We recently attended a briefing by one of our preferred international fund managers. The purpose of the presentation was to highlight to us the depth of research they undertake and included a focus on an area of fundamental change as they see it: how manufacturers are using data to revolutionise their business models.
This data revolution has even been referred to as the Fourth Industrial Revolution. The First Industrial Revolution introduced machines into manufacturing. The Second saw the emergence of assembly lines e.g. the Model T Ford and the Third brought robots into industry.
This current revolution uses smart technology to enhance manufacturing processes, to make them more efficient and more flexible and where possible more easily adaptable to customer needs. One way to think of this change is to imagine robots now having the ability to mass-produce millions of Model T Fords at a far faster rate than was ever achievable by human hands. However, in the world we now know, there may not be the demand for millions of identical vehicles.
This led to an explanation of “mass customisation” and the example was actually a Brisbane based orthotics manufacturer. This company has built complex machinery that is able to accept orders from across the world for custom fitted orthotics. Obviously, no one customer needs a million orthotics, but millions may need one or two orthotics. The company is able to use technology to quickly and efficiently receive, customise and dispatch the individual orders.
A further important and evolving change to manufacturing is seen in a shift to service-based business models. This involves what is known as predictive technology, where computers are able to remotely monitor shop floors and production lines with a view to ensuring that equipment and machinery is serviced before there are expensive or even catastrophic breakdowns. This is particularly applicable to robotic surgical equipment, where it is obviously vital that operations are performed without sudden technological breakdowns. From the viewpoint of an investor, such service models can be seen to provide an ongoing source of revenue, as opposed to the more traditional business model where revenue is produced only at the point-of-sale.
Their third example of this evolving revolution was a shift to outsourced production. Companies have recognised that manufacturing various components which make up their products is not necessarily highly profitable. It is the intellectual capital, marketing, service and distribution that makes a product valuable. This has led to a situation where many companies may have access to the same manufacturer to produce competing goods. The example used was semi-conductors, where one company now has 50% of the global market share of the physical production. This has enabled that company to build a high cost, state of the art facility that is then accessed by numerous semi-conductor manufacturers, each able to value add cost effectively on a mass production basis. This also enables smaller start-ups to effectively compete.
It was very interesting to hear industry experts refer to companies as manufacturers, when in so many cases the construction of the particular product was done by others. As one of the presenters said, industry is not dying, it is merely evolving thanks to these profound technological changes.
From our viewpoint, it served to reinforce the depth of research that is required, and is being applied by fund managers. This research is obviously key to being able to identify companies that have sources of revenue that will remain sustainable in a rapidly changing business environment.