Why the next Apple will come from Asia

PHOTO: The Straits Times

Is "big" always good? How are the biggest companies in the world doing?

Prior to the global financial crisis, it was always assumed that big was better. Every company strove for global scale, reach and brand reputation. Telecoms to supermarkets tried to internationalise and dominate global trade, especially in opening up new markets and putting in place global supply chains.

With the invention of the Nespresso capsule and coffee machine, Unilever brought top-quality coffee direct to your home.

In 2014, the Fortune Global 500 largest companies generated US$31.2 trillion (S$44.4 trillion) in revenue, US$1.7 trillion in profits and employed 65 million people. The largest of them, ICBC Bank of China, had US$3.3 trillion in assets.

But with Walmart, the largest global retailer, having signalled a profit warning, have global companies peaked as the world moves into stagnation?

Fortune Magazine analysis of the Global 500 companies shows that the geography of these firms has changed dramatically since 2005. In the last decade, the number of companies from the "advanced" world (the US, Europe and Japan) has shrunk from 452 out of 500 (90.4 per cent) to 353 companies, or 70.6 per cent.

The big entrant is China (98 companies, or 19.6 per cent, compared with only 16/3.2 per cent 10 years ago). South Korea (17), Taiwan (8) and India (7) also had more global companies than 10 years ago.

Other than China, technology was the big disruptor. Tech newcomers such as Apple, Google, Amazon, Visa and Facebook now have more market value per dollar of physical assets than older giants such as GM, Exxon and the like. If hardware was the age of the 20th century, software is defining the 21st century companies.

Nothing demonstrated this disruptive shift better than the dramatic fall of Kodak.

The company that created the chemical film and photo industry ignored the challenge of digital media and is now a shadow of itself.

Technology is disrupting the value of hard assets in more ways than one. For example, the shale oil and alternative energy revolution (solar, wind and nuclear power) means that fossil-fuel (oil, gas and coal) producing companies must write off all their recent heavy exploration costs.

These reserves made sense at US$120 per barrel of oil, but not at the present price of $40-50 per barrel.

The third disruptor after technology is the post-crisis reforms in financial regulation. In a period of low interest rates, large companies like GE made money from financing, in effect leveraging their capital.

General Motors made more money from car financing than from making cars.

But when in 2010 Dodd-Frank legislation threatened to make them financial holding companies, subject to many complex rules, these industrial giants decided to get out of the finance business.

The regulatory reforms also cut back on global bank profits by requiring large capital and liquidity increases and imposing huge compliance costs. Global banks are shrinking their balance sheets and lowering risk appetites to concentrate on where they have comparative advantage.

At the same time, high regulatory costs and the constant need to increase transparency is causing many family-owned companies to rethink the benefits of going public. Instead, there is more de-listing and fewer initial public offerings (IPOs) in many markets.

The total number of listed companies remains relatively small at 44,540, with a market capitalisation of US$63.5 trillion at the end of 2014, or roughly 21 per cent of global financial assets (World Federation of Exchanges data).

Such disruptive forces mean that the life of a company on the Fortune Global 500 list has now shrunk from 61 years half a century ago to 16 years today. Competition no longer comes from existing giants, the McKinsey Global Institute notes, but from minnows in emerging markets that are growing to become sharks.

Who are the minnows threatening to be sharks? These are the small and medium enterprises (SMEs) around the world that have begun to access global markets through the Internet. In China alone, there are roughly 40 million SMEs against only 2,800 listed companies.

When the IPO window was temporarily closed after the A-share turmoil, thousands of start-ups queued up to register on the Third New Market, the over-the-counter market for transaction in unlisted company shares.

Big companies are discovering that as they grow in size, they become too complex to manage and not just too big to fail.

The problems of Volkswagen in emission control turned out to be serious governance issues. Once your reputation is damaged, as the Japanese airbag manufacturer Takata discovered, the consequences can be almost fatal.

From an investor point of view, large-capitalisation companies no longer necessarily deliver greater returns than small caps. Indeed, the really significant returns come from nurturing start-ups to become "unicorns" (companies valued at more than $1 billion), as private equity and angel funds have learnt to do.

There is of course some concern that even technology start-up valuations have become a bubble, but as long as investors are betting with their own money, rather that being leveraged, the systemic impact will not be that big.

My own bet is that the next Apple will be a start-up no one would have heard of even five years ago. It will likely be in the bio-technology area, producing a new drug or medical tool that will change healthcare and medicine. It is more likely to be an Asian start-up, because of the massive efforts of Asian governments in fostering new entrepreneurship, from Osaka to Shenzhen to Singapore and Bangalore.

The reason is simply scale. Never have so many SMEs been able to access so much knowledge and so many markets with such speed and ease. The era of small companies in new markets is only just beginning.

Of course, many start-ups will be bought up by the giants - an inevitable cycle of corporate life. In the corporate jungle, the many small plants fight for sunshine until one becomes the tallest tree, only to die eventually and feed the next generation of saplings and weeds.

With massive disruption, the survivors will be the small. Governments will do well to foster the eco-system for innovation and change.

Andrew Sheng is an adjunct professor at Tsinghua University, Beijing, and at the University of Malaya.

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