AI will cut labour costs for 5 sectors in Asia. For some, it’s already happening
Such declines do not always translate to headcount cuts, however, say Morningstar analysts
[SINGAPORE] The rapid adoption of artificial intelligence (AI) is expected to lower long-term operating costs across multiple sectors in Asia, according to Morningstar analysts.
“This highlights undervalued companies that could be re-rated as earnings improve due to viable cost-cutting measures,” said Morningstar senior associate equity analyst Kathy Chan and Asia equity market strategist Kai Wang.
Wang gave the example of Trip.com in his response to queries from The Business Times on Thursday (Sep 4). The Singapore-headquartered online travel agency saw “better than expected” margin improvement of about 200 basis points, due to marketing efficiency with improved targeting by AI. His target prices on the counter – which is listed on both the Nasdaq and Hong Kong Stock Exchange – are US$70 and HK$560, respectively.
But such wins for companies leveraging AI come with downsides, such as employee concerns over job security and layoff risks. Analysts from Morningstar who BT spoke to on Friday said that the degree of these threats to existing workers will vary due to the specific nature of each industry, however.
Here are five sectors in Asia that will see labour costs fall and operating leverage rise with AI:
1. Consumer
Consumer companies in China have been cutting labour and marketing costs due to “soft top-line results and an uncertain demand outlook”, noted Chan and Wang.
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As examples, they cited food and beverage companies China Resources Beer and Inner Mongolia Yili, for which their target prices were HK$38.50 and 34 yuan, respectively.
They also said that Japanese beverage holding company Kirin’s pharmaceutical business could utilise AI to help reduce research and development costs. They set a target price of 2,500 yen on the counter and a “low” uncertainty rating.
The analysts explained that the current iteration of cost reduction is primarily characterised by layoffs and budget slashing, which has led to some improvement in fundamentals, despite demand softness, due to higher margins.
According to Morningstar consumer analyst Jacky Tsang, these companies are already taking the next step to reduce costs by utilising generative AI (GenAI), which will lower marketing costs while maximising production capabilities.
Chan and Wang added: “GenAI is analysing demand data and suggesting how best to spend company marketing budgets. Not only will AI drive marketing costs lower, but we expect it to also increase customer engagement across different platforms using the same budget.”
The Morningstar analysts also believe that in addition to cutting sales-and-marketing expenses, companies in the consumer sector can utilise AI in their production facilities to maximise efficiency and reduce the cost of goods.
Therefore, to the analysts, both consumer defensive (beverage production, discount stores) and consumer cyclical (Internet retail, travel agencies) sectors remain undervalued, with profitability improvement to be above expectations.
2. Communication services and technology
Amid the wait for higher operating leverage expected for consumer companies, labour cost-cutting measures are taking effect in the communications and tech sectors.
For example, human resources company Kanzhun from China saw a 75 per cent increase in earnings despite only an 8 per cent increase in revenue. “They have cited AI for much of the reduced costs, as they have cut 17 per cent of labour since the beginning of this year,” Wang told BT.
Chinese Internet company Baidu is another name that has reduced the cost of advertising for its clients by utilising AI, allowing it to target potential customers more efficiently, wrote Chan and Wang.
GenAI is also changing the way content is produced for multimedia companies such as iQiyi and NetEase.
“Content costs tend to be one of the highest costs of goods for these companies, but we should expect to see them decline in the future due to AI-generated videos or acting, which could significantly raise gross margins,” wrote the Morningstar analysts.
They believe there is also potential for operating leverage improvement for companies with content-streaming operations. “In this sector, we like Tencent, Baidu and NetEase.”
Their target prices on Tencent and NetEase are HK$800 and HK$264, respectively, with “high” uncertainty ratings on both counters.
3. Semiconductor
Morningstar semiconductor analyst Phelix Lee noted that GenAI is augmenting chip production by automating chip design, verification and validation, as well as accelerating the development of next-generation nodes in the semiconductor industry in Asia.
Chan and Wang added: “We believe that the larger companies, which tend to be at the forefront of AI, will see the largest benefit to their operating expenses.”
Some of these names include Taiwan Semiconductor Manufacturing Company (TSMC), SK Hynix, Luxshare and Murata. The target price for TSMC by Morningstar is US$306, with a “medium” uncertainty rating, while Lee also estimates TSMC to record approximately US$50 billion in net profit for 2025.
4. Financial services
The financial services sector should also see labour costs reduced, amid call centres being replaced with chatbots, wrote Chan and Wang.
“We are already seeing change being implemented in some fintech companies as AI is used to determine loan approval,” they explained. “Not only will banks improve their operating leverage, but so will insurance companies.”
They believe the larger banks, such as HSBC, MUFG and DBS, will be the first to lower their costs by implementing AI.
Morningstar’s senior equity analyst Michael Makdad told BT that AI-related process efficiencies will mean a need for fewer workers, though he clarifies that he does not have any specific numbers.
“I don’t think absolute personnel expenses will decline for any company, given inflation and wage increases, but the cost/revenue ratios have room to go down,” he said.
5. Healthcare
The healthcare sector will see AI assisting in data processing – in areas ranging from clinical trials to drug development.
Highlighted companies such as China analytics-driven healthcare solutions provider Yidu Technology and online physician platform Medlive are already using big data as their core competency, to engage in patient drug targeting or clinical trials.
“Some problems within the healthcare industry right now include the inability to advance drug development, as the amount of data to handle becomes increasingly cumbersome,” the analysts explained.
“We believe companies to benefit from AI include businesses that conduct genomic sequencing, clinical trials and patient targeting.”
Impact on existing manpower
The Morningstar analysts explained that while business’ use of AI often leads to requiring fewer human workers, direct cuts in manpower are not always the core consequence.
“For the semiconductor and technology sector, AI benefits can be hard to quantify as tech companies can combine cost-saving via layoffs and hiring to invest in new areas,” Lee said.
He did note that while AI can lead to fewer workers required to optimise existing processes, the “savings” will be reflected in the less time needed to roll out the next generation of leading-edge processes.
Lorraine Tan, director of equity research (Asia) at Morningstar, believes that AI is designed more to attain increased efficiency and productivity, which results in more companies choosing not to hire replacements upon attrition, instead of actively cutting their headcount.
“However, this also means that companies are likely not hiring as many entry-level staff as they used to,” she added.
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