The internet has the potential to continue to see very good growth in Emerging Markets (EM). Historically, the internet has been about creating and growing new market segments, and we expect this trend to continue while existing market segments such as e-commerce, digital ads, online/mobile gaming, videos and online travel/property/autos will maintain their good growth momentum.
Emerging market countries are at different stages of digital development. Despite already high internet penetration in parts of emerging markets (particularly in Asia), there are many countries where internet access is available to less than half the population.
Connectivity will become more affordable and accessible, especially with cheaper mobile devices. According to Pew Research, in India, two-thirds of internet access is through smartphones; in China, it is over 50 per cent. If internet usage across emerging markets matures to the levels found in developed markets, there could be an additional two billion internet users across emerging market countries.
The internet is likely to continue to disrupt many traditional retail industries and even create new business models unthought-of, even five or 10 years ago. Internet companies in China arguably started out as followers but more recently have been very innovative in extending the breadth of service offerings for the domestic market’s needs.
The less developed or weak traditional commerce infrastructure in many emerging market countries appears ripe for disruption and lends itself to a higher growth potential for these internet companies. In many cases, we even see incumbent companies embracing new technologies that may disrupt their traditional service offerings, as the latent cost of existing infrastructure is much lower compared to their developed market counterparts, none more so than in the telecom sector.
Outsourcing has been a significant growth driver and we observed this most in the case of electronics manufacturing services, as well as IT services. The companies in EM, particularly in Taiwan (leveraging off production bases in China) benefited as global brands outsourced their manufacturing for selected products to these parts of the world – mainly taking advantage of the cost arbitrage.
Over time, the cluster effect helped improve efficiency of the entire supply chain, benefiting both parties. Likewise, IT services companies in emerging markets, particularly in India, have used the offshoring model to grow significantly. Today, most of the world’s desktop PCs, laptops, mobile phones, TV sets and game consoles are already assembled in emerging markets.
The investment case for these emerging market industries will be one where the companies are globally competitive. These companies will be subject to the same competitive forces that their global counterparts will face. So, picking winners here will be quite similar to picking global winners. In particular, there will be emerging market companies that are able to migrate up the value chain. The technology sector’s history has been littered with instances of leaders being displaced and products being made obsolete.
So past performance will definitely not be an indicator of future success. However, selected opportunities exist for emerging market companies that are able to move up the value chain. This may be done either through their own offerings or through helping their customers provide higher value-added products or services. We see possibilities in several selected areas, including semiconductor and IT services.
On a parting note, we haven’t even started to discuss impending disruptors in this sector yet. FinTech, short for financial technology, may be defined as companies that use technology to make financial services more efficient.
While software and the internet appear to be the core of most FinTech companies that may disrupt incumbent financial systems, the entire sector supply chain, from semiconductor to network infrastructure and IT services, will form part of the required building blocks. Likewise, virtual reality/augmented reality will change the way we work and live in the future. These innovations will continue to grow and create value in the New Normal.
Urs Antonioli is a portfolio manager of the UBS GEM Opportunity fund.