seen a lag in infrastructure growth relative to rising demand, leading to unsustainable pipeline utilization rates. Companies like Kinder Morgan, which transports a significant portion of the U.S. natural gas, are positioned to benefit from these infrastructure needs.

Industrials

Electrical Solutions: Liquid Cooling

As data centers grow in size and server density, the need for effective cooling solutions becomes paramount. Liquid cooling is emerging as a viable alternative to traditional air cooling systems, particularly as power demands increase. The shift towards liquid cooling is being driven by both performance needs and environmental sustainability considerations.

Aerospace and Defense

AI is being harnessed to enhance capabilities in defense, including the development of drone swarms and advanced target recognition systems. The U.S. Air Force is exploring uncrewed systems to bolster air superiority, while AI is also being utilized in commercial aerospace for functions such as predictive maintenance and supply chain optimization.

Automotive Innovations

In the automotive sector, AI is set to play a critical role in both advanced driver-assistance systems and fully autonomous vehicles. Current applications include General Motors’ Cruise and Alphabet’s Waymo, with expectations for significant advancements in commercial trucking as early as 2025–2026.

Financials

Wealth Management

AI is becoming a central theme across all segments of the financial industry. In wealth management, GenAI can augment financial advisors’ expertise, enhance productivity, and improve client service. By streamlining communication and documentation processes, advisors can focus more on personalized interactions with clients.

Health Care

Enhancing Patient Outcomes

GenAI has the potential to significantly improve outcomes for patients and healthcare providers alike. From self-triage and patient intake to clinical decision support and ongoing patient engagement, AI can streamline processes and enhance the overall patient experience.

Consumer Products

Personalization and Supply Chain Optimization

In the consumer products sector, GenAI applications can enhance personalization and improve supply chain management. For instance, L’Oréal’s Beauty Genius app demonstrates how AI can tailor product recommendations to individual consumers, significantly increasing sales conversion rates. Similarly, Procter & Gamble has leveraged AI to optimize its supply chain, yielding substantial annual savings.

A Technological Tsunami?

The rise of AI technologies, particularly GenAI, is set to become a disruptive megatrend, transforming numerous industries. However, the full extent of these changes may take years to materialize. Challenges such as ensuring accurate responses and protecting user data could hinder adoption. Moreover, the high costs associated with GenAI may limit its application in entry-level positions.

Historically, investors have tended to overestimate the short-term benefits of emerging technologies while underestimating their long-term impacts. As GenAI continues to roll out across various sectors, it will be crucial for investors to stay informed about developments that could reshape the investment landscape.