The pandemic has hastened the decline of some companies and also devastated some industries that were previously doing well. In order to grow, some companies have been adopting new technologies to improve their businesses. The new environment is forcing even the most traditional and conservative brands to turn to e-commerce. Swiss watchmaker Patek Philippe reportedly began selling its products online for the first time in its history.
Brands that had already embraced digital are expanding their strategies, finding new ways to connect with customers and cultivate sales — from live chats on their websites to virtual fashion shows and product launches on social media. Many old economy companies are also investing heavily in technology to reinvent and revitalise their businesses.
Decades of reinvention
Railroads are among the oldest forms of transportation, which many consider part of the old economy. However, after years of operating in the shadow of the trucking industry, improved performance and dependability have made the freight rail sector a growing force in the US commercial transportation system. The current inflationary environment has also given the US railroad industry a cost advantage as its railway network is largely established. In contrast, the trucking industry is facing headwinds including higher driver wages and rising fuel prices; trucks require several times more fuel than trains, particularly over long distances.
Longer term, US railroads always contend with two issues: the need for large capital expenditures and increased government regulation. Still, the positives of the rail industry may outweigh the challenges. For example, railroads tend to have a diverse customer base, preventing one end market from weighing excessively on the overall business. Price hikes by trucking companies are also giving railroads more leeway to boost revenues. Importantly, railroads have a long-term positive impact on the environment. It accounts for 40% of freight movement in the US, but only 2.1% of the country’s transportation-related greenhouse gas emissions.
Precision scheduled railroading (PSR) has been a game changer for the industry due to the strategy’s advantages in transporting more freight with less capital compared to older practices. CSX is among the US rail carriers that have implemented PSR. The company has been able to achieve operational transformation and efficiency driven by improved management and leadership.
In terms of technology, CSX uses a smart cruise control system called Trip Optimizer to achieve fuel efficiency and enhance safety. According to the company, the Trip Optimizer software, which creates trip plans to optimise fuel burn, could reduce an average of 174,000 tonnes of emissions per year.
Technological innovation continues to shape the US railroad industry. As the industry evolves, a regulatory environment that allows innovation to thrive could help US rail companies achieve steady and durable growth well into the future.
Running ahead in innovation
The COVID crisis has reinforced the strength of select business models. In particular, companies with fast and efficient online business models are soaring above the competition. Previously considered an old economy company, Nike has sought to improve its business by aggressively shifting more sales online. It has also developed disruptive innovative technologies such as the FlyEase, which create footwears that are easy to put on and take off – a functionality that appeals to a wide range of consumers. Some of its innovative products include hands-free shoes called the Nike GO FlyEase as well as eco-friendly shoes Nike Space Hippie, which are partly made from recycled material.
Technological innovations in India’s banking system
As old economy companies evolve in the US, their counterparts in India are also adapting to new ways of business. On the banking front, larger private banks in India have been growing profits and gaining market share. They are well-positioned to scoop up some of the country’s weaker lenders. For instance, Kotak Mahindra Bank is leveraging technology, amid the digitalisation of India’s economy, to make faster lending decisions and reach customers in rural areas through its mobile app.
Interestingly, India’s entrepreneurial culture and a vast pool of technology talent has given rise to a host of domestic competitors, some with significant private equity funding.
Now, as companies extend their scale, many are lining up in the initial public offering queue. If successful, these deals could help support the digital ecosystem and diversify India’s equity markets. New public companies are part of the further diversification of India’s equity market away from state-owned enterprises to private-sector banks, technology companies and consumer stocks.
Uncovering opportunities with a global mindset
Not every company that embarks on a digital transformation or adopts technological innovation will emerge as a long-term winner. The key is to fully understand a company’s digital and innovation strategies and the prospects for success.
When considering the potential winners in today’s fast-evolving world, thinking exclusively about the consumer tech giants, fintech businesses or cloud-based software providers could mean overlooking some of the innovations and advancements that are happening in areas such as the old economy industries. Having an exposure to innovative companies in traditional industries may also provide diversification benefits to the portfolio. For example, industrials and financials sectors could fare better than high growth industries in a rising interest rate environment.
When it comes to stock selection, especially when targeting innovative companies, having a global mindset can help to uncover investment opportunities. A long investment horizon is also important as it requires time for secular growth patterns to take hold.
Looking ahead, our economist expects equity markets to stay resilient, as slow but positive economic growth could support an increase in corporate profits. However, an unknown COVID trajectory and lingering inflation could result in heightened volatility.