Investors Focus on Tech Disruption Risks…

On my latest roadshow around Asia, the macro implications of new technologies were a key presentation theme and topic for debate as much as China’s leverage unwind, and indeed tech has been a sustained overweight and the subject of several notes over the past year, including the ‘Rise of the Machines’ looking at the next wave of automation published last April. On that topic, I suggest that every investor reads “The Second Machine Age” by Erik Brynjolfsson and Andrew McAfee of MIT, which I finished on my travels (and “The Zero Marginal Cost Society” by Jeremy Rifkin covers the same ground, albeit with a more utopian bias). They posit that advances in computer technology, robotics and artificial intelligence mean that an algorithm driven automation wave will erase many job functions over the next decade. It will also slash the profitability of many consumer facing sectors, as we’ve seen already from music to mobile operators, by crashing entry costs and margins. In Shibuya in Tokyo, I visited a café with 3D printing machines for hire for instant prototyping (mostly for Kawaii trinkets, from what I saw, but this technology is now going mainstream for niches like biomedical implants), an early sign of a very different future for mass manufacturing and the associated global supply chain. I met a hedge fund manager who is so paranoid about being eavesdropped that he uses the highly secure Telegram app for his instant messaging, and a proxy web server that hops around a dozen countries for everything else – I didn’t ask if he’s taking his fees in Bitcoins. Meantime, Alibaba bought a controlling stake in ChinaVision to launch a Netflix style content streaming business and a stake in a US messaging app to combat Tencent’s mobile threat ahead of its landmark US listing (which will likely ring the bell on the increasingly frothy wider social media/mobile web subsector near-term – note the selloff in equally heated US biotech).

The integration of neuroscience and software to give say a factory robot the intelligence to ‘learn by doing’ i.e. rewriting its own software code by simply repeating a task, would have profound implications. Indeed the topic of machine learning and its macro consequences are critical for investors to understand – one point I’ve made repeatedly is that the ‘cognitive threshold’ for a job in terms of its automation vulnerability is rising very rapidly now, and given the immutable IQ bell curve a substantial proportion of the population will simply become surplus to requirements. There are of course plenty of signs of this already, including high levels of graduate unemployment globally – about 3m Korean graduates are ‘economically inactive’ in an academically obsessed country, while US graduate underemployment is becoming entrenched. This looks quite different from the industrial revolution that began 150 years ago and which saw a huge migration in Europe and then the US from farms and country to factories and cities, driving a virtuous urbanisation/productivity cycle as repeated in recent decades in China. A trend I’ve highlighted is the growing concentration of household and corporate wealth and cash flows, the latter focused on the tech sector which is leading the overall economy toward a growing ‘dematerialization’ i.e. we need less capital and labour input for every increment of GDP and corporate revenue (and China will belatedly make that same shift, as its own tech giants begin devouring SOE margins). Think for instance of the implications of all those taxi booking apps proliferating from the US to China – by matching supply and demand more precisely and adding private limo supply (and in Uber’s case removing fixed pricing), they reduce redundancy and the overall fleet of vehicles required to serve any given population – Airbnb is doing the same to hotels by adding private spare bedrooms as a competitor.

Sophisticated data analysis reduces capacity slack in the system (as airlines have known for many years) but huge chunks of the global economy are now becoming subject to similar optimising ‘yield management’ software. If Amazon can generate a million USD of incremental turnover with a tenth of the labour and even less real estate overhead of a WalMart, the only rational response of the latter (and Tesco etc.) is to restructure their business model as margins get compressed. Having a large legacy workforce and real estate assets to restructure and downsize as new online entrants cherry pick your client base is a looming threat – there will however be a first-mover advantage for those adapting business models early.