SA is on wrong side of global shift towards new industries
• Fresh policies needed for country to become more focused on growing the pie for everyone
One of the most enjoyable elements of my job is travelling to countries where the companies we invest in are based. Travel is an important part of our fund’s bottom-up investment process because we need to build on-the-ground knowledge of the companies we invest in to avoid making errors that can cost our clients money.
By far the best way of doing this is to meet company management at their head offices (as opposed to meeting them at a conference) in-country, because one can monopolise the full time allotted to you with them and learn softer details about their respective companies.
We recently completed a trip to the US west coast, with Silicon Valley companies demanding the bulk of our attention. The electric pace of technological advancement in this region highlighted some hard truths regarding the shortcomings of our own local industries and broader economy.
In a world that is progressing away from agriculture and manufacturing towards one where it is increasingly the owners of intellectual property who are collecting the greatest rents, SA looks to be falling hopelessly behind.
The name Silicon Valley, which was coined in the early 1970s and used to reference the number of silicon-chip manufacturers in the Santa Clara Valley, has come to refer to the entire San Francisco Bay area, where many of the US’s best tech businesses are based.
Silicon Valley has managed to attract some of the brightest tech minds in the world because it offers entrepreneurs the opportunity to strike out on their own and start the next Facebook (or Amazon or Google). Part of this opportunity lies in the slew of venture-capital funding waiting to ride on the coat-tails of the “next big idea”.
It is no exaggeration to say that should any natural disaster befall the Bay Area, which is known for its seismic activity, a significant amount of the world’s intellectual capital is at risk of being lost. This combination of brilliant minds and venturecapital funding has naturally also led to a booming economy: the San Jose municipality within the Bay Area has the third-largest GDP per capita in the world at $127,000, after Zug in Switzerland and Oslo in Norway.
TECH CAMPUSES
Of the Faangs (the acronym for Facebook, Amazon, Apple, Netflix and Google), we visited the Apple and Google campuses. While the Google campus has the collegiate atmosphere of a university, the impressiveness of the newly built Apple campus, whose building budget of $5bn roughly equates to the market cap of Mr Price, was eclipsed by Apple’s secretive — and perhaps even arrogant — culture, which is beginning to resemble the Microsoft of yore. Apple’s closed ecosystem also contrasts with the “new” Microsoft, which has evolved from pushing its products onto its customers to allowing them to choose the solutions they want.
We also visited a number of specialised software businesses whose dizzying growth is testament to what is possible when bright minds with big dreams are married with funding.
These companies included enterprise software-as-a-service firms such as ServiceNow (founded in 2004, now with a $30bn market cap) and Veeva (founded in 2008 and now worth $10bn).
Finally, we met a number of companies that, while not well known, have very large market shares within the niches they compete in and would fall within the realm of what we would label “good businesses” because they have entrenched competitive advantages (what Warren Buffett calls “moats”) and consequently generate outsized cash (not just accounting) returns.
This list includes companies such as Cadence Design, which sells electronic design automation systems (a computer-aided design program for semiconductors); Maxim, which participates in the analogue semiconductor market, a small but necessary part of the massive overall semiconductor market; and the more “old-world” Omnicell, which builds automatic dispensing units and software for the health-care sector.
The success of the trip allowed us to meet a large number of businesses we would like to own should they trade at the right price, even if they may not be trading at those levels currently. Investing, after all, is a long game.
However, these company meetings made it difficult not to draw unfavourable comparisons with SA.
For example, sales of the Apple iPhone, one of the bestselling products in the world, totalled $144bn in 2017, almost half the size of SA’s nominal GDP. Apple makes gross profits on this item of $56bn, greater than three times the value of all the commodities used to produce it (which total $18bn).
As a commodity exporter, SA would battle it out for a portion of that $18bn and the gross profits SA corporates could earn would be a fraction of the commodity value they had managed to supply.
While this example paints a picture of the future that is gloomier than the reality, it is clear that today SA is on the wrong side of this global shift towards new industries.
It is my hope that our policy priorities shift away from redistributing portions of an ever-diminishing pie to one that can evolve with the changing times we find ourselves in and become more focused on growing the pie for everyone.
It will not help to cry foul when the inevitable does eventually manifest.
IT IS TESTAMENT TO WHAT IS POSSIBLE WHEN BRIGHT MINDS WITH BIG DREAMS ARE MARRIED WITH FUNDING