We see structural change and long terms trends as key themes for many of the businesses we own in the UBS Australian Small Companies Fund. They can be seen as either a negative, especially for the larger and lazy slow moving industry incumbents, or alternatively as a significant positive driver of long term value creation for the more nimble challengers and innovators.
Adapt or die
There are many examples of old industries failing to recognise the winds of change, not adapting quickly enough and, as a consequence, disappearing off the face of the earth. The rapid transition from horse and buggy to mass produced motorised transport that occurred during the early stages of last century is a great example.
When the trend to the internal combustion engine started at the turn of the 20th century, cars were seen as curiosities. Within a relatively short timeframe of 13 years (about same the time it takes a child to go through the K-12 school years), horses had instead become the curiosity on 5th Avenue, New York. The implications of this change are not limited to the massive decline in demand for horses. Consider also the negative change for suppliers of horse feed, owners of stables and blacksmiths. However the change was also a massive boom for the suppliers of petrol, mechanics and Henry Ford, the person who figured out how to slash car prices by excluding choice (any colour as long as its black). There are significant parallels in this 100+ year old structural change with what has happened over the last 15 years. Apple, like Ford 100 years ago, has dominated a market by selling the consumer an innovative product with less choice than the alternative product. Amazon, like the Rockefellers, has very cleverly vertically integrated on the back a complete change in distribution technology. Amazon provides electronically originated fulfilment. Standard Oil, for the first time in history, perfected the mass distribution of a flammable liquid. A period of significant structural change creates as many opportunities as risks.
Disruption creates opportunity
Today, with the rapid rate of advancement in technology leaves many industries ripe for sweeping disruption. The irony is that 100 years on there is perhaps no better example of an industry more exposed to disruptive structural change than the petrol driven motor vehicle. Although electric vehicles (EVs) have been around for a while, their prior inferiority to the internal combustion engine motor vehicle (ICEV) made them an unconvincing substitute. This was due to their high cost, short range, inferior functionality and limited models on offer.
Today EV's are both viable and in many cases superior to ICEVs. For example, the current model Tesla S is an EV with a range of now more than 400kms. It accelerates faster than the latest Porsche 911 sports car, has running costs a fraction of petrol driven cars (low fuel costs and low maintenance costs due to few moving parts) and comes with an eight year infinite km warranty.
Furthermore, with the rapid advancement in battery storage technology its cost is expected to fall from currently 3-4x that of an average car to about half the cost of an average car over the next decade or so. This technology is now also spreading rapidly into the supply of static electricity. Battery technology is looking to partially solve the problem that very low marginal cost renewable electricity cannot be stored for use when the sun doesn’t shine or the wind doesn’t blow. Industries that by implication look to be structurally challenged in this environment include everything from petrol stations, coal mines, fuel tankers and perhaps complicated mechanical car maintenance. To be replaced over time by large power supply to supermarket car parks (for recharging) and cars that require rebooting or an electronic patch to fix them.
The surprising local investment opportunities created by electric cars
In the Australasian context, we have invested in the raw materials that are more in demand by these new industries. This includes several new lithium mines (a mineral that up until now has been used for grease). Lithium, like copper ,nickel and cobalt, will be required in much greater quantities than before as the demand for batteries, electric motors and electricity networks increases. We have also increased our investment in engineering specialists who are now in demand to install solar farms, battery storage and expanded electricity distribution.
Portfolio Manager, UBS Australian Small Companies Fund