sketching out long-term stock market themes (ii)


1. Some (not many) domestic-oriented US companies are mentally living in a past that no longer exists, making them particularly vulnerable to competition.

How so?

WWII had two immediate effects on US industrial companies:  their domestic installations were the only plant and equipment  still left standing after the conflict in Europe and Japan, so they had eager customers, no matter what the quality of their output; and a generation of leaders abroad, grateful for American assistance in rebuilding, gave preferential treatment to American firms.

This wasn’t “normal,” and it’s no longer the case.  Those leaders are long-since retired.  When China thinks of the US, it thinks of the Boxer Rebellion, not WWII.

2a.  The Internet has destroyed many barriers to entry, or “moats,” as the academics like to say.

–It allows large, established firms to control far-flung manufacturing and distribution networks remotely.

–It allows them to stitch these networks together out of both owned and third-party pieces, so they can keep high value-added pieces in-house and farm out the rest.

–It allows fledgling firms to mount low-cost social media product awareness campaigns, to open their own online storefronts and also to distribute through third-parties like Amazon.

As a result, the embedded value of many years of past advertising campaigns no longer sets the bar for creating public interest in a new product.  Slowly building your own bricks-and-mortar retail presence, your own warehouses and your own fleet of delivery trucks isn’t needed to get wares into the hands of customers, either.  And you don’t need to lay out tons of your own capital to build an effective supply chain.

2b.  A recent article in the Financial Times points out that the US has about 5x the mall space per capita as the UK, 6x as much as in Japan and 8x as much as in Germany.  To the extent that retailers have signed long-term leases to rent this space, it can act as a ball and chain around a firm’s ankles, as online replaces bricks-and-mortar.

3.  Emerging economies understand that the ticket to entering the developed world is technology transfer.  That requires offering multinationals a low-cost workforce and state-of-the-art plants to induce them to open up in their country so locals can learn how to work in, and ultimately run, a manufacturing business.  This means a constant stream of new manufacturing plant coming into existence, undercutting the value of existing capacity (developing governments are looking for employment and technical education, not profits).  Developed countries’ only effective response is continual modernization and innovation.

4.  Hydraulic fracturing (“fracking”) is lowering the cost of producing natural gas and oil.  So far, fracking is happening mostly in North America.  So it’s principally a boon to manufacturers here, like chemical companies, that use hydrocarbons as feedstocks.  It’s also putting more money into the hands of American consumers, who (thanks to a uniquely misguided government energy policy in the US) use double the oil and gas per capita of anyone else.

We’re already seeing foreigners building new energy-intensive plants in the US to try to level the paying field.  Great for the balance of trade and for domestic employment.

The bottom line:  this is no longer a rest-on-your-laurels world for established companies.  For investors, this means the odds on backing younger “disruptive” competitors are better today than they have historically been.

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