Watch out for the disruptors - Part I

Investors can’t ignore the impact of technology in their investment checklist


Are we on the cusp of one of the biggest and most disruptive technology transitions of all time? A plethora of emerging technologies that have the potential to radically transform our lives, businesses and global economies seem to be converging at the same time. The pervasiveness of these technologies and the accelerated pace of change being brought about by them make the chances of future disruption of several industries a certainty. Not surprising, then, that John Chambers, executive chairman, Cisco, has warned that as many as 40% of enterprise companies across India, Europe and the US would cease to exist in the next four to 10 years. 

Sample this disruptive prognosis:

  • Driven by sharp and continuous declines in cost curves, solar, energy storage and electric vehicles (EVs) together are all set to disrupt the over $10 trillion oil and gas, power generations and transportation industries. This inevitable change could also radically alter the geopolitcial future of nations that are supported by fossil fuels.
  • Within the next decade, EVs will reach a tipping point in terms of costs versus the traditional internal combustion engine, triggering mass adoption of the former amd making obsolete the latter. Global luxury car manufacturers without an EV strategy could be the first to be impacted. This technological shift will also have profound implications for the moats of auto parts manufacturers of fuel injectors, diesel auto engines and the like.
  • With sharing of self-driving vehicles set to become a commercial reality within the next 15 decades, this service could displace personal ownership of cars, potentially shrinking new car demand by as much as 80%.
  • Digitisation of enterprise and consumers, driven by faster and cheaper computing power and ubiquitous connectedness, is weakening traditional barriers to entry in several businesses such as retail, media and entertainment, banking and hospitality. For instance, Netflix, a $50-billion market cap company is reinventing television and within a short span has reached 540 million households worldwide.
  • A phrase reflective of the expanding capabilities of smart, connected products, IoT promises to stretch the industry boundaries of every manufactured product by expanding their functionality. It is estimated that 50 billion devices will be connected by 2020 and 100 billion by 2030 (basically, everything and everyone on the planet will be connected). That marriage of machine data and advanced analytics could sharpen functionality and lead to large savings.
  • It is estimated that automation of knowledge work will have a $5 trillion- $7 trillion impact on white-collar jobs, while advances in 3D printing which creates just-in-time inventory, will threaten the jobs of millions of manufacturing workers across the globe.

It is increasingly imperative, therefore, for investors to be armed with an understanding of the principles of technology adoption and business disruption. First, it is important to recognise that technology adoption is rarely linear; in fact, new technologies usually hit an exponential rate of growth (also known as the technology s-curve) as they move from a phase of early adoption to mass adoption. Electricity, automobiles, radios, refrigerators, colour TVs, mobile phones and the internet have all followed this s-curve pattern of adoption. More recently, so have Uber, Facebook, Airbnb or Netflix, who, thanks to the network effect in technology, also dominate their respective categories.

Secondly, disruptive technology innovations (a term popularised by Clayton Christensen of Harvard Business School in his book The Innovator’s Dilemma) are usually commercialised by newer entrants — armed as they are with new business models — rather than existing players. WhatsApp, for instance, was created by a start-up team of 50 people instead of being harnessed in a large telecom company. The innovator’s dilemma then refers to the difficult choice an established company faces when it has to choose between serving and protecting its existing entrenched and profitable market versus trying to capture an emerging, less profitable, nascent market by employing a new business model. Usually, the incumbent, even when well run and well managed, fails to successfully manage this transition (a popular example is Kodak, which was unable to succeed in the digital photography world). 

Across technologies and markets, this Silicon Valley culture of innovation and risk-taking (on the scale of customers/revenue first, profits later) is being encouraged by investors experiencing success with proven models of massive wealth creation at an unprecedented velocity. A global environment of low cost of capital is also helping. Fortunately, investors do not have to become technology forecasters to stay ahead. Historically, markets do not de-rate valuations of a company until the disruption to its prospects becomes obvious (usually around the technology hitting the s-curve). However, as investors reflect on their investment checklists while assessing individual businesses, they will need to incorporate the potential impact of these emerging technologies on their investments. 

For part 2, click here