First published in The Sunday Times on 30th July 2017.
The global economy is growing and corporate profitability appears strong, yet the long- term prospects for many bellwether industries are bleak. I cannot remember a time when so many big sectors were facing such profound structural challenges.
Take the oil business — perhaps the biggest sector of all. Companies continue to invest $700bn (£530bn) a year in extracting and refining fossil fuels. Currently, more than 40% of crude oil is used to fuel the global vehicle fleet.
But if the more optimistic assumptions on electric vehicle adoption are realised, then in about 20 years, at least a third of all vehicles will be powered by lithium-ion batteries, not petrol or diesel. This would clearly have a dramatic impact on demand for oil — which might make much of the current exploration and production uneconomic. Unfortunately, prospecting for oil has a very long-term investment horizon — 25 years or more — so many projects that the industry is undertaking may well be destroying value.
Similarly, the automotive industry is confronting multiple threats. Personal car ownership likely to decline, especially in cities. Millennials are increasingly happy to rely on Uber, public transport and car-sharing services. For the first time in history, fewer young Americans are learning to drive than previous generations, while the utilisation rate of private vehicles — how much of the time they are actually being driven — is typically about 5%. And autonomous driving systems should mean much more efficient use, leading to far fewer vehicle sales.
Further, electric-powered cars are likely to replace those with internal combustion engines in the coming decades. This technology shift will bring a need for huge additional investment by manufacturers, and big write-offs on existing plant. Such disruption is likely to eviscerate profits for car makers in the coming years.
Banking is another industry likely to suffer erosion in margins and returns in the future. Many aspects of the traditional bank model are becoming redundant. Cheques, traditional payment systems, bank branches and so forth are all gradually disappearing.
The oligopoly of British clearing banks may have large market shares and big balance sheets, but there are also many legacy issues — such as poor IT, unloved brands, unions, pension deficits and ever more burdensome regulations.
Meanwhile, new fintech and challenger bank competitors are steadily stealing customers and forcing the big players in the industry to lower prices. Be it mortgages, money-transfer fees or overdrafts, old profit centres are being hollowed out. Banking’s days of wine and roses are well and truly over.
Retailing is yet another huge sector that is under sustained assault from new digital entrants — and in particular Amazon. As shoppers rapidly migrate to online merchants, retailers with big chains of physical shops are struggling. Unless they downsize, many will go broke — be they furniture chains or clothing retailers. Behemoths such as Tesco and Walmart are trying to acquire their way out of trouble, but this sort of strategy smacks of desperation and an inability to innovate.
Pharmaceuticals, food and beverages, and telecommunications also appear to be sectors in structural decline — at least in terms of corporate profitability.
Across the spectrum, there is something of a race to the bottom; in many categories, only the lowest-cost operators will prosper. The internet has brought complete pricing transparency, and globalisation means almost every field is dramatically more competitive than it used to be. In a world still awash with capital, more ventures are funded and more capacity is being created — adding to oversupply and putting ever more pressure on returns. The pace of change is increasing, and the amount of creative destruction will increase, as old giants crumble and new players rise from the debris.
Big business always struggles to reinvent itself. With huge sunk costs, a desire to protect existing franchises and profit streams, and frequently a culture of complacency, large corporates often react too late when faced with existential dangers. Like frogs in gradually heating water, management fail to jump — and they and their investors are boiled to death.
Inefficient, bureaucratic businesses find adaptation hard. Start-ups and entrepreneurial companies tend to be much more flexible and have fewer legacy issues. They are better at evolving to cope with changing markets and new technology.
All this has serious implications for investors, for jobs, for tax revenues and for the future of many multinationals.
Lots of giant corporates are slowly dying, and while not many people will shed tears at their demise, it is hard to know what will supersede them — as job providers, as wealth creators and as civic institutions. Let’s hope their eventual replacements can deliver equally well for society.