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So far, in this research series, we have explored the structural force of disruptive innovation, and outlined how, in our view, this is accelerating. One of the many implications of this hastening process, is the immense impact it is having on existing business models. As we previously highlighted, the average tenure of a large-cap company has never been shorter than it is today.

Disruption Within Industries

Thomas Fitzgerald Thomas Fitzgerald Fund Manager
Opinion

Disruption Within Industries

Thomas Fitzgerald

Thomas Fitzgerald
Fund Manager

So far, in this research series, we have explored the structural force of disruptive innovation, and outlined how, in our view, this is accelerating. One of the many implications of this hastening process, is the immense impact it is having on existing business models. As we previously highlighted, the average tenure of a large-cap company has never been shorter than it is today.

In contrast to the past, new technologies are rapidly evolving into commercial products as they are disseminated to society faster than ever before. This is possible thanks to the proliferation of the Internet, the ubiquitous connectivity provided by smartphones, advanced computing technologies such as the cloud and artificial intelligence, as well as global payment digitisation. This creates a virtuous circle for technology companies that can monetise new technologies at a similarly accelerated pace, which enables profits to be reinvested in rapidly evolving innovation.

The convergence of these technologies and the sheer scale of innovation will, in our view, result in an acceleration and broadening of disruption across more industries.

Disruptive Innovation in Retail

At an industry level, nowhere is the impact of disruptive innovation more evident than within consumer retail. As the online retailer of choice for most Americans and increasingly the world, e-commerce giant Amazon utilised the Internet to reconstruct the entire retail industry, providing consumers with products and services in a simple, efficient and cost effective manner. Today, 63% of American households have an Amazon Prime Account, which is more than the 44% of households that own a gun, the 49% that own a landline telephone, the 51% attend church on a monthly basis, and even more than the 55% of households that voted in the 2016 US presidential election.

Amazon grew from a fledgling online bookseller to one of the most valuable and powerful corporations in modern history in just two decades. Today, the company commands a 45% share of the US e-commerce market, 25% of US retail growth and as we here on an increasingly regular basis, is poised to expand in to other consumer facing markets such as health care, logistics and personal finance. As a result of Amazon’s success, of the 10 largest retailers in the US in 1990, only 2 remain in operation today. Amazon, established in 1994, registered more annual revenue after 22 years in 2016 ($120 billion) than Walmart, founded in 1962, did after 35 years in 1997 ($112 billion). 

Disruptive Innovation in Transport

We are also seeing a huge amount of disruption in the automotive industry as electric vehicles, ride hailing platforms and autonomous driving technologies continue to advance. For a century, automotive companies have built their global franchises around an incumbent system that is based primarily on the internal combustion engine. However, as the current system is increasingly challenged by regulatory and economic forces, a more sustainable form of road transportation is emerging.

Electric vehicles currently account for less than 2% of total global passenger vehicle sales annually, however, due to improvements in the economics of battery technology and government regulation, we believe that we are reaching an inflection point at which this technology will rapidly capture a larger share of the overall market.  Simultaneously, the premise of private car ownership has been brought in to question due to the improving economics and accessibility of mobility-as-a-service. Today, only 25% of Americans aged 16 years old have a driving licence, a sharp decline from the approximate 50% rate in 1983.

 

 

Through a confluence of innovations in engineering, technology and regulation, an electrified system has the potential to eliminate many of the negative environmental and safety related externalities of the past while delivering a considerable amount of opportunity and value to consumers and society more broadly. Traditional automotive manufacturers and the associated supply chain are trying to adapt to a not too distant future of much more simplified transportation network built around electric motors, batteries and shared mobility platforms. In order to survive, automotive companies will need to become technology companies to compete with new disruptive entrants like Tesla, Uber and Waymo (a subsidiary of Alphabet).

Disruptive innovation within the automotive industry has widespread consequences for other industries. For instance, according to the consulting firm KPMG, the global automotive insurance industry, which currently generates approximately $250 billion in annual premiums, could shrink by 70% (or $137 billion) over the next thirty years, as technology enhances the safety and reliability of vehicles. Additionally, the automotive industry accounts for approximately 20% of global oil demand, thus these disruptive trends create a significant amount of uncertainty over the future outlook for demand in the Energy industry. Therefore, this example highlights how one seismic shift in technology could potentially impact trillions of dollars worth of market capitalisation.

Disruptive Innovation Gains Pace in Times of Crisis

These industry examples provide a small window in to the current pace of change, which is greater now than ever before. Disruption is being felt across industries and economies and providing a differentiator in the long-term performance of investment portfolios. There are exciting opportunities but also significant risks for the 'disrupted'. We believe that it is only from a detailed understanding of the process of disruptive innovation, and through rigorous research, that investors can stay on the right side of change.

The next instalment of Tom’s Disruptive Innovation series will be published next week, looking at how EdenTree Investment Management is positioning its portfolios to capitalise on these trends. Check back on our Insights Hub to continue reading, or follow us on Twitter at @EdenTreeIM or search for us on LinkedIn so that you can get updates on new posts.