Remember the 1999 movie Bicentennial Man, based on a book written by Issac Asimov? It was fiction then, the late Robin Williams playing a robot.
Then came Aibo, the robotic pet dog, and Pepper, the semi-humanoid robot. Eclipsing them is Sophia, the digital humanoid, who in her own words is “empathetic robot”. Sophia is a global celebrity, has touring countries, and been granted citizenship of Saudi Arabia.
Like boiled frogs, we are all experiencing disruption in virtually all areas of our lives, whether we consciously realise that or not. The way we shop or travel or communicate, disruption has permeated it all.
Naturally, this will impact our investing strategy prompting Ramesh Damani to state that “Very few businesses have a permanent moat. It's not always obvious which company will outperform.” Some are being left behind, some are embracing the future, while a few are trailblazers.
Take the auto industry. It is apparent now that it is ripe for disruption. Be it changing consumer behaviour, preference for mobility providers, fully autonomous vehicles and electrified vehicles, the industry has the potential to be unrecognizable from that of today. I remember a prominent Indian investor noting that a company like Maruti needs to think of itself as being in the transportation industry, not just the auto industry. This shift in perception will help it brace the competition and disruption.
My colleague in London, JAMES GARD, wrote about this. Though the companies mentioned are not Indian, I found the lessons relevant, hence reproducing it below.
TRAVEL
Thomas Cook’s demise after 178 years of trading highlighted how much the internet has disrupted the travel sector. It’s now easier than ever to book your own bespoke trip online without using an agent or having any human interaction until you board the plane or check into your hotel.
The success of start-ups like Secret Escapes, owned by Old Mutual Global Investors among others, suggests that the sector can still be highly profitable if you find the right niche.
Reputation is everything in ecommerce, and few online reviews carry as much weight as those on Nasdaq-listed TripAdvisor, which can make or break a hotel, restaurant or even resort. TripAdvisor's key advantage is it brand network effect - because so many people use the site already, this attracts more people to use it in future.
One trend in travel in recent years has been specialisation, and that has benefited the likes of online package holiday expert On the Beach. Unlike firms like Thomas Cook and Tui, On the Beach doesn’t have the burden of running high street chains and an expensive fleet of aircraft.
Strikes at IAG-owned British Airways have hit customer satisfaction levels for the UK flag carrier, while the unexpected departure of IAG boss Willie Walsh after 15 years with the wider company adds an element of uncertainty as the airline industry faces up to a tricky period, which has seen the future of FlyBe in doubt.
Well-capitalised Tui should benefit from Thomas Cook's demise, but as an owner of costly assets - travel agents, hotels, airlines - it faces the same challenges as the now defunct UK travel operator, especially with geopolitical tensions rising.
CYBERSECURITY
With more and more people now online worldwide, the need for anti-virus software has never been greater. But big companies face even scarier risks than the average smartphone user: they live in fear of cyber attacks, phishing and viruses bringing down their networks. Even government sites have been hacked. Currency retailer Travelex was paralysed by a ransomware attack on December 31 that lasted more than two weeks as hackers demanded nearly £5 million to stop releasing card details into the public domain.
- Leader: Palo Alto Networks
Cybersecurity firm Palo Alto Networks made its name as a provider of firewalls and has since branched out offering subscriptions and support for “threat-prevention” services for business. The company has built up a loyal customer base, becoming the market leader in network firewalls. With a renewal rate of nearly 100%, these users are now unlikely to switch providers. The industry itself will continue to expand as cyber threats increase and become increasingly sophisticated.
Many computer users find anti-virus software such as Norton, Kaspersky and McAfee bundled in with new laptops and leave it installed. Czech-based Avast has tried to disrupt this market by offering cheaper software than the incumbents, greater discounting on renewal and a wider range of services: ranging from a basic "freemium" package that doesn't expire to more advanced options. Its software is ranked more highly by users and tech experts than the big names. Private equity firm CVC bought a stake in Avast in 2014 that valued the company at $1 billion. Avast listed in London in 2018 at 250p and since then the company’s shares have more than doubled to around 518p.
- Laggards: Royal Bank of Scotland and Banco Santander
The UK banking industry is plagued by IT failures and is vulnerable to cyber attacks. Banks are key targets for hackers because their sprawling legacy networks are hard to protect completely, and with millions of customers online every day, there are plenty of access points for criminals: 2018 saw a co-ordinated cyber attack on seven UK banks, the National Crime Agency revealed.
PAYMENTS
The adoption of contactless payments in UK has been so swift that it’s hard to remember a time when you couldn’t just tap to pay for a coffee. But the rate of development towards a cashless society is not so fast everywhere in the world; parts of Europe still prefer notes and coins while the US has only recently introduced chip and PIN. This an example of an industry where incumbent players such as Visa and Mastercard have the advantage over new entrants, not least because they have invested the money in developing the technology in the first place. Morningstar analyst Brett Horn notes: “Visa is a somewhat unique company in that it is a long-time, established market leader that still enjoys strong growth prospects.”
Visa has an enviable business model, taking a cut of every contactless transaction that is made on one of its terminals. The firm is highly rated by Morningstar analysts, who assign it a “wide economic moat” because of its scale - along with rival Mastercard, analyst Brett Horn says Visa’s dominance is “unassailable” but a strong price surge last year means it is already highly valued.
Paypal's association with eBay over the years make it a familiar name for internet shoppers, who enjoy the security and convenience of using its systems over manually entering in their card details to make a purchase online. Morningstar analysts think this first-mover advantage in the early years of e-commerce will stand it in good stead, especially as electronic payments are expected to grow significantly in the coming years.
One of the world's largest banknote makers has struggled to adapt to the changing payment landscape. A major blow to the business came last summer when it lost the contract to print UK passports, and shares fell 20% in October 2019 after a profit warning.
Cash machine manufacturer NCR has a dominant position, especially in the US, but changes to the way we use money will inevitably have an impact on companies involved with the cash economy. NCR is doing its best to innovate and stay relevant though, and has even developed a cash machine system which allows customers to withdraw cash without having their bank card on them, using a six-digit code instead.
