2025 Lookback

When I wrote my 2019 investment outlook, we were in the middle of a “market correction” as it is now retrospectively known. Volatility was extreme and global recession fears dominated the market narrative. I didn’t know which direction the market was going (I still don’t), so I focused instead on disruptive technological trends and the sorts of companies we would be looking to invest in. I called it “inevitable intersections” and you can read what I wrote, then, here. [Note: there are no predictions about the market levels and no mention of interest rates, Donald Trump or Brexit]. 

This year I’ve decided to copy one of my favourite comedians, David Mitchell. Rather than writing an “outlook”, I have instead imagined myself in 2025, looking back at the important things that have happened over the last five years. It’s a “lookback”. The benefit of this is that it focuses minds on the important long-term issues and helps us break free from the status quo bias we are all anchored to.

2025 Sustainable Investment Lookback

Clean & Autonomous Transport
Here we are in 2025 and I still don’t have a car that can drive me from my home to work whilst I snooze in the passenger seat. It’s all very well Tesla* delivering an Electric Car that has 600 miles of range and can do 0-60 in 2.5 seconds for £45,000, but it’s supposed to be fully autonomous by now! Most of my neighbours and work colleagues think the same thing about their Tesla’s. On the plus side – thanks in no small part to Tesla – it looks like the worst climate change scenarios might be averted as oil demand peaked in 2022-23 and is now declining despite robust economic global growth. It’s amazing to see how the global car industry has been disrupted. There are only two genuine “old world” competitors to Tesla in the electric vehicle market (VW and Hyundai) and they are seeing all the growth. 36% of new car sales are electric today and annual demand for new combustion engine cars is less than half what it was just 7 years ago, so it doesn’t look good for most of the traditional car makers at this point.

Healthcare Innovation
Artificial Intelligence was certainly hyped up a few years back, but it’s interesting to see machine-learning being used in a variety of industries, particularly the healthcare sector. The US healthcare system is still over-priced, but some technology that is emerging there is inspiring (from an outcomes and cost saving perspective). Diagnostics is one such area where machine learning has enabled early identification of diseases. This has improved outcomes, reduced hospital admissions and taken cost out of the system. AI-enhanced breast cancer scans and nasal swabs for testing lung cancer are two clear examples.  It’s also great to see these new peptide-based drugs hitting the market and addressing unmet needs in a variety of illnesses. In genomics, research has proliferated and compounded, increasing our understanding of diseases like Cancer and Alzheimer’s.

Clean Electricity
We now have over 100 countries in the world mandating solar panels on all new built houses. Desert states are rapidly leveraging their position in this transition by becoming renewable energy exporters. The relatively simple task of covering their unused land in solar panels and building grid infrastructure around it is so economically compelling now it would be daft not to.** Combine that with 100 new 10-12MW wind turbines that are being built globally per day and we actually have a shot at being fossil fuel free within a decade or so.

The Sustainable Consumer
Sometimes it’s difficult to point to exactly how and when a cultural change occurs but a change certainly came in the early 2020s regarding the perception of human consumption and waste. I think Sir David Attenborough – still going strong at 98 – had something to do with it. However it happened, there has been a step change in how consumers perceive their consumption in terms of both its origin and disposal. Start-ups leveraging a variety of old and new technologies emerged to resolve this friction and large corporations were forced by these disruptors to re-design the environmental and social impact of their entire supply chains.  There’s a lot of work to do but glossy CSR reports produced by outsourced marketing agencies are now a thing of the past. Stakeholder monitoring and oversight of corporates has been taken to a new level. Integrated circular economies are becoming the standard of best practice. Digitally printed garments, which reduce resource use and pollution, compostable plastics, better recycling systems, a reduction in intensively farmed animal protein and less trees being cut down are some of the positive outcomes we’ve seen.

Summary: It could be worse
All said and done, we’ve made good progress this decade. Significant geopolitical uncertainty around the globe and the odd inflation scare haven’t managed to derail the important technological and societal trends that are driving us towards a more sustainable future.  Sure, we could still mess it all up, but the stock market seems to be pricing in a future where companies that are having a net positive impact will be the ones that continue to grow. The world is complex with many grey areas that require diligent analysis in order to get the right answer, but the sustainable wheat is being separated from the unsustainable chaff when attributing value to a share. It’s particularly interesting to see many of the unsustainable companies that were stalwarts of the twentieth century consumer and industrial complex slipping into obscurity and financial irrelevance.

** In 2025, scientific consensus that human emissions are causing climate change is 99.99999999999999%. One person on Twitter still believes in the “alternative facts”.

*Companies mentioned are held in some of the sustainable and ethical funds at Kames Capital.

About the author

Craig Bonthron is an investment manager in the Equities team, responsible for actively co-managing high conviction global equities portfolios. He focuses on analysing disruptive and sustainable investment trends within the technology, healthcare, industrial and consumer sectors in order to identify high conviction stock specific investment ideas.  He joined us in 2014 from SWIP, where he was an investment director in global equities. Prior to SWIP, he was a portfolio manager at Kleinwort Benson Investors. Craig has a 1st Class honours degree in Building Surveying and an MSc with Distinction in Business Information Technology Systems from Strathclyde Business School. He has 18 years’ industry experience.

*As at 30 November 2019.

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The Silent Disruption: Why traditional car makers and customers will get an Electric Shock! Part III

Part III: Practice makes perfect

In part I and II of my series on the disruptive shift to electric vehicles (EVs), I explained why it is normal for car buyers and traditional internal combustion engine (ICE) car makers to be surprised by it. As I explained, it is mostly about the relative rate of improvement on the key performance vectors (including the all-important affordability factor). But a key consideration when investing is understanding not just if, but when an inflection in demand will happen. So why now? A key factor in my conviction (combined with Christensen’s framework explained in Part I and II) is Wright’s Law. Formulated in 1936 by Theodore P. Wright, it states that progress increases with experience — specifically:

“Each percent increase in cumulative production in each industry results in a fixed percentage improvement in production efficiency.”

This law has successfully explained the cost curve of over 60 products from solar panels to cars, including the Model T Ford. In car production it has translated to 15% improvement for every doubling of cumulative production. Crucially, small numbers double much faster than large ones. Wright’s Law still applies to mature technologies, it just takes longer. What’s fascinating (to me anyway) is that the Tesla Model 3 is already following the path of the Model T Ford. By Q2 2019 Tesla had cumulatively produced 275k Model 3’s and will produce about 600k by the end of 2020. Based on Wright’s Law this should result in a 23% improvement in production efficiency. Translated to finance speak, this means higher gross margins and lower capex per unit of production.


Source: Ark Investment Management LLC, 2019

Tesla has produced more EVs than any other company. Unlike its incumbent competitors who have largely outsourced their innovation to suppliers, Tesla is a vertically integrated technology company. It designs and builds its own electric motors and batteries. It is adding production and battery capacity at a faster rate than any other company (with 44GWh they have almost 50% global EV battery capacity). It has been refining its own drive chain management software for years and it owns the largest and fastest charging network in the world. Does this company remind you of any others?


Source: Bloomberg survey October 2019 (5000 owners)

Range and recharge speeds are probably the two performance vectors on which EVs still lag ICE. However, with range there has long been what Christensen calls “performance oversupply”. Most car journeys are < 50 miles long and now you can refuel while parked, which means the necessity for rapid refuelling falls. Furthermore, Tesla recently announced a 3% range increase for the S and X and a 5% increase for the 3. These were deployed via an over the air software update. And for those who regularly drive further than 300 miles, the most recent generation of Tesla superchargers can deliver up to 75 miles of range in 5 minutes. Teslas are the only cars on the market today that continually add improved features to the car over the air for free. The car improves while on the road.


Source: Tesla Q3 2019 Shareholder presentation and researchgate.com.

Tesla are growing units of production and reducing cost per unit of production faster than anyone else, in a market that will grow faster than most expect. Quality is improving every month and the energy and creativity evident in product development meaningfully differentiates it in the design stakes. The recent #CyberTruck (pickup truck) is the most obvious example. Does any other automaker have the courage, creativity or technical ability to replicate it? What this all translates to – in my opinion – is a combination of underappreciated competitive advantage, underappreciated addressable market and an underappreciated inflection in demand.

“They can have it in any colour they want, as long as it’s black.” Henry Ford

In summary, I believe the winner in the transition to electric vehicles will be the company that has the clearest vision of the future, the least historical baggage (in terms of mindset, bureaucracy and source of revenue) and is innovating fastest. That company will never be perfect but at least we can have confidence that they are motivated to improve and move as quickly as possible in the right direction. The recent unveil of the Tesla Cybertruck is – to me – indicative of all of this. Bold and courageous, built from first principles, technically superior to any ICE pickup truck on the market at the same price… but with windows that need work before they can reliably be claimed to be bullet proof. Remember nothing is perfect to begin with!

“We can fix it in post” Elon Musk


Source: Tesla

About the author

Craig Bonthron is an investment manager in the Equities team, responsible for actively co-managing high conviction global equities portfolios. He focuses on analysing disruptive and sustainable investment trends within the technology, healthcare, industrial and consumer sectors in order to identify high conviction stock specific investment ideas.  He joined us in 2014 from SWIP, where he was an investment director in global equities. Prior to SWIP, he was a portfolio manager at Kleinwort Benson Investors. Craig has a 1st Class honours degree in Building Surveying and an MSc with Distinction in Business Information Technology Systems from Strathclyde Business School. He has 18 years’ industry experience (as at 30 April 2019).

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The Silent Disruption: Why traditional car makers and customers will get an Electric Shock! Part II

Part II: The incumbent’s perspective

Last week I wrote about why customers don’t appreciate the rate of change in disruptive technology until they experience it.  But it doesn’t stop there. Like their customers, established companies under threat from disruption tend to miss it too. And this feeds into the mainstream media, who are naturally attracted by the fallacious appeal to authority of the established brand names…. Surely if anyone knows, [insert established brand] would know!?

Despite the rapid advance of EVs in relative cost and performance terms, internal combustion engine (ICE) manufacturers still see electric vehicles (EV) as a small market, with negative margins which most of their customers don’t want. Why?

Clayton Christensen observed this behaviour repeatedly in his study of why great businesses with excellent managers fail to adapt to disruptive technologies. And just like their customers, it’s not because they’re idiots!

“It is in disruptive innovations, where we know least about the market, that there are such strong first-mover advantages. This is the innovator’s dilemma. Companies whose investment processes demand quantification of market sizes and financial returns before they can enter a market get paralyzed or make serious mistakes when faced with disruptive technologies. They demand market data when none exists and make judgments based upon financial projections when neither revenues or costs can, in fact, be known…Discovering markets for emerging technologies inherently involves failure, and most individual decision makers [within established bureaucracies] find it very difficult to risk backing a project that might fail because the market is not there.” – Clayton Christensen

Given the news last week that Telsa will build their European manufacturing facility ‘Gigafactory 4’ in Berlin, recent statements from BMW executives are extra ironic. I suspect that those who laugh at EVs and Elon Musk now will look back and laugh at ICE companies and Klaus Frölich in a few years. For now, such comments are usually taken as evidence that EV adoption will be slow. In a disruptive context however, dismissive comments like this are entirely predictable. Indeed, when viewed against the recent EV unit growth in all markets (1) and the fact the Tesla has not spent a single dollar on traditional advertising to date, I think they are a very positive contrarian signal. The quote below was sourced from a Forbes article in June 2019:

“There are no customer requests for [EVs]. None,” BMW’s director of development, Klaus Frölich, told a shocked round-table… “Europeans won’t buy these things… From what we see, [EVs] are for China and California and everywhere else is better off with plug-in Hybrid Electric Vehicles with good EV range.”

I believe the chart below is insightful when assessing the prospects of EVs. It tells me two things. 1) The demand is very high because people are willing to spend more than normal to purchase the item and 2) The addressable market is much bigger than most people think.

So it won’t surprise you to learn that I think Frölich is missing the biggest disruptive shift in automotive history, but I also believe he is overstating the role of hybrids in the transition. Why? Whilst it’s natural to cling onto the technology you know, pure EV costs will inevitably be lower than hybrids over time due to predictable cost reductions. These are reductions which can’t be achieved when combining both technologies, due to the complexity of doing so and the compromises needed. ‘Inevitable!?’ I hear you say ‘That’s a bold statement!’ Perhaps so, but in the context of history, I don’t think it’s that bold.

Source: SS Savannah 1819 (The first hybrid “steam ship” to cross the Atlantic).

Next week I will explain why EV costs will keep falling and performance will keep improving in the part III, the final act in the Trilogy of the Silent Disruption.

Source: European EV growth rates
https://insideevs.com/news/373420/august-2019-plugin-ev-car-sales-europe/
https://insideevs.com/news/373278/plugin-car-sales-europe-h1-2019/
Tesla surveys
https://www.bloomberg.com/graphics/2019-tesla-model-3-survey/market-evolution.html#intro

 

About the author

Craig Bonthron is an investment manager in the Equities team, responsible for actively co-managing high conviction global equities portfolios. He focuses on analysing disruptive and sustainable investment trends within the technology, healthcare, industrial and consumer sectors in order to identify high conviction stock specific investment ideas.  He joined us in 2014 from SWIP, where he was an investment director in global equities. Prior to SWIP, he was a portfolio manager at Kleinwort Benson Investors. Craig has a 1st Class honours degree in Building Surveying and an MSc with Distinction in Business Information Technology Systems from Strathclyde Business School. He has 18 years’ industry experience. *As at 30 April 2019.

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The Silent Disruption: Why traditional car makers and customers will get an Electric Shock! Part I

Part I: The customer perspective

 “If I’d asked people what they wanted, they’d have said a faster horse”– Henry Ford

 To most people, this quote from Henry Ford is a funny quip. It’s fun to look back and laugh at the silly old people of the past who thought cars would never replace horses.

But if you know how disruptive innovation works Henry Ford’s point is a serious one.

The reality of America in 1900 was that cars just didn’t make sense to most people. There were no gas stations. Roads were mostly mud or gravel tracks. There was no highway system. Cars were unreliable and very complicated pieces of machinery… and whilst black smiths were plentiful, there were no motor mechanics. Cars were too expensive for most consumers and considered ‘vulgar’ by those in high society. They were also noisy and not much faster than the average horse. The Model T Ford only had 20 horse power and a top speed of 40 mph. There were no traffic lights or laws governing how to drive. In fact, such were the barriers to adoption that Ford constructed a highway and gas station network to facilitate demand (1) and the Ford Motor Co. internally produced everything, because there was no established supply chain. How could there be?

As a result of these bold strategic moves, The Ford Motor Co. dominated the market for decades.
Source: Tony Seba, Stanford University

One paradox of disruptive innovation is that the customer is not always right. That’s because the average customer does not closely track the rate of change in disruptive technologies. In fact, it is normal for people to underappreciate the rate of change in a new technology that they do not yet use. Customers certainly can be fickle however, and whilst initially sceptical and resistant to the friction inherent in change, they will quickly flip when the perceived benefits outweigh the barriers to adoption. As Clayton Christensen observed in his seminal book ‘The Innovators Dilemma’, this can be confusing for the incumbent companies who closely track their customer’s desires.

“Most companies with a practiced discipline of listening to their best customers and identifying new products that promise greater profitability and growth are rarely able to build a case for investing in disruptive technologies until it is too late.” Clayton Christensen


Source:Innovators Dilemma, Clayton Christensen: Sustaining (i.e. incumbent) technology improves slowly vs. disruptive technology

I believe Electric vehicles (EVs) have quietly moved to a place where they outperform internal combustion vehicles (ICE) on almost every performance vector (2) without most people realising. Indeed, on an apples-to-apples comparison today, the only vectors on which they don’t, is fully loaded range and refuelling speed. And I stress today, because as we’ll see in part III, these frictions will be solved too. In this context, Elon Musk has a proverbial ‘walk in the park’ compared to Henry Ford. Furthermore, his conviction to rapidly expand global production, the Tesla charging network and service centres should make a lot more sense to the cynical naysayers and incumbent competitors.

Yet many traditional car makers still don’t see EVs as a meaningful threat to the status quo. Yes they’re improving but they are still a niche market and will be for decades. Next week I will explain why – like they’re customers – they are blind to this disruptive shift. And as you’ll find out, it’s not because they’re stupid.

About the author

Craig Bonthron is an investment manager in the Equities team, responsible for actively co-managing high conviction global equities portfolios. He focuses on analysing disruptive and sustainable investment trends within the technology, healthcare, industrial and consumer sectors in order to identify high conviction stock specific investment ideas.

He joined us in 2014 from SWIP, where he was an investment director in global equities. Prior to SWIP, he was a portfolio manager at Kleinwort Benson Investors. Craig has a 1st Class honours degree in Building Surveying and an MSc with Distinction in Business Information Technology Systems from Strathclyde Business School. He has 18 years’ industry experience. *As at 30 April 2019.

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[Video] Insulin Prices in America. What the…?!

Insulin prices in the US have gone up by 1171% over the last 20 years. Patients pay half, insurance companies pay half- and they employ a middle man to negotiate the price down and prevent price rises. So, how has this price increase happened? Craig Bonthron tells us why this greed will catch up with companies in the long term, and talks about the sustainable companies disrupting this trend.


For a more in-depth analysis of the insulin situation in the US see our two-part blog here: part 1, part 2

About the author

Craig Bonthron is an investment manager in the Equities team, responsible for actively co-managing high conviction global equities portfolios. He focuses on analysing disruptive and sustainable investment trends within the technology, healthcare, industrial and consumer sectors in order to identify high conviction stock specific investment ideas.

He joined us in 2014 from SWIP, where he was an investment director in global equities. Prior to SWIP, he was a portfolio manager at Kleinwort Benson Investors. Craig has a 1st Class honours degree in Building Surveying and an MSc with Distinction in Business Information Technology Systems from Strathclyde Business School. He has 18 years’ industry experience.  *As at 30 April 2019.

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