It doesn’t matter how much money you have.
It doesn’t matter how recognised your brand is.
If you’re running at a competitive disadvantage, you will almost always lose.
That’s why Uber needs to work fast. Right now, Uber is the big daddy of ride sharing. But soon they might not be.
Google’s Waymo is a ride hailing business limited to Phoenix, Arizona for now. The only difference between Waymo and Uber is that Waymo doesn’t use drivers.
The entire fleet is driverless.
I have no idea what it costs Google for each driverless car. The company ended up spending more than a billion dollars to develop the technology.
My gut feeling is that it’s probably cheaper to just hire millennial drivers, for now.
But in time, this autonomous technology could put Google on top. Removing drivers from the equation reduces Google’s cost structure.
So, not only would Google hold onto more sales dollars. They could cut fares, forcing Uber to match and watch them bleed.
And it won’t just be the millennial out of the job soon.
Automation is killing global manufacturing
During the American baseball season, fans were eating flipped burgers…but not by some young college kid…
The cook was a robotic arm. The machine uses cameras, thermal scanning and artificial intelligence to cook the perfect patty every time.
Sure, the robot burger flipper costs a lot now. But what happens when input costs fall? At some point the efficiency of a robot burger flipper justifies the costs.
Say goodbye to all those kids in McDonalds.
Process driven and highly repetitive. These are the jobs you could see disappear in your life time.
It won’t all happen overnight. But in time, automation and robotics will take over a lot of these jobs.
One industry where this is happening faster than anywhere else is in manufacturing. Global manufacturing is dying. And it’s all because we’re too efficient.
Look at recent data…
Global manufacturing is in a slump, according to the Australian Financial Review (AFR):
‘Manufacturing gauges across the world’s largest economies stumbled at the end of last year, starting 2019 with fresh challenges for global growth and central banks.
‘The global manufacturing index from JPMorgan Chase & Co and IHS Markit fell in December to the lowest level since September 2016 as measures of orders and hiring weakened, data showed.
‘That followed other IHS Markit reports showing factory conditions slumped across Asia’s most export-oriented economies, with China’s signalling contraction for the first time since mid-2017 as Taiwan, Malaysia and South Korea also point to declines. Factory growth in the euro area fell to the lowest in almost three years.’
The AFR points to a slowing global economy. The current US-China trade tensions aren’t doing manufacturers any favours either.
I don’t believe this is a temporary slump.
In the long run, I believe manufacturing will continue to decline.
And it’s because we’re just too damn efficient. Productivity gains are adding up. Robotics and automation will dramatically lower the costs. Cheap labour will no longer be an advantage. Producers will be local.
Automation is even creeping into the mining industry. Miner Rio Tinto Ltd [ASX:RIO] spent AU$1.3 billion to automate their Pilbara long-haul iron ore rail network.
Such technology could make mine locations far less important. With less stops and no drivers, transport costs should come down significantly. A mine 200km from port might end up having the same cost structure as a site 50km from port.
If you listen to a guy like Bruce Greenwald, you’d be all over this. The former Columbia Business School professor believes globalisation is finished.
‘Trade is falling. All the production will come back to the U.S., but none of the jobs,’ he said in a 2017 Barron’s interview.
And it’s all because productivity gains are outstripping demand.
‘Everybody today talks about disruption. [But] manufacturing is dying because productivity growth is 5% to 7% and global demand growth is maybe 2% to 3%. Employment is dying, value-added is dying,’ Greenwald added.
What does this all mean for investors?
The locally dominant companies will prosper
Globalisation in reverse will not be a smooth transition.
Millions of people will lose their jobs. They’ll need to re-skill and enter another profession. The service sector should continue to grow though.
I believe it will be the locally dominant companies that prosper. What do I mean by local?
A company like REA Group Ltd [ASX:REA] is a good example (this is not a recommendation).
REA focuses on Aussie property in all major Australian capital cities. They have an overwhelming lead on all other property listing businesses with their realestate.com.au site.
Not only do real estate agents tend to think REA first, most buyers jump onto REA because they have the largest and most up-to-date range.
You might say REA’s most valuable asset is their powerful local network of sellers and buyers. And because REA can spread their costs over so many customers, it allows them to spend that much more on developing and advertising their service.
Of course, price is a factor. Locally dominant companies like REA are not worth an unlimited price.
But these are the kinds of businesses that are likely to dodge the brunt of reverse globalisation. Companies that dominant their product segment or local region.
So, even as globalism starts working in reverse, I don’t think REA (the business) will be the least bit affected. They’ll likely continue to dominate Aussie property listings and grow earnings over time.
Your friend,
Harje Ronngard