Discussion of major structural trends in the global economy and the impact they have on specific sectors or industries. A full list of identified trends is available at Structural Trends. I will focus each month on changes to existing trends, the latest statistics, and their impact on sectors or industries.
Cyber Security
Rapid growth of the Internet and online services has spawned a whole new array of threats to governments, corporations and private individuals. Data breaches and identity theft are growing.
The type of cyber attacks has evolved from early blunt instrument, denial-of-service attacks — where co-opted servers are used to overload the target with bogus traffic — or destructive viruses, to more sophisticated penetration of security networks using phishing, worms and trojans.
Opportunity
Growth of cyber attacks and data breaches has established a niche for specialized security software and consultancies to protect client networks from external threats. First Trust have a Cybersecurity ETF (CIBR) that illustrates sector performance. Their top 10 holdings are not a comprehensive list of companies in the industry but offer a good start.
Threats
All industries are vulnerable but Trend Micro identifies the most targeted industries as:
- Health Care
- Education
- Government
- Retail
- Financial
Serious security breaches are capable of destroying shareholder value as with the September 2017 Equifax (EFX) announcement of a major data breach. The credit reporting specialist recorded a 37% fall in stock value.
But at this stage security breaches are considered unlikely to blight an entire industry.
Social Media
Social media giant Facebook (FB) dominates social networks with three of the top five networks ranked by number of users: Facebook, WhatsApp and Facebook Messenger. The other two are Youtube (Google) and China’s WeChat (Tencent).
Social media is dominated by mobile users. Approximately 90% of active users connect via mobile, according to We Are Social global stats for January 2017, and mobile social network users grew 30% over the previous 12 months.
Opportunity
Social media growth is expected to continue over the next three years but is then expected to slow as saturation increases. Mobile usage growth has already slowed to 5% (Asia-Pacific: 4%) and should act as a constraint on long-term social media growth.
Threats
Proliferation of fake news and misinformation threatens the industry. The motto of early Internet adopters was “Information is free” according to Mike Elgan at Computerworld, but it has now become “Information is fake”.
He explains:
The rise of false information online is caused by five factors:
1. The Internet allows anyone anywhere to publish anything everywhere.
2. Digital content is easy to counterfeit or modify.
3. Many people have powerful incentives to spread false information.
4. It’s easier for social network algorithms to favor emotionally reactive content than true content.
5. The public increasingly relies upon digital internet content for “knowledge.”
Facebook, Twitter and Google claim that they’re taking active measures against the rise of fake information. But previous efforts have failed.
Reaction from major advertisers and governments is likely to impose greater responsibility on online media to restrict publication of misleading information on their platforms, or face onerous penalties.
Online Retail
E-Commerce retail sales are growing rapidly and now exceed 9% of total retail sales or $110 billion on a quarterly basis.
US online retail giant Amazon has announced plans to open its first major Australian warehouse in suburban Melbourne, according to ABC News.
Australian Retailers Association, Russell Zimmerman, played down the threat (to Wesfarmers and Woolworths) saying traders had been planning for Amazon’s arrival.
But Amazon operates on a lower cost structure than traditional bricks-and-mortar retailers and their margins are bound to come under pressure.
Opportunity
Online retail is expected to grow significantly as a percentage of total retail sales over the next few decades.
Threats
Medium-term: Bricks-and-mortar retail margins are likely to shrink.
Medium-term: Shopping center vacancies are expected to rise.
Electric Motor Vehicles
Adoption of electric battery-powered vehicles is accelerating in Europe, with several countries targeting zero sales of internal combustion engines in the next decade.
Opportunities
Huge amounts of money are being poured into battery research and development but there are no clear winners as yet. The rewards will be massive.
Threats
Australia lags far behind in the adoption of electric vehicles but the long-term threat to automotive groups is diminishing revenue. Not only from new vehicle sales, with manufacturers like Tesla selling direct to the consumer, but also falling service revenue as electric vehicles have far lower service requirements.
Telecommunications
The telecommunications industry typically requires massive capital investment to deliver low marginal costs, whether that be for mobile phone calls or Internet connections. It is dominated by a few large players, whose size delivers cost advantages over competitors.
Australia
In Australia, the natural order has been disrupted by the government-funded National Broadband Network (NBN) which delivers fiber-to-the-home in some areas of the country and fiber-to-the-node to the rest where fixed line copper or co-axial cable (Foxtel) is used to bridge the last 500 meters to the home. The NBN supplies broadband Internet connections at the same basic cost to large and small telcos alike, allowing smaller players to undercut large competitors such as Telstra, who have traditionally dominated fixed line and broadband, eroding industry profit margins.
Broadband
Growth in numbers of broadband subscribers has slowed but download volumes are growing exponentially.
Already there are complaints of slow download speeds on NBN as telcos overload purchased bandwidth to compensate for narrow margins.
Telstra and Optus have announced plans to commence the roll-out of 5G mobile broadband in 2018. At 10 Gigabits per second, speeds are expected to be up to 100 times faster than the existing 4G network and 10 times quicker than the fastest NBN plans.
Mobile
Growth in the number of mobile handset subscribers (26.3 million) in Australia has slowed, to 3.4% for the six months to June 2017. But download volumes increased 44.5% for the year ended 30 June 2017.
Threat & Opportunity
The telecommunication industry faces a profit squeeze in the medium-term (say 3 to 5 years) as the NBN disrupts profit margins but the long-term future looks bright as data downloads in both broadband and mobile are expected to grow exponentially.
