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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
The closure of the Strait of Hormuz has thrown users of Middle Eastern oil for a loop. Relying on a single region for a critical commodity, as is more or less inevitable when it comes to fossil fuels, is a huge risk. But what if the commodity in question were not oil, but data?
This is a question governments have been wrestling with for some time. It gets an extra sense of urgency from the crisis unfolding in the Middle East. The popular answer is “sovereign AI” — the governmental goal of securing a domestic base of servers, data centres and the stuff that goes in them, including even the AI models themselves. For companies, this is potentially a large profit opportunity.
McKinsey reckons sovereign AI could account for $600bn of annual spending by 2030, sped by local regulation on data handling, and a general desire to be less dependent on the US. Of that sum, about half comes from infrastructure and “compute”. Big spenders such as Google and Microsoft tend to say that two-thirds of physical capital expenditure goes on chips, servers and networking, which suggests a prize of perhaps $400bn.
Unsurprisingly, AI chip supremo Nvidia stands to be a big beneficiary. Its revenue from sovereign customers was $30bn in its last fiscal year, or 14 per cent of the group total. As a thought experiment, if Nvidia captured a quarter of that potential physical sovereign spend, at its current 75 per cent gross margin, its earnings would increase by roughly half.
The growth of sovereign AI is particularly helpful for tech companies because it involves duplication. If Singapore doesn’t want to depend on data centres in North Virginia, it must build its own, at no small cost. Deglobalisation — which is in effect what this is, however rational — is expensive for individual countries, but a windfall for their suppliers.
Becoming a government’s go-to is also distinctly helpful. Palantir, a partner of Nvidia for its sovereign push, derives most of its revenue from government contracts, but that helps attract corporate clients too. If it’s safe enough for the Pentagon to use in its war on Iran, surely it’s solid enough for the average US widget maker too.
Expect AI companies to target the public purse more assiduously. The more sophisticated the technology gets, and the more elaborate and critical its tasks, the greater value governments will place on being more self-sufficient. And being indispensable to the sovereign is the next best thing to being a sovereign yourself.