Technology - opportunity, and risk
What is technology risk?
Australia's big four banks are responding with various impetus to technological change. Reportedly, CBA is the most advanced in relation to the upgrade of its core banking systems. This traces back to ex-CEO Ralph Norris, who had a strong IT background before his CEO days. (And ANZ, speaking from personal experience with their new personal internet banking, has some way to go!) Getting the core IT backbone right is essential - it is an absolute necessity and basic of operating a bank, not just in the future, but today.
But getting the IT backbone right is expensive, and complex. However, as the use of internet banking increases, settlements and transactions become quicker, customer demands for responsiveness increase, etc etc etc, it will get harder and harder for banks to hide out-dated IT systems.
But technological risk is not just about the core IT systems of the banks. And it is not just about the banks.
I am sure you have all had your own varied internet shopping experiences. I use two of my personal experiences as illustration. Bonds has a fantastic website, and is a great online shopping experience. Pacific Brands (owner of Bonds) is using technology to drive sales, and to decrease reliance on distribution channels it doesn't control - it has adapted, in a timely manner, to technological change, and it is using it for its own advantage. It is a better business today as a result. We hope, and expect, this to continue.
Woolworths, on the other hand, has (based on my personal experience) a clunky website. It works, but it isn't easy (e.g. the scroll bars), and it isn't intuitive. Your Investment Team considers Woolworths to be a company that has an online offering because it has to have one; not because it has a vision for customer demands / experience / needs into the future.
The above observation about the banks and online shopping are but two minor illustrations. The impact of technology and technological change is pervasive across really every business: from how a business runs internally, to how it interfaces and conducts business with the world, to what product and services it can compete with in the world. It is here now, and it is impacting now (as is seen with media ownership laws being long obsolete, and the traditional gambling companies (e.g Tabcorp) facing up to the reality of the online entrants). Your Investment Team expects the disruption to continue, and even to escalate.
Back to the banks. New technology, from established players such as Paypal and Bitcoin, direct interaction between companies, lenders/borrowers etc, to new entrants such as the mooted IPO Afterpay (allows online shoppers to buy then pay later), will all adversely impact the banks - taking away their business and / or changing how they need to do business.
So, in summary, we consider technology risk as:
- not having modern IT systems so that responsiveness, customer focus and operational efficiency are compromised;
- not adapting to new ways of interacting and interfacing with others (customers, other businesses, government entities etc.); and
- not adapting a company's product and service offering so that its market position is impacted by competitors and new entrants.
The ultimate technology risk is associated with those companies who just can't adapt - either through their own fault, or because new technology makes them obsolete.
Obsolesce can and will happen. Telstra is facing up to the latter at the moment as it attempts to offload its stake in Foxtel (with Netflix [House of Cards is brilliant and terrifying at the same time], iTunes etc, and the internet more generally, making Foxtel's existence more and more difficult - especially in relation to their non-sport content).
Thermal coal (and the companies who mine it) faces obsolescence, with the only question being when. China's 30% cut in thermal coal imports last year reflected not only a slowing economy but China's desire to reduce its reliance on a high polluting energy source.
Technology opportunity and risk from an investor's perspective
Our expertise is not in predicting the technologies of the future. Thus it isn't actually that easy to consider technology opportunity, especially in relation to the disrupters. Additionally, the more conservative, value-oriented approach we take to investing often precludes up from investing in distrupters at their early stages. That said, where a specific instance warrants investigation and investment, then we will.
Technology opportunity for us really resides in those companies that we already own, or are potential investments, that are using technology to create better businesses in the future.
Many of you have heard your Investment Team discuss downside in the context of investing. Technology risk is an significant consideration in relation to this. Our job is to avoid investing in those companies where technology risk undermines the investment potential.
Your Investment Team factors technology risk in making investment decisions. It can be a downside risk; one that can insidiously undermine a business over time.
But there is an upside risk, i.e. the opportunity. Innovators and adapters will use technology to better their businesses - and thus represent potential for increasing the investment return to you.