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AB 2000 studies

Alain Boublil Blog

 

Innovation and financial markets

Financial markets have always been influenced by the innovations which affected the survival of some companies or which generated the success of the others which had been at their launch. Excessive reactions spiraling out of controls even generated major crisis as at the beginning of the years 2000 with the Internet bubble. Its blow-out had consequences by far more important than the fall of some stocks and affected growth of the American economy. Lessons have not been learnt because we see again a craze for stocks which represents the “new economy” as Alphabet, Google parent company, or Amazon. They reach market capitalizations without precedent, between 500 and 600 billion dollars when their financial results reach only some billions of dollars when they make profits which is not always the case. Apple and Microsoft are even higher, between 600 and 800 billion. Traditional industries are not left outside that phenomenon: Tesla, with a market value superior to 52 billion dollars, over passed Ford and General Motors, even if the company never made any profit.

The founders of these companies have understood the role of dreams which was at the origin of these valuations, whose they were the first beneficiaries. Within few years or few decades in Apple and Microsoft cases, they became the richest men in the world. Their challenge today is to keep these dreams alive and to save these levels of value which are not justified by their current financial results. So they try to convince public opinions and through it, financial markets, they will, at last, become profitable enough or even profitable, when it has not been the case until now, to justify current valuations. Tesla is accumulating losses but is working on an electric car model which, thinks its chairman, should transform the entire car industry. He doesn’t neglect other projects, able to make people dreaming, as a transport system, the Hyperloop, a kind of super TGV, which could move at the speed of sound or tourism in the space. Amazon was confronted to a fall of its profits during the second quarter and is even forecasting losses for the third one but is trying to convince financial markets through acquisitions in the retail sector. The company thinks it can transfer to the sale of consumption goods its methods which were successful with books and develop a new logistic system. But nothing permits to be sure it will be able to do that successfully. Google, on its side, is making efforts to convince that tomorrow, thanks to its software, car will be autonomous.

But experience shows that it is very difficult to forecast the success of an innovation. In the past, most of the infatuations lead to costly disappointments. On the opposite, successes were very rarely anticipated. The Seventies and the Eighties, for instance, were dominated by the priority given to space. Japan was not the last one to think so and every pavilion, at the Tsukuba international exhibition, in 1984, was celebrating the new era which was coming. People thought; at that time, that it could be possible to produce in the space products with a quality it was impossible to reach on earth. In the United States, after the second oil shock, some people even imagined to launch satellites with huge solar panels which would redirect energy toward power stations on earth to produce electricity.

Of course, all these projects were quickly abandoned. On the opposite, the first major application of the space was the launch of telecommunication satellites whose role had never been anticipated. Steve Jobs had had the brilliant intuition, thanks to the software developed by Bill Gates teams inside Microsoft, that computers, in the future will not be limited to companies and will become consumption goods. In France, we were not far from thinking that with the Minitel experiment but the equipment was too limited and, especially, transmission capacities were not powerfull enough. We should be wrong to mock that because Minitel did help the general public to get familiar with that tool which prefigured Internet. That gave our banks, for instance, an advantage against their competitors.

The two major innovations of the last decade, Smart phones and shale gas hadn’t been forecast by anybody. The first was in the continuity of the mobile phone but it changed social relationship and the way people were working in many areas, a lot more that it was anticipated. Regarding the second one, in the first time, it was denied by those who thought that fossil resources were near a “peak”. New extraction technologies, both for oil and natural gas brought a stinging denial. The abundance of oil provoked a price fall and the reduction of natural gas prices has encouraged the diminution of coal consumption, more polluting. The success of an innovation depends not only on its performances. It relies first on its capacity to fulfill the expectations of those who are targeted. Solar power, from the space was possible but did not respond to a demand. It is the validation of the innovation by those who are supposed to be interested in which commands its success and it is what today financial markets seem have forgotten.

Are car drivers going to be convinced to use electric vehicles? Until now, despite substantial incentives, they are not because technology is not yet appropriated. Autonomy is not large enough and to charge the batteries takes too much time. Technologies to be developed to cope with these weaknesses have a slow evolution. On top of that, raw materials, which are necessary, like lithium and copper, are not immediately available to respond to such a huge demand, which will affect costs. But it did not prevent financial analysts to get excited by Tesla and to start to speculate on raw materials markets. Are the drivers going to be attracted by the idea that their car can be autonomous? It still has to be proved. Curiosity about what is new must not be confused with the fact to buy, even if legal solutions to identify responsibilities in case of an accident are found, which will not be easy. But the debate is crucial regarding Google and all the companies involved in the project because it is necessary to keep that dream alive to protect their market value. Two scenarios are possible. The appetite for innovation stays and the first real signs of achievements appear. In that case, financial markets will confirm the current very high level of valorization. But if, on the contrary, doubts appear, the reaction will be violent and due to the market values level, it will have systemic consequences. A crisis, with a magnitude close to what happened in the past with the “Internet bubble” and the sub-primes could be possible. Its consequences wouldn’t be limited to the American economy.

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