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Rob James

Globe WorldWatch

Beware! Disruption ahead

WorldWatch
24 March 2017

By

Emerging Markets Portfolio Manager

Following the tumultuous geopolitical events of last year, it is reasonable to see 2017 as the beginning of a new stage in the post-crisis world economy, characterised by rising US rates, protectionism and increasing political tension. Likewise, 2017 could mark a new critical phase in disruptive innovation, which continues to transform industries around the world. In this edition of WorldWatch, we assess the potential impact of several particularly powerful disruptive forces.    

3D printing is among the least discussed disruptive forces, yet it is undoubtedly one of the most important. In just a few short years, 3D printing has transformed from a niche hobby into a vast industry producing a wide range of products. Materials that can be printed include metals, carbon fibre, nano-tubes, stem cells, textiles, ceramics and food. While 3D printing will clearly have a growing number of applications in fields such as agriculture and biology, its biggest impact is likely to be on the global manufacturing industry. Indeed, recent technological developments suggest that 3D printing speeds could eventually be 100 or even 1000 times faster than the current limit, enabling products such as clothing, shoes, home appliances, phones and medical devices to be manufactured in vast quantities.

Over the next decade, 3D printing will radically alter who makes what and where. Rather than subcontracting the production of components to Southeast Asia, transporting those components to China for assembly, and then shipping them to consumers, many manufacturers will produce locally and switch to just-in-time production schedules. This will likely exacerbate the ongoing slowdown in global trade, particularly if President Trump continues to pursue his protectionist agenda. As manufacturing returns to developed countries, those economies that rely heavily on exports will be forced to accelerate their transition towards consumption-driven growth. We are therefore starting to consider which companies will benefit from 3D printing and, equally importantly, which are poorly positioned.

3D printing is just one example of a much bigger disruptive force – automation – which will likely continue to displace millions of jobs around the world. In a widely cited study, 47% of US workers were found to have jobs at high risk of potential automation. Similar studies put the equivalent figure at 49% of the workforce in Japan and 35% in the UK (where more people work in creative fields less susceptible to automation). In particular, most workers in transport and logistics (such as taxi and delivery drivers) and office support (including receptionists and security guards) are likely to be substituted by computer capital, while many workers in sales and services (such as cashiers, counter and rental clerks, telemarketers and accountants) also face a high risk of computerisation. Moreover, automation is increasingly blind to the colour of the collar as most jobs can be broken down into a series of routine tasks, more and more of which can be done by machines. Given growing concerns about automation displacing jobs, we are likely to see increasing interest in schemes such as the universal wage, which aims to provide citizens with an income floor. It is interesting to note that Finland has become the first country in Europe to pay its unemployed citizens a basic monthly income, in a radical pilot project aimed at reducing poverty and joblessness. Two thousand people will receive €560 euros every month for two years, without having to report whether they are seeking employment or how they are spending the money.

Just as 3D printing will fundamentally disrupt global manufacturing as we know it, the energy and transportation industries will be completely transformed by exponentially improving technologies including solar power, electric vehicles, and self-driving cars.

solar power

Source: Wikimedia

Both the solar power and electric vehicle industries have been doubling in size every two years and this is likely to continue due to improving technology cost curves and product innovation. Solar costs have been decreasing exponentially from almost $100/W in the 1970s to $1-$3/W today. On a cost/unit basis, solar has improved over 5,000 times versus oil and over 2,300 times against natural gas. In certain markets such as California and India, solar is now fully competitive with conventional fossil fuel energy generation.

Similarly, the cost of battery packs for electric vehicles has fallen from about $1,000/kWh in 2010 to around $227/kWh in 2016. As the cost of producing electric vehicles continues to fall, consumer demand will inevitably rise. In fact, 2017 will truly mark the arrival of mass market electric cars, with the Tesla Model 3 due to hit the roads this year at a starting price of £24,400 before any government incentives.

Meanwhile, despite Trump’s pro-fossil fuel policies in the US, renewables will continue to represent by far the largest share of the world’s new energy generation capacity. Recent innovations in this area include artificial photosynthesis to produce hydrocarbons that power cars, and high-altitude wind power that uses kites and hot-air balloons to act as aerial wind turbines. Moreover, far more research into renewable energy will be necessary if world leaders are to achieve the goals of the recently-ratified Paris Agreement on climate change. This aims to keep the global average temperature from rising more than 2° C above pre-industrial levels. In our view, picking the long term winners of such clean disruption will be difficult – the key will be avoiding the losers. These are likely to include traditional power generation businesses, oil companies, and auto manufacturers that are ignoring electric vehicles.

Elsewhere, we anticipate disruption as Telecoms and Internet companies start to form closer alliances. A pertinent example of this is leading Russian Telco MegaFon recently buying a controlling stake in Mail.Ru, which owns VK (Russia’s version of Facebook) and Odnoklassniki (Russia’s take on Friends Reunited). As the top two social networking sites in Russia, VK and Odnoklassniki should provide powerful new marketing synergies for MegaFon, truly differentiating the company in a fiercely competitive operating environment. Indeed, one of the biggest problems for Russian Telcos is churn. In a country of just over 140 million people, about 120 million sim cards are sold each year. This is very costly in terms of advertising to persuade people to switch, marketing to retain customers, the cost of producing sims, and the cost of maintaining an extensive branch network to sell sims across Russia. VK and Odnoklassniki should provide MegaFon with detailed personal information on potential customers, including their current mobile service provider. MegaFon can then use these sites to accurately target customers of rival providers by contacting them directly online, offering new sims without the need for such a sprawling branch network. While the benefits of integrating social media and traditional mobile telephony are clear, the impact of this as a disruptive force may be limited by the dominance of Facebook in many markets.

The final disruptive force worth discussing is arguably the biggest structural trend we face globally. It is of course the rapidly ageing population, which will continue to create enormous opportunities and challenges for companies around the world. We are on the cusp of a staggering rise in the number of old people, and they will live longer than ever before. Over the next 20 years the global population of those aged 65 or more will almost double, from 600m to 1.1 billion. This will have important implications for aggregate demand, world savings, productivity and ultimately economic growth. As these people begin to drop out of the workforce and start to consume the capital they have built up, the global savings rate will almost certainly fall, weighing on net investment around the world. The problem will be compounded by the fact that capital stock in all the major western economies is already at a record age. This means that more maintenance expenditure will be necessary just to sustain the status quo, draining capital from other more productive uses. With productivity growth heavily dependent on both labour force expansion and rising capital investment, it will likely continue to slow, limiting global GDP growth.

At the same time, the share of wealth transferred to the next generation via inheritance will continue to rise, entrenching the division between winners and losers. Thus, an ageing economy will be a slower and more unequal one – unless policy starts changing. One obvious response is to impose higher inheritance taxes to encourage old people to spend their cash. Another is to make pensions more progressive. However, governments are unlikely to make these changes anytime soon as the swelling ranks of older voters, and their disproportionate propensity to vote, have left politicians keen to pander to them. We expect a rapidly ageing population to remain an important consideration in portfolio construction, particularly the implications for consumption, savings, investment, economic growth and inequality.


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