Disruptive technology is set to disrupt even more; what investors should do
Category: Thought for the day
A new report from McKinsey makes a startling claim. It reckons it has pinpointed 12 disruptive technologies that could have a collective potential economic impact of between $14 and $33 trillion a year by 2025. Take note of this one; economists are lousy at taking into account new technology, but that is no reason why you have to be.
The economist Joseph Schumpeter is a contender for the title of the greatest economist of the 20th century. For your information, he once said he had three ambitions: to be the world’s top economist, the best horse rider in Europe, and to be Austria’s greatest lover. I am only really qualified to talk about the first of these three ambitions. The theory he is most famous for these days is creative destruction, but those who cite this as justification for austerity miss the point. Schumpeter did not see destruction as essential for enabling creativity, as some seem to think; rather he saw destruction as the consequence of creativity. It is a subtle, but important difference. He saw destruction as inevitable, and that as new disruptive technologies emerge, even the very largest companies in the world – including monopolies – will fail.
We see evidence of Schumpeter’s creative destruction all the time. It could be said that Kodak, Nokia, and maybe even Microsoft are victims. But that does not mean all of the world’s largest companies will be go that way – not for a very long time, anyway. I reckon there are companies out there, companies we have all heard of, who will benefit from a new wave of disruptive technology. I cannot say which of these companies for sure will be ultimate winners, but I can give you examples of the type of firms that will win through. They include IBM, many of the big pharmaceuticals, such as GlaxoSmithKline, and companies such as Google. What all these businesses have in common is a willingness to experiment. In the case of the pharmaceuticals, the process of creative disruptive technology is largely outsourced. They sit on the side lines, and wait for smaller companies to develop the next big thing, and swoop in to provide their marketing expertise and distribution network. IBM is a great innovator and features prominently among many of the disruptive technologies McKinsey identifies. Google is one of the great experiments of our age. I am sure you can think of other examples. I am not sure about Apple. I certainly don’t think the company’s best days are behind it. I stick to my prediction made at the end of last year that it will eventually gain a market cap of one trillion dollars plus. But Apple is, in my humble opinion, too reliant on the expertise of a small number of people. It does not experiment like some of the other companies I mention.
I am now going to summarise the disruptive technologies McKinsey identifies. I am sure you can think of plenty of examples of companies that are well poised to take advantage.
So here goes.
First off: mobile internet. McKinsey estimates this will have a potential economic impact in 2025 of between £3.7 and $10.8 trillion, and it also sees one benefit not commonly discussed here as a 10 to 20 per cent cost saving on the treatment of chronic diseases via the ability to remotely monitor health.
Next is automation of knowledge work. McKinsey says: “Advances in artificial intelligence, machine learning, and natural user interfaces (eg voice recognition) are making it possible to automate many knowledge worker tasks that have long been regarded as impossible or impractical for machines to perform.” Its estimate of the economic impact of this technology in 2025: $5.2 to $6.7 trillion and says resulting advances in additional labour productivity would be equal to the output of 110 to 140 million workers.
Next is the so called internet of things. This is where various monitoring equipment such as sensors are linked together. This will enable companies and governments to become more efficient, and provide improvements in the health of patients suffering from chronic diseases. Potential economic impact by 2025 could be $2.7 to $6.2 trillion. Incidentally, I see an opportunity for ARM here, and its devices could potentially sit in most of the so-called things that make up this new internet. There are no guarantees, of course, it may do a Psion – which was a British firm that once seemed perfectly poised to dominate the smart phone market – and the likes of Intel may prove to be the ultimate winners, and Samsung.
Also on McKinsey’s list of disruptive technologies, with their estimated economic impact by 2025, are Cloud computing – $1.7 to $6.2 trillion; advanced robotics (which may be used to improve lives of amputees) – $1.7 to $4.5 trillion; autonomous or near autonomous vehicles (think Google, here) – $0.2 to $1.9 trillion; next generation genomics – $0.7 to $1.6 trillion; energy storage – $0.1 to $0.6 trillion; 3D printing – $0.2 to $0.6 trillion (I think McKinsey has underestimated the effect of this one); advanced materials (such as Graphene, carbon nanotubes and nanoparticles) – $0.2 to $0.5 trillion; advanced oil and gas exploitation – $0.1 to $0.5 trillion, and finally renewable electricity from wind and solar – $0.2 to $0.3 trillion.
Just to reiterate, these estimated economic impacts are for the year 2025, but they may well become even more important in the years that follow.
2025 may seem like a long time off, but many of these new technologies will have at least some economic impact before then, and in any case, the markets are supposed to price-in what’s likely to happen in the future. When it comes to disruptive technologies, the markets are clearly not doing this, and that is why there is a major opportunity here. Watch this one very closely.
These views and comments are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees