Aktualisiert: März 14
Are we at the cusp of a gigantic transfer of money between industries? Will there be a catastrophic failure of whole industrial sectors and explosive growth of new sectors?
A small warning: I will be wrong with many of my statements. Please make your own research and decisions. This will be much more educational than to follow me into every cul de sac of my thinking 😉. But, if you find evidence that my reasoning is wrong, please share with me! 😊
I will present some exponential drivers of change, describe the S-curve of industrial revolutions, discuss industries caught in the ‘Valley of Death’ and as a conclusion give some hints how to invest safely and profitable during the next years.
Looking at the global industrial landscape I cluster Investment into 5 exponentially growing platforms. The order of these platforms in the list below is intentional - I think the scaling pressure of this platforms will impact the economy in a staggered way.
In this article I will investigate these economic drivers and propose some assumptions regarding timing of investment, because the platforms are not fully synchronized regarding the start of their fast growth phase. During this process whole industries will go bankrupt or at least be diminished to a minor role.
Drivers of economic transformation:
1. Energy production, storage, usage & ClimateChange
2. Artificial Intelligence
4. FinTech & BlockChain
5. Genome analysis and editing
Three of the 5 exponential drivers will disrupt industries.
Sustainable energy production, storage and usage will disrupt fossil fuel-based industries, transport industries like railway, utilities like current electricity providers.
FinTech companies are disrupting and will disrupt banking as we know it
Our capability to change the human genome will disrupt the pharma and health care industry.
Two of the five drivers are enablers, capabilities. Artificial intelligence and robotics will impact nearly all industries. The theme will be: “Use it or go out of business”.
The S-Curve of industrial revolutions
Last time such a synchronicity between several significant economic drivers was observed around 1900. Electricity as a medium to transport and use energy was on the rise, the internal combustion engine transformed transport, and communication around the globe was transformed by the telephone network. Typical for such a phase is that the effectivity of investment and operating expenses and throughput measured in 'things' produced for significant industries sky-rocket. Share price is a completely different story and mostly misleading especially at the start of such a cycle. Companies contributing to this cycle are identified by fast and exponential growing throughput.
Such a cycle may last 30 years from initial slow growth to the ‘Fast Growth’ stage and later maturity and subsequent replacement by another wave of disruption.
You may say: This story I have heard in 1999 and then the dot com bubble burst. Big promises, no viable products!
But there are significant differences regarding the current situation. Looking at such cycles in detail you will find indications if the phase of slow growth is already in progress or if a more stable phase between two such disruptive events will last some (or many) years longer.
The question is: Are we chasing dreams or are the 'new' companies producing real products?
Artificial intelligence had economic false starts since the 1950ies. Currently AI is incorporated in many tools we are using daily. In word processors, in internet searches, in logistics, in cars, in bio chemistry, in games, … Yes, this is ‘weak’ AI, not general-purpose AI, but in many small areas AI starts to deliver better results than average humans. This was not the case 20 years ago.
The human genome was finally declared as deciphered in 2003. Huge hype, no products. Now, nearly 20 years later, CRISPR allows to edit genes at our command. First clinical trials are in progress. Several genetically caused illnesses were cured by changing the genome of the patients. It cost 8 billion dollars to decipher our genome. Today, the company InVitae offers a personal genome scan for 250$. Three years ago only approximately one thousand human genomes where scanned. In 2020 alone about two and a half million. These are small numbers, but exponential growth of real delivery has started.
Twenty years ago only software and internet usage drove change. We waited for a productivity breakthrough but it did not come. At that time communication using computers was the domain of an (large) IT literate minority. This all changed with the smartphone. Now my family has regular video chats with grandma (85).
This time capabilities like software development & artificial intelligence, robotics, and genome related tools drive separately and together nearly all industrial sectors in synchronicity.
This looks like an inflection point. The exponential curve turns upwards. We are currently at the launch point of a golden age, but at the same time we stand before a precipice, a black hole, for many big and currently dominating companies.
The Valley of Death
Currently industries dependent on fossil fuels and other mature industries make up a significant part of the world’s share indexes and therefore of invested capital. This capital will shift within the next ten years to companies which developed their exponential capabilities early on.
Only a few of the dominating car and fossil fuel driven companies will survive. Most of these currently big companies will merge and/or go out of business. An excellent report from RethinkX on the miscalculation used for conventional energy generation using LCOE = Levalized Cost Of Electricity. This miscalculation has lead and is leading to gigantic wrong investments, which may have to be paid for by consumers or tax payers. Several trillion $ are at stake.
Conventional forcasts are wrong. Starting being wrong decades ago.
Such forcasts start at the last data point and extrapolate wishful thinking of an industry into the future. Being wrong again coming next year.
Look at usage of coal. Coal follows the negative S-Curve of a dying industry.
But coal industry, forcasters and many politicians don't see the writing on the wall. (Source: RethinkX )
On the other hand. Energy production from solar. The forcasters think in linear trends, which are wrong every year.
Energyproduction from solar is growing exponetially following the S-Curve of disrupting industries and is already far cheaper than coal, oil, gas in more and more countries on earth. (Source: RethinkX )
One driver vor green energy is fast decreasing battery cost. Batteries allow South Australia to rely completely on renewable energy without using peaker plants (usually expensive gas powered plats to deliver peak energy, when needed. Batteries deliver needed energy in milliseconds. No black-out anymore in South Australia. Battery cost and energy density of batteries approach the level to economically power aircrafts. Battery costs will be not much above 2 % of 2010 prices in 2030. (Source: RethinkX )
This creates a virtuous circle for the new industry and a deadly vicious circle for the old technology.
Each circle inhances the dynamic of the other.
(Source: RethinkX )
How long did it take flat screen displays to take the market of TV-sets and computer monitors? Imagine what will have happened to ICE (Internal Combustion Engine) cars in 2030. But most big car makers plan to produce more than 50% ICE vehicles at that time. (Source: RethinkX )
What does this mean for investors?
During the last decades small investors looked for safety after experiencing the dotcom bubble of 2000 and the financial crisis thereafter. Safety was found in index funds, which just invested along major indexes like S&P, DowJones, DAX, FTSE, …
The strategy of passive investing makes sense when market parameters are rather stable. Index funds need little competence from fund managers. You just hold the shares which are in the fund and buy and sell to have the same composition as the index. Another plus is, that commissions for index fund management are much lower and consequently more of the profit goes to the clients.
These index funds brought rather stable income of around 8%. These returns look fine until a major part of the companies traded on stock exchanges are valued at the wrong price. This is currently the case. They are valued on past earnings not earnings in five years, when earnings of many currently dominant companies will be zero.
When you look at television in US, the TV providers have dwindling subscription numbers but rather stable income from advertisements. Streaming content is growing rapidly and allows better targeting of customers. That means that advertisement money will rapidly switch from classical TV to streaming (Netflix, YouTube, Disney+, …) during the next few years.
This looks very much like the double take cartoon characters experience when chased over a cliff.
‘Wile E Coyote’ moment or double take.
Another double take is ripe in the financial sector. If you look at the Chinese financial market more and more financial transactions are not executed using banks but specialized FinTec companies which allow customers to hold their money in their cell phone.
This may lead to an economy where customers do not need a bank account, but get their salary, sell goods, transfer money and buy items via a purely digital account represented on their phone.
Surly there will be companies to provide the platforms. Some banks move into this space, but mostly regional. Big global providers are currently represented by PayPal and Square. All big ‘new economy’ companies like amazon, google, facebook, AliBaba have their strategy to capture a share of the market. Since customers value that their relatives and friends use the same platform, a strong network effect will eliminate small market participants, which are typically the current banks.
Currently the survivors of the dotcom bubble dominate the stock exchange.
But does Apple heal cancer? Where is the whole health industry, when a huge part of global economic output goes into health care? This is a trillion $ industry which will come into its prime because of AI and our new capabilities regarding the human genome.
Do you remember Exxon? Exxon used to be the most valued company on earth.
This trend does not look exponential.
And Sales go down too.
As of this writing TESLA has three times Exxon’s value. The fossil fuel companies would have to reinvent themselves to survive. They must write off trillions of stranded assets. Most coal and most oil which we have already found will remain buried under the earth, because we do not need it and because we must not use it. The paradigm changed. There is no scarcity of fossil fuels. We have too much, we burn too much and we do not need to burn it because there are other ways to feed, cool, and warm humanity.
The years 2022 to 2024 are currently called the ‘Valley of Death’ for many industries. This valley is created when customers realize that current products, for example ICE cars, are not satisfactory but new and cheaper products (attractive EVs) are not created in needed numbers.
In 2020 TESLA demonstrated that it can scale production faster than expected, despite a pandemic, and sell electric cars at the same price as similar ICE (Internal Combustion Engine) cars. A Tesla3 now costs as much as a BMW3, has a much lower cost of owner ship, better performance and wins market share every quarter. Price parity between EV and ICE was expected in the thirties but was achieved in 2020. From now on electric vehicles will be better and cheaper than their ICE competitors. The big automotive companies know this (mostly), but they struggle to find a strategy to bridge the valley of death. Their own EVs are too expensive to build and these companies currently only earn money with ICE vehicles. A deadly dilemma. Currently sellers see the used car market of ICE cars in collapse, buyers are waiting for an attractive EV at the right price and they know it will come soon.
EV producers struggle to fill the market’s need. They cannot. TESLA will grow to one million cars produced in 2021, doubling the 2020 numbers and probably grow to 2 Million cars produced in 2022. This is not enough. The number of EVs coming from car makers outside China and TESLA is minuscule. Companies like GM and VW are happy to sell 50000 EVs per year. Cars sold worldwide will fall by tens of millions in the next few years, because buyers wait for the EV producers to deliver. TESLA will sell every car produced, has no stranded assets, has money in the bank from healthy margins and knowhow for rapid expansion. It currently builds the biggest (car) factories in the world and doing it faster than anyone. The current biggest car factory, the VW Wolfsburg factory produces short of one million cars a year. The Berlin/Germany and Austin/Texas factories of TESLA are projected to produce each two million cars per year when fully built. It would need a heroic effort for one of the current market leaders to catch up to TESLA. VW’s CEO Herbert Diess tries, but has to fight extreme headwinds from owners and his own management team. Toyota is much worse off; its leadership does not even see the problem. Like most car companies, they are sleeping at the wheel in a car without self-driving capability. Waking up 2023 will be too late. Promising a TESLA killer now does not generate cash. Delivering one now would.
Crossing the Valley of Death
What shall I do as a small investor seeing the valley of death before me and not much knowledge about the future trends and currently mostly invisible future titans of industry?
During the last two years I followed ARK Invest’s Catherine Wood . She identified a gap between the current investment policies of major investment firms and the reality evolving before our eyes, that an industrial revolution not seen since a hundred years will move trillions from current dominant companies to future winners. She wanted to find the winners early. She founded ARK Invest in 2014. She has set up research teams with real professional experience in the relevant scientific fields.
Here I present a list of some of the funds she created:
This is a chart of the past trend for one of the funds, ARKK, as an example:
I am most interested in
ARKK (Disruptive innovation)
ARKG (Genomic revolution)
ARKQ (Autonomous Tech & Robotics).
I expect these funds to perform very good during the next 10 years, but specific companies within the fund’s portfolio will outperform the fund by a factor 5 or more. A plan from my perspective would be to invest part of available money in the fund and another part in the most promising two companies the fund is invested in based on ARK Invest’s research and my intuition.
This should help to bridge the valley of death and board the exponential train.
I wish you all the best for this journey Franz