UBS has focused on three logical arguments for investors to favor U.S. IA firms. This recommendation goes against the tide as tariffs increase and Chinese industrial profits plunge to record lows. Our response— U.S. companies are increasing their research and development (R&D) spending at record pace. This change has them better poised to find the breakthroughs that might shape the next great technological age.
After peaking at the start of 2023, profits for China’s industrial firms have sharply reversed. They’ve gone down for the last three consecutive years, showing a scary downward spiral. Recent data indicates that China’s industrial profits fell by 0.3% in the first two months of 2025 compared to the previous year. The import decrease emphasizes an ongoing, ominous narrative within the Chinese official industrial sector. This deficit should ring alarm bells about the long-term viability of its companies.
U.S. AI companies are pouring billions into R&D. UBS argues that this investment is essential to remain competitive in the tech industry. The U.S. capex intensity in AI firms’ capital expenditure (capex) share reaches 20% in 2025, greatly exceeding China’s 11.7%. This inequity runs counter to the U.S. pledge to internationalize leadership in technology. It could result in a greater near-term increase in depreciation-related costs, but the intent is unambiguous.
“The higher capex intensity in the US, defined as capex spending divided by revenues, stands at 20% in 2025 compared to China’s 11.7%. This disparity highlights the US’s commitment to maintaining a technological edge, even though it may lead to higher depreciation-related expenses in the short term.” – Mark Haefele
For beginners, U.S. President Donald Trump has slapped huge new tariffs. As a result, this action has introduced a significant new layer of uncertainty to the investment climate. The new 20% tariff on Chinese goods has raised average tariff rates to their highest point in decades. Since Trump’s announcement, these rates have more than tripled, now surpassing 8%. First, Trump declared a new 25% tariff on imports of all vehicles not produced in the U.S. This tariff is scheduled to enter into force on April 2.
In response to this announcement, shares of major Japanese automakers Toyota and Honda dropped 3.69% and 2.91%, respectively. On top of that, shares of Chinese automakers Nio and Xpeng plummeted 3.94% and 1.97% respectively. These increasing tariffs only add to the uncertainty for businesses that depend on cross-border trade, especially in the fragile automotive supply chain.
Michael McLean, an economist at Barclays, commented on the wider ramifications of these tariff hikes.
“We think the direction of travel is clear: average tariff rates are increasing, likely to levels not seen since before World War II.” – Michael McLean
Chinese market are proving to be daunting. AI investors continue to be somewhat skittish at the prospect of competing against cheap Chinese developers. Mark Haefele commented on this sentiment, highlighting concerns that these firms could potentially disrupt U.S. competitors with their lower sunk investment costs.
“A lingering sense of nervousness remains among AI investors, primarily centered on the concern that Chinese AI developers and their low-cost models threaten to usurp US competitors with higher sunk investment costs.” – Mark Haefele
This puts U.S. firms at a distinct advantage due to their strong R&D investments and high capex intensity. They remain under intense pressure from foreign competition. Here, Japanese Prime Minister Shigeru Ishiba was influential in raising concern over the uniform application of tariffs. This is especially critical considering Japan’s massive investments in the U.S.
“Japan is a country that is making the largest amount of investment to the United States, so we wonder if it makes sense for (Washington) to apply uniform tariffs to all countries.” – Shigeru Ishiba
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