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Saturday, 1 May 2010

The Smart Paradigm comes to Asia

After the great moderation comes the great rebalancing. If OECD economies are to reduce the amount of debt in both the public sector and within households, then saving has to increase. Just as falling interest rates and the decline in economic volatility, combined with a rise in credit, defined the world since 1982, the need to pay off debt in the OECD will define the coming decades.
Co-ordinated government stimulus and low interest rates have postponed the dreaded day that this will happen but investors can hear the clock ticking. One of the key elements of this great rebalancing will be that Asian consumers will have pick up the slack as consumers in the West consume less. Today, the US consumer represents $10.35 trillion in spending, compared to roughly $2 trillion for both India and China. However, Asia will represent an ever greater proportion of the growth in demand. This has long been the case for computers and, as Apple’s numbers demonstrate, it is now beginning to drive smartphone sales.  
Asia is becoming the greatest markets for tech goods but how should an investor play it? First off, ignore analysts who continue to focus on the corporate PC market. Better still,  sack them because they are in gross dereliction of their duty. Second, be suspicious of analysts who focus on networking equipment.
As Microsoft again affirmed, in its latest results, consumers continue to power sales, not corporates. As we have argued before, the super cycle that we are in the midst of is the networking of the private and public space. The mainframe and PC cycles of IT expenditure were about the networking of the corporate space. The life that is lived by ordinary people is of movement, in geographic and temporal terms it takes place in 360 degrees and not at a desk top within a corporate building. 

The blue line represents PC sales, the purple  line is mobile, the red lap tops and the green smartphone. All in hundreds of billions of dollars. Source:

The arrow of time in tech points to mobility becoming increasingly dominant. Mobile phone revenues overtook fixed line revenues around the mid point of the last decade, and lap top PC sales have been the fastest point of growth in the PC market for about 10 years. Tablet computers will accelerate the trend, particularly in Asia and emerging markets. Soon there will be a generation of young people. in emerging economies whose first experience of text has either come from a mobile phone or a small computer. In the first quarter of this year smartphone sales increased at 50%, if that rate were to continue there would be close to five hundred million on sale by 2011, by which point it will probably be outselling PCs.
Unlike the PC, smartphones are something of a fashion item, they are badges that we use to signal something of our selfhood. There appearance confirms what could be described as a super cycle. The first waves of technology were all about networking the corporate space. Smartphones, like tablets, netbooks, and notebooks play to networking of private and public spaces, in other words, society in 360 degrees.

A few years ago it was estimated that the average western home had twenty-six electronic devices. One trend, that is at an early stage, is that more of these devices will be linked to the internet. With this in mind, Ericsson estimates that by 2020 there will be 50 billion devices connected to the internet. Within the home there will computers, lap tops, netbooks, tablet computers, numerous phones, digital music systems and a TV. There may be something called a home media gate way, a server computer that stores digital media that can then be streamed around the home.
The simplistic way to play this trend is to buy Taiwanese companies, such as Gemtek, Realtek and Zyxel. The problem is that these companies have little pricing power. Networks are built using international standards, so it is difficult to add any value. Cisco might be a networking equipment company but its market position is built upon a proprietary operating system,.Like Apple, Cisco is not primarily a hard ware company. Some of the Taiwanese networking names might enjoy a moment in the sun, as sales take off but it will not last long.
The rise of the Asian consumer will, in many ways, be a reprise of the world that was dominated by the personal computer. Therefore, the Asian hardware companies that mainly win will be the ones who dominate the PC world now: Hon Hai, Samsung, TSMC, with the addition of newer names, such as Mediatek, would be a good place to start  

A Media Centric Age
In an age when billions of devices are linked to the internet, and when most of them are mobile, what we have is the mother of all networks. Increasingly, these devices and the internet will be used for communication and the creation of communities. This pattern has been under way for some years and is already affecting which brands consumers value. Yet it may be have its profoundest impact upon the consumption of media. Look at the following chart, which comes from the Silicon Alley Insider website. It analyses Amazon’s sales, which for the first time are now dominated, not by books or CDs, but by digital products.

The network is being built, rapidly it is being populated by devices, as our various charts illustrate. The next step is that networks and devices have to do something. Increasingly, what they will be used for is the consumption of content. This is one of the articles of faith behind our theme of the Smart Paradigm.
The future just happened. In 2009 mobile data, for the first time, outstripped mobile voice. Yet there are only 400m mobile broadband connections, compared to 4.3 billion mobile phone subscribers. By 2013, more than 90% of global consumer data traffic will be video on demand and TV. Today, Youtube traffic is greater than that of the entire internet during much of last decade. Each minute 24 hours of video are uploaded to Youtube.
Asia’s influence is rising, and as the power of the region’s consumers increases, then Asian   media companies and internet names, such as NC Soft, NHN, CTrip, Tencent, Baidu will continue to prosper. Over the coming weeks we will examine this theme further because there are obviously opportunities to be had within the Indian media scene. 
However, let us not forget the West. American culture shaped the 20th Century, there is something about the American sense of fantasy that is seductive. This may have something to do with the fact that capitalism is making us more infantile. Therefore, American and some other Western media giants, such as Disney, Time Warner and News Corp, will among the winners from the digitalisation of Asia. Apple would be the other name we would focus on. Our hunch is that Apple may be the Western company that benefits most from the rise of Asia. By contrast, Microsoft, like Nokia, is likely to be among the Western losers.