Decade of Disruption - Transportation

Previous Updates have pointed out how the negative events over the years, that
have concerned investors every day, are in the news and in our face. While we
dwell on all of the concerns, the positive developments that have allowed
the S&P 500 to rise more than 100 times since 1981 (total return including
dividends) evolve slowly over time. For example, you may remember when the
first cell phones, that were the size of a brick, came out in the mid-1980’s. They
were a real novelty. In those early days, it was a status symbol to have a cell
phone antenna on your vehicle.

However, mobile phones became smaller, cheaper and more powerful. Being
able to reach people at any time was a major boost to efficiency, saving people
and businesses time and money. That was well before the smart phone was even
developed. With the growth of the Internet, and the easy to use iPhone smart
phone, our phones have become powerful tools to do more than I would have ever
dreamed of. Poorer countries skipped building telephone wire systems and went
straight to cell towers for the phone and the Internet. While all of us have
observed various stages of this development, we likely did not focus enough on
the positive implications this had for everyone in every part of the world. We
were too focused on all of the other short-term stock market concerns while the
slow evolution of this one innovation transformed the way people, businesses and
the world functions. This one transformation has been a huge boost to efficiency,
and productivity, thereby reducing costs and increasing profits for businesses. It is
innovations like this that enabled the value of businesses to increase, which has
been reflected in stock prices over the years.

Innovations such as personal computers, fax machines, the Internet, mobile
phones, the GPS system and digital photography were features of the 1980’s and
1990’s. Another significant factor that we do not often think about is that the pace
of change is doubling every ten years. So, what happened in the 1980’s and
1990’s can now happen in a single decade or even a shorter period of time. What
do you think that does to corporate earnings?

Most of the market commentaries this spring and summer have focused on
negative short-term issues such as rising interest rates, rising inflation, Covid
variants and the war in the Ukraine. I pay attention to what is happening in the
short-term but I want to FOCUS on what is developing in the longer-term. Let
us look at the innovations that have the potential to increase productivity, reduce
costs and boost corporate earnings in the years to come. We are familiar with
some of these trends but they seem to be in the background. I don’t think many of
us realize the impact some of the current trends will have on our lives and the
businesses we invest in.

Tony Seba is a world-renowned thought leader, Silicon Valley entrepreneur,
Educator and author of Amazon #1 best-selling book, Clean Disruption of Energy
and Transportation: How Silicon Valley Will Make Oil, Nuclear, Natural Gas,
Coal, Electric Utilities and Conventional Cars Obsolete by 2030. This book was
published in 2014. The reason I respect his thoughts is because many of the cost
projections he has published in this book and others he has written before 2014
have materialized. We must remember that this is not a blueprint for exactly what
will happen in the future. This information gives us an idea of what is possible
and how current innovations can cause change that benefits people, businesses,
society and perhaps even the planet.

According to Tony Seba, “We are on the cusp of the fastest, deepest, most
consequential transformation of human civilization in history, a transformation
every bit as significant as the move from foraging to cities and agriculture 10,000
years ago.” If he is correct, transportation and energy as well as food and
agriculture will be much different ten years from now. This Update is the first in a
series of Decade of Disruption, which will focus on transportation.

What is disruption? Disruption is when a new product or service helps create a
new market and significantly diminishes, transforms or destroys an existing
product, market or industry. For example, mobile phones are disruptive since they
create a new market for mobile phone manufacturers and communication
companies. In addition, they are destroying the traditional landline
communication sector.

How fast can change occur? Tony Seba has an illustration of an Easter Parade
in New York City in 1900 where the street is full of horse drawn carriages except
for one motorcar. He has a photo of the Easter parade on the same street 13 years
later in 1913 and the street is full of cars with only one horse drawn carriage. That
is how fast things could transform a century ago.

One hundred years later, there were probably very few walking down Robson
Street in Vancouver carrying a cell phone in 1990. By 2015, many not only had a
cell phone but also had a smart phone. Now almost everyone in the world has one.

Mr. Seba has observed that most smart people, including stock market experts
and economists, have consistently failed to anticipate disruption because they
have a linear mindset. In other words, in 1900, they were thinking about faster
horses instead of a car with a motor in it. As an example, in 1994 Bill Gates said,
“It is important that (Internet) expectations aren’t cranked too high. The total
number of users is still very small.”

In 2007, Bloomberg reported, “The iPhone’s impact will be minimal. It will
only appeal to a few gadget freaks. Nokia and Motorola have nothing to worry
about.” (The iPhone was released in 2007 in the US and 2008 in Canada.) In
2007, I had owned a tiny Motorola StarTac phone since the late 1990’s that was
amazing for making phone calls but was too complicated to even add a name and
number in the contact list. Blackberry phones did not appeal to me. When I saw
what the iPhone could do, I bought one the first day it was available in Canada in
the summer of 2008, and I have loved it ever since.

In 2007, Microsoft CEO Steve Balmer said, “There is no chance that the
iPhone is going to get any significant market share. No chance…” This shows us
that we have to be careful to be open to new ideas. My assessment of the iPhone
was better than Steve Balmer’s. Therefore, your assessment of an innovation may
be better than Elon Musk’s for example. The Dalai Lama said, “Our mind is like a
parachute. It works best when it is open.”

Tony Seba projects that the cost of lithium ion batteries will continue to fall by
a rate of 20% per year. He believes that the cost of the cheapest electric car will
fall to as low as $5000 in ten years. In the next decade, he envisions that most
people living in cities will use services like Uber that have self driven electric
vehicles to drive them around instead of owning a vehicle. This could save the
average person close to $5,000 a year. If you are a real estate investor or
developer, you will be interested to know that this trend could free up a lot of
parking lots for development because they will no longer be needed. In the future,
newer buildings may not require nearly as many parking stalls as they do now.

This all makes sense for people living in cities. However, I think vehicle
ownership could still be very popular outside of city centers. What will these
people spend the extra $5,000 on? This is that entrepreneurs can think about.

In the past, cars were used to date, eat at drive ins, watch movies at drive ins,
and to shop. Now people use Internet dating sites, order Skip the Dishes on the
Internet, watch movies at home on Netflix and shop online. The transformation of
our culture has been amazing when you think about it.

He does not mention hydrogen powered fuel cells but he could have a linear
mindset as well. No one has a monopoly on wisdom. His major point is that major
cost reductions, when combined with new technologies, suddenly create a rapid
process of change. The cost of fuel cells has dropped sharply over the years and is
becoming competitive with the internal combustion engine.

I believe battery powered vehicles will replace many gas powered vehicles
over time while hydrogen powered fuel cell vehicles will replace diesel powered
vehicles. Transport trucks, ships, locomotives, and heavy equipment that operate
on a 24/7 basis cannot be sitting idle for hours to recharge so fuel cells are ideal
for these applications. It takes as long to refuel a fuel cell vehicle as it does to
refuel a regular vehicle now. The production and disposal of fuel cells is much
less harmful to the environment than batteries, so that is also a factor. Fuel cells
can be recycled easily.

Toyota has been the leader in hybrid engine technology ever since it first went
on sale in Japan in 1997. Toyota is focusing on fuel cell vehicles instead of
battery- powered transportation, which is a significant endorsement for fuel cells.

The first flight of the supersonic Concorde in 1969 seemed to usher in a new
phase of air transportation, but it did not succeed. It didn’t fail due to the
technology. It failed due to the cost. The cost of oil skyrocketed in the 1970’s and
the Concorde used extravagant amounts of fuel to fly at 1,360 mph instead of 500
mph like a normal jet. Higher oil costs are what killed the Concorde. This
emphasizes how important lower costs are to spurring innovation.

Self-driving vehicles are another innovation we are likely to see. This is one
area where artificial intelligence is coming into play. Mr. Seba states that these
cars have proven to be 90% safer and will reduce motor vehicle fatalities by
900,000 people a year. That is 900,000 fewer families to experience a tragedy
they will never entirely recover from!

Perhaps there is another example of linear thinking or thinking about the faster
horse. Seba does not talk about drones. It costs more than $1,000 an hour to
operate a helicopter. Drones can be flown for $100 an hour or less. People may
not fly in drones for years but they can be used for many other purposes that most
of us may not imagine. Who in 1910 would have imagined that 200 people at a
time would cross North America at 500 mph in a Boeing 707 only 50 years later?
If Bill Gates could vastly underestimate the impact of the Internet, we will
probably vastly underestimate the impact that drones could have.

Over the last 120 years, land transportation has evolved from where people
owned the horse and the buggy to vehicles powered by an internal combustion
engine. Who could have ever imagined all the jobs and spinoffs that would occur
after blacksmiths lost their jobs. Now we are moving towards electric vehicles
that are powered by batteries and hydrogen powered fuel cells. Self-driven cars
and services like Uber are likely to reduce car ownership in cities, which will
impact the way buildings and perhaps cities are designed. This will make travel
cheaper and more efficient for individuals and companies, which will increase
corporate profits. We are likely to underestimate all of the effects and
repercussions that changes like this will have on us and our society.

Air travel has barely changed in the last 60 years. Drones could revolutionize
the how people and products are transported. Innovations like this create growth
in the economy and the stock market over time, even though it does not make the
headlines. I will address the disruption that could occur in the energy sector in
order to charge all of these battery powered vehicles in a separate Update.

Summer is here. This is a photo of one of my grandsons enjoying a simple classic
summer ritual with his new dog. Have a great weekend my friend!