Peter Ball, 21 August 2017

Since we learned to make fire and invented the wheel, disruptive technologies have had dramatic effects on the way we live. In recent years it seems like new technologies are being developed at an ever increasing rate. We are finally realising the kinds of innovations we have been seeing in sci-fi films and books for decades.

Given the scale and speed of change we are seeing, it is very difficult to envisage how the world may look in 10 years. While new technologies will inevitably have both positive and negative effects on investment portfolios, historically they have provided some of the best investment opportunities so it is important for the long-term investor to have an understanding of the risks and opportunities technology may create for their portfolio.

Below we identify four new technologies or ideas that we believe will substantially disrupt an existing market over the next decade. Along with advancements in AI (Artificial Intelligence), augmented reality and self-driving cars that are driving innovation in a wide range of industries, technology is also unravelling the mysteries of the human body.

AI (Artificial intelligence) has moved out of the realms of sci-fi

Post the mobile revolution, AI and automation look set to become the next disruptive technologies that transform the world, with the economic implications likely impacting policy makers, corporates and investors.
What makes automation so revolutionary is the scope of its disruption. Robots are already commonplace in the manufacturing industry, usually undertaking tasks seen as either too difficult or dangerous for humans. However, technological advances and a significant drop in component costs have increased the scope and usability of robotics.

AI has already moved out of the lab and is outperforming humans in many real world situations. The latest deep learning systems outperform humans in image and speech recognition. According to McKinsey, a global consulting company, 45% of work activities could be automated using technology that was being demonstrated in 2016. This gives us the impression that the advancement and adoption of automated technologies could play out a lot quicker than many appreciate.

A wide range of technology companies stand to benefit from these trends. Semiconductor (microprocessors and graphic processors) and sensory vendors are at the epicentre of this revolutionary shift; AI demands fast and reliable high performance computing and sensors (cameras, radar, ultrasound etc) to function. Cloud infrastructure leaders  have been very busy investing in AI solutions and are already off ering products that incorporate AI technology that helps to automate certain business processes. Automation and robotics companies are also at the forefront of this revolution. McKinsey forecasts the number of industrial robots could rise from 15 million currently to 25 million by 2025, implying a 25-30% annual growth in robot sales.

The emergence of autonomous vehicles is likely to be the most powerful trend the automotive history has ever experienced

Due to the legal and technical hurdles that must be met, fully autonomous vehicles are probably many years away from becoming mainstream. However, based on the direction key players are taking, we see two key offerings emerging: 1) a personally-owned vehicle with full driverless capabilities (sold by auto manufacturers); and 2) an on-demand autonomous network offering taxi and ride sharing services.

The number of vehicles on the road is likely to significantly decline as the market shifts toward vastly more economical automotive service models (posing a bleak outlook for the automotive manufacturers). These could take the form of dedicated robotic taxis, goods delivery services, overnight trips in sleeping cars etc. It could also be disruptive from a social perspective; an improved taxi system could make ride-sharing more efficient. In the future, autonomous cars could be designed specifically for business meetings or as restaurants. Road safety would rise and there would be better utilisation of roading infrastructure, lowering insurance rates and fuel costs. In decades to come, if every vehicle was fully autonomous, traffic lights could become obsolete.

Over 40 companies are developing autonomous vehicle technology. This includes the automotive manufacturers, established tech companies and a number of tech start-ups. Alphabet’s self-driving car business, Waymo, is a clear leader in developing driverless car technology. Its self-driving cars have already clocked up more than three million miles of on road testing over the last seven years and billions more in a simulated environment using machine learning technology. Not only has this led to significant technological advancement but the cost of Waymo’s technology has also dropped dramatically. Waymo has partnered with Fiat Chrysler which has the automotive manufacturing expertise and scale. A number of tech companies are also working on self-driving technologies. Automotive manufacturers and parts suppliers are making significant investments into this field.

Advances in the field of genomics are leading to significant insight into the understanding of DNA and how the body functions

DNA determines our physical characteristics, regulates biological activity and can indicate a person’s risk for certain diseases. In order to interpret DNA, scientists look to next generation sequencing, a technology that matches genes to bodily functions and can identify gene mutations. Over the last few years there has been a significant advancement in the technology used to sequence DNA. Next generation sequencing tools are now faster and more affordable than ever. To put it in perspective, in 2000, the Human Genome Project finished sequencing the first whole human genome which took over a decade and cost over US$3bn. Today, next generation sequencing tools can sequence nearly 20,000 human genomes per year at a cost of around US$1,000 each.

The next generation sequencing market is currently worth around US$2-3bn per annum but is growing rapidly. The market is dominated by two companies that together hold around 90-95% market share. Illumina is the clear leader with 80% market share while Thermo Fisher, through its 2014 acquisition of Life Technologies, holds the number two position with around 15% of the market. Illumina estimates that the total addressable market for next generation sequencing instruments is worth around US$30-35bn per annum.

Advances in genomics have opened the door to precision medicine – targeted therapies that use specific biomarkers to match treatments to the unique conditions facing each patient. Some of the most prescribed drugs in the world only help a fraction of the patients they are given to, which can prevent patients from getting the treatment they need and wastes precious healthcare resources.

Precision medicine looks to use biomarkers in the body to tell medical professionals which treatment would be best for the patient. Biomarkers are proteins in a person’s blood or a genetic mutation that can be linked to a particular disease. By looking at biomarkers, doctors can gain insight about the disease and how to inhibit its effects. The opportunity in precision medicine is tremendous and is already revolutionising the way doctors treat disease. Many of today’s newest and most effective cancer treatments work to block the expression of cancer linked gene mutations. According to the American Association of Cancer Research, there are over 800 new cancer therapies in development and 73% have the potential to be precision medicines. These trends demonstrate the vast degree to which R&D is ramping up in the space and the massive impact the field is having on healthcare.

Augmented reality; a revolutionary technology

In an interview with The Independent, Apple CEO, Tim Cook, called augmented reality a revolutionary technology. He viewed it as a product that everyone can use, similar to the iPhone. So similar to the iPhone, in fact, that it might one day supersede it. Mr Cook is not alone in this view; some industry experts anticipate the market to be worth US$180bn by 2020 as virtual devices replace smartphones and businesses start utilising the technology.

Augmented reality and virtual reality are related technologies that provide a very different experience and serve very different purposes. Virtual reality, as the name suggests, creates a fully immersive virtual world that users interact with. Users don goggle type displays that completely cover their field of vision. The goal of virtual reality is to make a world so immersive that a user can’t tell the difference between what is real and what isn’t.

At present the primary content available on virtual reality headsets is game software but we believe it will quickly expand to include movies, TV and music and then broaden to other types of entertainment such as theme parks, zoos, museums and concerts.

Augmented reality blends virtual reality and real life; users experience computer generated images superimposed over their view of the real world. Ultimately, we believe that augmented reality will come in the form of glasses. Users will be able to make phone calls, send messages and receive directions in front of their eyes all while walking, driving or talking to someone. Google glass has already provided a glimpse of the potential of augmented reality but due to technological limitations it never moved past being a concept. Alphabet is now working on a model for business use.

Augmented reality technology will probably be used in commercial applications before being adopted for personal use. As the technology improves (power efficiency) and becomes more mainstream (moves beyond goggles to glasses) we expect there to be explosive uptake. As production volumes increase, prices should fall, spurring further growth. While virtual reality is a completely new device and therefore has very little overlap with other consumer electronic devices, augmented reality will provide a number of the same functions of a smartphone, yet in a potentially more convenient way. As a result, many industry experts believe that growth in augmented reality will likely be a catalyst for the evolution from smartphones to wearable devices.

Wanting to gain exposures to these technologies? Contact a Craigs Investment Adviser to discuss. 

Please note: This article was first published in the August 2017 edition of News & Views. Craigs Investment Partners clients can view the latest edition of News & Views, which includes the full version of this article, by clicking here.