Gen AI pushes global firms to pour money into hardware upgrades

Bengaluru: The world's largest companies are shifting their technology spending priorities, favouring hardware upgrades over IT services. This pivot is primarily driven by the rising demand for systems capable of handling generative artificial intelligence (Gen AI), industry executives and analysts said.

Since the launch of ChatGPT in November 2022, Gen AI has gained global attention for its content creation capabilities. This has ignited a race among homegrown software service exporters and their clients to integrate the technology into their offerings.

According to research and advisory firm Gartner, spending on data centre systems and devices is expected to increase 24% and 5.4% yearly in 2024 to $293 billion and $730 billion, respectively. This would be the steepest growth in expenditure towards data centre systems since 2018.

These estimates are higher than in 2019, when overall spending for data centre systems and devices was $210 billion and $711.5 billion, respectively.

To be sure, Gartner issues IT spends by clients on a quarterly basis and these numbers are subject to change every quarter.

At least two senior executives of prominent global companies emphasized the need for clients to invest in hardware upgrades to accommodate Gen AI workloads.

Sridhar Mantha, president and CEO of the Generative AI Business Services unit at Bengaluru-based Happiest Minds Technologies Ltd, told Mint on 14 June post its June quarter earnings that companies currently use outdated, generic servers that could handle standard AI tasks. However, these systems require an upgrade to servers that could handle Gen AI-related tasks.

“Now Gen AI is certainly, across both the private data centres as well as for the hyperscalers…I keep using Nvidia as an exampleof the H100servers to replace the existing servers. AI load at least we can run on a commodity server, but Gen AI you just cannot run on the commodity servers," said Mantha.

Also Read: Who’s making money from GenAI? Big Tech, consultants or data centres?

Another senior executive at a top IT services company echoed similar sentiments. “Customers do not have money to implement Gen AI. Many of them need to spend money on their hardware before they look into Gen AI as hardware upgrades need to come first," the executive said on condition of anonymity. “We are supporting customers who are still using systems that can only support older versions of Windows such as Windows 95 and Windows XP."

 

“The compute power needs of Gen AI are being felt across the data centre, and spending in that segment reflects this ravenous demand," said John-David Lovelock, VP Analyst at Gartner in a release dated 17 July.

However, the shift in client spending priorities raises questions about the recovery of India’s $254 billion software services industry, which witnessed its slowest growth last year due to macroeconomic uncertainties and clients' spending cutbacks.

Notably, two of the country’s top five IT services companies, including Wipro Ltd and Tech Mahindra Ltd, posted a revenue decline in the year ended March 2024.

The quarter ended June was a mixed bag for India’s six largest IT outsourcing companies.

Tata Consultancy Services Ltd, Infosys Ltd, Tech Mahindra, and LTIMindtree Ltd reported muted sequential revenue growth of 1.9-3.3%. However, peers HCL Technologies Ltd and Wipro Ltd reported sequential revenue declines of 1.9% and 1.1%, respectively.

Just a blip?

Analysts are divided on whether this re-prioritization of tech spending is a temporary or structural shift.

“AI is causing budgets in software to shift to hardware. Unlike the internet which had many players in the space, the technology was not proprietary," said Ray Wang, principal analyst and founder of Constellation Research. “AI has only a few players because it is so expensive and the technology is closed and not open-sourced."

This was a structural change, such as cloud computing’s impact on IT services, when most companies shifted their workload to digital public servers, mainly during the covid pandemic, Wang added.

According to Akshay Khanna, managing partner of Avasant, a Los Angeles-based IT advisory firm, companies will focus their tech spending more on hardware and data centres, but not for long. “Over the last few years, data centre spending had been consistently on decline, as enterprises aggressively moved their workloads to the cloud," he said.

“However, as right now everyone is in the phase of building Gen AI applications, there is a huge need for compute and storage to organise data and their models," said Khanna, adding that overall long-term spend on software and applications would increase as clients are currently spending on hardware to put foundations in place.

In contrast to the pandemic, tech spending may slow if the US economy weakens, leading clients to cut back on expenditures.

“The future is based on IT service providers which can help clients set up and run effective India capability centers," said Phil Fersht, CEO of US-based HFS Research, an outsourcing-research firm. “We are just seeing a slowdown in the need to increase services spend for traditional work."

Meanwhile, Accenture Plc, the world’s largest IT services company, reported $2 billion in Gen AI project contracts as of May 2024. However, homegrown IT services companies have not disclosed the financial impact of their Gen AI projects, despite claiming to have integrated the technology across their offerings.

Also Read: It’s swallowed billions of dollars, but has AI lived up to the hype?