In the 80s and 90s, innovations were far and few. Pace has increased, and it would be at least 10x of now in the next 20 years. Things are becoming obsolete faster than ever before. The leader of today may not be the leader of tomorrow. Gone are the days when there was something called first-mover advantage. The economic moat is no longer the size or the brand but the ability to think outside the box. So many brands were dusted in the last few years as they failed to innovate-be it Nokia or BlackBerry. So, first mover is an advantage or disadvantage? I feel it’s a disadvantage. Where are the companies who invented the web browser or manufactured the first mobile phone? Netscape launched a web browser for mass. The first mobile phone was launched by Motorola. Jio never had the advantage of the first mover but is today calling shots in the industry. Another classical example is Big Bazaar. It introduced the first supermarket store, but Reliance group is acquiring it as the company did not innovate to take on challenges from the likes Amazon, Flipkart, and Big Basket.
Brand loyalty is a subject that no longer exists in hyper reality. People are looking for products and services that meet their needs. That makes it easy for someone new to come and acquire the market share. Most of the companies that are top of the innovations chart did not exist two decades back.
Someone can argue that Apple enjoys brand loyalty. Yes, customers will be brand loyal as long as they don’t have a better choice. The day someone comes out with a better product, brand loyalty will vanish, and that too in no time. Innovation is a magnet that attracts customers as well as investors. The company that can’t think ahead of the curve will perish, and those who can-will thrive. We are living in a world where “Winners take all”. This will accentuate further in the coming years unless the government across the world intervenes. Focus on Innovations has shifted to make products or services that are simple and intuitive. It helps to expand bandwidth or make their task easy. Alexa is a classical example of the same. People want products that can multitask, and that’s where more and more innovations are happening..
So what are innovations to keep an eye on?
Opex will be the new theme
More and more companies will try to make money by offering services and rather than products. In other words, the revenue stream will consist of a small monthly income catering to a larger section of society. One such example is cloud services rather than buying your hardware. Co-sharing office space Vs. buying office or leasing an office for the long term is another such example. Innovations in the future will target each of the expense items which can be converted from capex to opex. Gross block in the companies will shrink substantially. In 70 and 80s, more than half of the balance sheet size was accounted for by the gross block, but today the same got reduced to 35-40 percent. In the next ten years, this number will reduce to maybe 15-20 percent. Likes of Dixon and Amber will flourish who will supply the product as per customer needs and specifications. Apple biggest brand in mobile has zero in-house production facility. Apple did it in the early 1990s. Companies will focus on innovations, and production will be outsourced. Indian IT software companies will be the biggest beneficiaries of outsourced services. Breakeven periods will shrink drastically due to shorter life cycles of businesses. Challenges will not be within the industry but across. Airbnb offered competition to the hotel industry. Mobile phones to digital cameras and Netflix to DTH and cable operators.
Employee cost as % of the market cap will decline
Due to outsourcing, more and more companies will reduce the number of employees count. The companies would be more of top-heavy team with a typical day-to-day functions will be either outsourced or automated. As per one study, average worker income is much less (adjusting for inflation) than 40 years back despite productivity has gone up by 2x. This ratio in the future will shrink further. The new normal could be an employee to market cap ratio of 3 percent.
IT Services, Agri and Education will benefit in short to medium term
Some of the most significant innovations will happen in 3 main verticals- IT, Agriculture and Education. In India, agriculture is one of the laggards in using the technology, but agri is a critical piece for India’s self-reliance on food. IT will be a clear winner due to focus on service sector and we would see a spur in domestic consumption of IT services which will grow much faster than exports. The young population needs good Education, but the physical infrastructure is far from satisfactory. This is where innovations will make rapid strides to make India at the forefront of the same. Covid has started the innovation in Education somehow, but this is just the tip of an iceberg. We can expect a big tsunami in the education field where innovation will make Education quite different from the present. Big data analysis will help to create a module based on the child’s learning ability. Hence each student will absorb knowledge based on his/her learning abilities. As per one survey, 50 percent of the job profile has no match with formal Education. The disconnect between the Education and real-life will converge, making educating youth employable.
Job loss, our biggest challenge
So far, automation has happened at the basic clerical levels. But innovations will target the middle-income layer where big data, research, automated operational and delivery processes, mechanised systems will do much more sophisticated jobs. Knowledge levels will need to be upscaled otherwise need to automate and pressure to control cost for a healthy balance sheet will see redundancy seeping at middle levels of employment. As a community we will need to upscale our skills and knowledge otherwise I fear loss of jobs at a large scale coming up as our biggest challenge.