The disruptors are coming

Business Spectator
ROBERT GOTTLIEBSEN
8 SEP, 2015
Last week at a cocktail function I asked the chief executive of one of our top 10 non-banking ASX companies: “What is going to drive change in your business?”
Normally, CEOs ponder such a question and often come out with vague answers related to topics of the day, like interest rates and politics. But this CEOs eyes narrowed and bullet-like he came back: “New batteries and disruptive companies.”
“Batteries?” I asked. The CEO said that within a decade, and probably much faster than most people think, we will be driving battery-driven cars and an increasing proportion of those cars will be driverless. And disruptive companies are attacking giant corporations on many fronts and CEOs who don’t take them seriously will endanger their long-term market positions. A large number of our top ASX companies are in the frontline, led by banks, retailers, including Woolworths and Coles, energy companies, insurance groups and toll roads.
The main reason why change is escalating and becoming more profound is that the old Moore’s law has taken on a new twist and computers and artificial intelligence are assisting the development of new technologies and systems, so the magnitude of the changes ahead are greater than have been seen for a century or two. And the disrupters use this technology to attack incumbents; the stocks where most of our superannuation is invested.
Let’s start with our banks.
Although no bank has made any official statements, we know Westpac plans to substantially reduce costs over the next five years and in a decade the costs will probably halve as artificial intelligence takes on more roles in banks.
Westpac’s announcement yesterday is part of that longer-term plan. I am sure the other three big banks have similar plans. The Commonwealth Bank has been a leader in this area and NAB is introducing a new base system, which if it works as planned, will make NAB among the more advanced global banks in technology. If banks don’t lower their costs substantially, they will be ­attacked by disrupters specialising in the most profitable parts of banking. It’s true that new activities and new areas of employment will be created but the halving of costs over a decade will involve a substantial reduction in labour.
The battery technologies that our CEO referred to are being pioneered by many groups including Tesla and Horizon. As the battery technology develops, so generating power by solar and wind, either centrally or in houses, and factories is going to become far more economic.
Longer term, cars will simply be batteries on wheels and will need little maintenance. Already, modern cars are much less accident prone because of crash avoidance technology but driverless cars will reduce the accident rate even further. If that is the way technology moves, then insurance companies will need to rethink their motor business.
Service stations may become akin to blacksmith shops after the horse and cart era. Companies like Caltex and motor insurance leader IAG will be in the forefront of that change. Roads will be able to take far more vehicles, which will affect operators like Transurban.
And if you are in the electricity business, the way power moves around networks looks likely to change from the current centralised models. Groups like Origin and AGL will need to manage this new environment and not all the network decisions they have made in previous years will be shown to be correct. Part of the energy change is a new attitude by banks, which are looking much more closely at the long-term environmental impact of the businesses they are loaning money to. There is certainly not a ban on lending to coalmines and other carbon activities, but the big banks are looking to see what is being done to lessen the carbon impact.
In retail, new competitors are carving out market share from the old department stores. Even the supermarket business is changing. Apart from online retailing, Aldi has developed a model that involves only house brands and carries lower costs than a model based on established brands. Woolworths and Coles will need to develop techniques to handle this disruptive force or they will lose considerable market share.
I am sure readers can think of other fundamental changes that will stem from those two changes that our CEO has mentioned.
There is a temptation to think that all these changes will come quickly. Some will; some won’t. But normally most of these fundamental direction changes take a lot longer to unfold than people expect. But the true test of today’s chief executives and boards is whether they understand what is taking place and whether they have the strategies to adjust their corporations for the longer term.