Pandemics are a frequent phenomenon of global history. But the subsequent series of lockdowns that we have lived through over the past year have been unique in both their scope and their duration. Never before has the world undergone a ‘great pause’ of this nature, with whole slices of the economy put into enforced hibernation, and swathes of the world’s population confined to their homes for months at a time.
It is only expected that extraordinary conditions precipitate extraordinary changes in industries, and 2020 certainly delivered that. Lockdown has acted as a huge accelerant to certain pre-existing trends, particularly in the tech and digital spaces, condensing a decade into a year:
» According to the Office for National Statistics, E-commerce as a share of addressable retail rose in the UK from c.7% in 2010 to 20% at the start of 2020, before leaping to well over 30% penetration during the next 12 months. Additional data reveals it took a decade for online grocery sales in the UK to creep from 2.5% of total grocery to 5%, before exploding to more than 10% in under a year, even with supermarkets open.
» The phenomenon of working from home had been flirted with in forward-thinking offices for years, but with very little change, before almost overnight corporations across the world flipped the switch and sent employees home in droves.
» The march of robots and automation has long been mooted, whilst proceeding slowly. But as reported by the Financial Times, even as broad exports from Japan dropped last year, the export of industrial robots leapt 13% YoY in Q2 2020, and in America only pharmaceuticals saw a bigger jump in YoY imports than robotics did the first three quarters of 2020.
These are huge, technological forces reshaping the world. As investors, we want to remain on the right side of them.
We think that automation is a pre-existing trend that lockdown will accelerate. Automation often occurs in the wake of a crisis, as disruption presents a window for change to be seized. During lockdown, companies were forced to try and maintain productivity with far fewer workers. It was inevitable many would choose to do so through automation, and these lessons will not be unlearnt post-Covid. Also, robots do not get sick, so companies may look to disease-proof their supply chains through automation in the wake of such a profound reminder of the innate fragility of human health.
Keyence, one of Japan’s largest companies, is the world leader in providing sensors and machine vision for automation across multiple major end-markets. Think of it as the eyes of automation. Keyence’s sensors can detect change, measure distance and inspect products with a granularity and precision beyond anything that can be replicated by a human on a production line. The applications of these sensors are many and varied:
» The company produces a unique image-based laser sensor that sits at the end of a bottling line and examines pharmaceutical bottles to see if their seals have been damaged or breached in any way. This unwavering diligence can save lives.
» In the crabbing industry, the sorting of crabs by length, thickness and colour has traditionally been done by hand and eye, a laborious, salty process that could involve the crunching of sore fingers in-between sharp pincers. Keyence visited a crabbing factory and developed automated sorting sensors for the industry, saving on labour (and fingers).
It’s important to note that for all its potential good, automation presents various risks to workforces if mishandled. Interested in learning more? Read our recent Viewpoint on the ESG implications of artificial intelligence, automation and the future of work.
Covid and the disease-proofing of supply chains is not the only driver of automation. Reuters was one among many to recently report that the birth rate in South Korea dropped to 0.84 babies per woman in 2020, which may be the lowest birth rate in recorded history. Until very recently, the world had never seen anything like this, but now similar patterns are playing out across the developed world. This has profound implications for economic activity and the supporting of aging populations. Companies like Keyence will be pivotal in solving the great demographic challenges that Covid, as with other things, appears to have accelerated.
If 2020 was the year everything went digital, then the flow, sharing and connectivity of data has never been more important. Working from home, online retailing, digital doctors’ appointments, remote education, emergency responders, track and trace apps etc have all relied on strong, quick and resilient telecom communications.
Ofcom data shows that in February 2020, about 35% of UK adults made a video call at least weekly; by May, almost 75% had such a call as part of their weekly routine. Everyone has experienced the irritation of a dropped Wi-Fi signal in lockdown; it’s the difference between being able to get something done and not being able to. Extrapolated across a society, it’s the difference between functionality and everything grinding to a halt.
Crown Castle is a leader in North America in providing communications infrastructure, with over 40,000 towers, and 80,000 miles of fibre laid. Already, 80% of 911 calls in the US are made from mobile devices1 and these need wireless connectivity of the sort Crown Castle provides. Crown Castle is an essential part of the 5G rollout, which will enable data speeds as much as 100x faster than 4G, unlocking hundreds of billions of new GDP, and facilitating remote learning and remote hospital diagnoses.
Already much of life is lived on wireless devices like mobile phones. In the future, machines, appliances, autonomous cars, and even traffic lights may be connected and communicating with one another, requiring hyper reliable, hyper speed data transmission. Companies like Crown Castle, or KDDI, one of Japan’s leading telecoms companies, which is working with car companies to connect onboard vehicle equipment with the cloud, will be central to connecting and protecting societies in the 21st century.
So, from online retail to automation to digital connectivity, the great pause of the last year may ultimately be viewed by history as the great accelerator. As investors, it is important we own the companies that are driving this sustainably.
Risk warnings
The value of investments and any income derived from them can go down as well as up and investors may not get back the original amount invested.
The information, opinions, estimates or forecasts contained in this document were obtained from sources reasonably believed to be reliable and are subject to change at any time.
Views and opinions have been arrived at by BMO Global Asset Management and should not be considered to be a recommendation or solicitation to buy or sell any companies that may be mentioned.
Harry joined BMO GAM in 2013 and works as a portfolio manager on the Global Equities team. He focuses on Japan, as well as global stocks contributing to Technological Innovation and Health and Well-Being. Outside of work he is interested in understanding history, as well as mastering Jiu-Jitsu – both of which are proving equally challenging.
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