Mike Moritz and Steve Bicknell are two men at very different ends of
capitalism’s ladder. The Cardiff-born Moritz is one of the lords of Silicon
Valley, ranked by Forbes magazine as the world’s most astute investor for
picking winners such as Google and YouTube, and amassing an estimated
fortune of £500m. Bicknell, operating out of a small office in West Sussex,
has just sunk £200,000 of his own money into launching a new children’s
publishing company. Whether he ever gets any of that back will depend on how
far he can take titles such as The World’s Strongest Guinea Pig.
They are united, however, by a single thought: for all the apocalyptic
warnings of a global depression, a collapse into permanent stagnation and a
replay of the worst of the 1930s, this is a great time to be creating the
future of capitalism.
“In dark times, even though none of us has probably lived through anything
quite as difficult as what we are meant to be going through now, the kinds
of people who are setting up a business for the right reasons, are still out
there,” said Moritz. “In this kind of landscape, you can see through all the
camouflage of a boom and detect the businesses that can really succeed.”
Bicknell is probably just the kind of character Moritz has in mind. A driven,
wilful man, he had already been running a small business selling children’s
calendars before this year taking the plunge and transforming that into a
full-scale publishing venture.
“Of course you have to be concerned abut the economic outlook,” he said. “But
there are 36m children’s books sold in this country every year, and all our
products are going to be under £10, so we need only a tiny slice of that
market.”
Indeed so. Step down from the Olympian heights of economic theory, with its
impenetrable equations and its closed, often private language of demand,
deficits and cycles, and that’s all a capitalist system is: a collection of
entrepreneurs, workers and consumers getting together to try out new ideas
and see what works. This week and for the next two weeks, The Sunday Times
is examining that system, putting its history, its health and its future
under the microscope.
The credit crunch has tested the system with a severity that took the experts
by surprise. Big banks collapsed, houses that were people’s pensions dropped
sharply in value and, in the case of Iceland, a whole country went pop.
It was more than just banks and statistics. For a generation since the fall of
the Berlin Wall in 1989, the big problems of the global economy appeared to
have been settled. Inflation was tamed and unemployment conquered. Wealth
flowed magically from stock markets and property portfolios. New countries
made the leap from poverty to prosperity in the space of a generation. Even
the business cycle, once a mighty beast that could lash whole continents
with the fury of a hurricane, had been turned into something so tame it
could be safely steered by a few technocratic central bankers with the
occasional quarter-point tweak of interest rates.
All that changed in the space of a few weeks last autumn. There is nothing
safe or settled about the economy any more.
Some kind of capitalist system will emerge from the carnage, however, that
much is certain. No one, not even the mob that routinely gathers outside G20
summits, is offering any serious – or, come to think of it, even jokey –
alternative to an economy based on free markets and private ownership. But a
look at the way the system has changed shape over a couple of hundred years
teaches us two things, both relevant to the kind of economy we are going to
be living with for the next 25 years.
First, capitalism comes in plenty of different flavours. Next, it changes in
response to a crisis. Out of each past crisis have come new industries, new
ways of doing business, and new ways of earning a living.
The chances are, it will be the same this time around. The capitalism of the
next 25 years will be very different to that of the past quarter century.
It will be created from the ground up by entrepreneurs figuring out new ways
of using resources, by workers shifting their priorities and by consumers
changing what they buy and how much they are prepared to pay for it. But
capitalism is fundamentally about people making and selling things – and all
the evidence suggests that the dominant global industries will be very
different once this crisis has passed.
TOM NICHOLAS has spent much of the past decade studying how business is forced
to change direction in response to a crisis. First at Oxford and more
recently as a professor at Harvard Business School he has looked at how
technology, the stock market and the economy interact to determine which
kind of companies do well and which fail.
Over that time, one thing has become obvious to him. Great businesses can
emerge even in the worst of times. “It’s not necessarily easier to start new
businesses during recessions, but it is important to note that innovation
and entrepreneurship do not stop during downturns in the business cycle,
even though it is commonly assumed that they do,” he said.
Really? Look closely, and it turns out to be true. The Great Depression of the
1930s is one example. For all the closed banks, American dustbowls and
Jarrow hunger marchers, there is a different story of industrial
development. The 1930s were also a period of furious technological
innovation, when industries that dominated the next three decades were
hammered into shape.
“There are tons of examples,” said Nicholas. “By 1937, 40% of DuPont’s sales
came from products that did not exist prior to 1929, such as rayon, enamels
and cellulose film. This required aggressive R&D across DuPont’s product
portfolio at a time of huge uncertainty about what the payoffs to this
investment would be. In another case, RCA invested heavily in television R&D
during the 1930s, while IBM opened up a new research lab in the nadir of the
depression.”
That was just in America. In this country it was much the same story. In 1931,
EMI was formed, and it opened up a studio in London’s Abbey Road to have a
bash at making gramophone records. The motor, electrical and chemical
industries that were the backbone of postwar British industry came into
their own during the 1930s.
To many experts the crisis we have just witnessed is not so much a rerun of
the 1930s, which started with a stock-market collapse, as the 1870s. The
financial panic of 1873 – which began with the failure of an American bank,
leading to the collapse of the Austrian bourse, and then a global wave of
bankruptcies – ushered in a decade known to economic historians as the Long
Depression.
Just as in the 1930s, there was also intense innovation. In America, Thomas
Edison was setting up General Electric and wondering if there might be a
market for light bulbs. In Germany, Deutsche Bank was launched as a new type
of industrial bank, eventually financing the mighty manufacturing giants of
the Ruhr.
Likewise, the 1970s might have been marked by hyper-inflation, oil-price
shocks, trade-union militancy and IMF bailouts. But that didn’t stop
entrepreneurs such as Microsoft’s Bill Gates or Apple’s Steve Jobs creating
the personal computer industry.
Even more recently, we hear a lot about Japan’s “lost decade”. And while it’s
true that the Japanese economy has hardly grown in the past 10 years, that
hasn’t slowed down Japan’s inventors or designers. Ask a small kid if it has
been a lost decade for Nintendo, the manufacturer of the Wii and the DS. Or
take a look at the number of Toyota hybrid cars cruising past your window.
Certainly, the men at the front line of financing the growth industries of the
future see no reason to zip up their wallets. “There has never been a better
time to set up a new business,” said Barry Maloney, general partner of
Balderton Capital, the venture-capital firm that includes hits such as the
online gambling site Betfair and the DVD rental business Lovefilm in its
portfolio.
“In terms of the talent available, the cost of resources, this is the time to
be doing it. What matters to a new business is what the economy will look
like in two years, because it will take 18 months to get the product to
market.”
Back in Silicon Valley, Moritz pushes the point even further. His firm,
Sequoia Capital, has just turned a healthy profit by selling Pure Digital
Technologies, the manufacturer of the hugely popular Flip camcorder, to
Cisco Systems.
“That was a business set up during one downturn, and sold during another,” he
said. “In fact, there are positive advantages to setting up a business in a
recession. There are resources available, everything is much cheaper, and
people within big companies are much more willing to take risks.”
Paradoxically, great companies are probably more likely to get started in bad
times than good. If you look at the British boom of the past 10 years – the
longest uninterrupted expansion for a couple of centuries, as Gordon Brown
kept reminding us – it is striking how few genuine entrepreneurs emerged.
Sir Philip Green was the greatest success of the decade but, although an
astute businessman, he is a really a trader of existing assets rather than a
creator of new ones. Otherwise, it was the men running the big banks and
retailers who dominated the headlines. None of those was a new company.
Those emerge when slates are wiped clean. In a deep depression, three things
happen to kick-start new businesses and new industries. First, all the raw
materials you need to get started suddenly become a lot cheaper. Shops,
factories and labour all tumble in price. Next, big companies become more
open to innovation. With margins under fierce pressure, they start by
slashing costs, but soon realise they can only stay in business by making
new things in a smarter way. Lastly, the alternatives melt away. There isn’t
much point in starting your own business when you can become a millionaire
before you are 30 by trading derivatives for Merrill Lynch. In bleaker
times, you have to invent your own future.
For Harvard’s Nicholas, it goes back to the work of Joseph Schumpeter, the
great Austrian economist, who coined the phrase “creative destruction” to
describe the way capitalism endlessly renews itself by clearing away old
industries to create space for new ones. “Recessions can have a very
beneficial upside because they lead to the survival or renewal of strong
companies and the extinction of the weak,” he says.
The trouble is that, while it’s easy to see the extinction of the weak by
walking down any high street, it is a lot harder to spot the renewal of the
strong. Although both the theory and the historical record suggest the
industries of the future are being seeded right now, that doesn’t make them
any easier to see through the thick fog of the current crisis.
FROM his office at the Boston Consulting Group in Montreal, George Stalk has
noticed something very interesting. The author of Five Future Strategies You
Need Right Now, and adviser to a string of multinationals, he has noticed
that big companies are becoming exasperated by the complexity of moving so
much stuff around the planet.
Ports, airports, sea lanes and roads have all become congested – and dearer –
as more and more products and raw materials get shuttled from continent to
continent. “If it wasn’t for the recession, we’d be seeing huge supply
bottlenecks,” he said. “And when demand gets going again, they are going to
come right back.
“A lot of our clients are telling us that they don’t want to source nearly so
much from China,” he said. “They want to source their goods from Mexico if
they are in America, or from eastern Europe if they are in western Europe.”
His prediction: globalisation, one of the dominant trends of the past decade,
is about to be thrown into reverse gear. Instead of making everything in
China or Turkey, we are about to rip up the rule book and bring
manufacturing back home again.
Over in London, David Suratgar, a career financier with the World Bank and
Deutsche Bank, has just launched a new venture, Medicapital, with backing
from City big-hitters, including Stanislas Yassu-kovich, the former European
head of Merrill Lynch, and Bernard Asher, a former chairman of HSBC’s
Investment Bank. Its focus: channelling money from the global capital
markets into Africa.
“I was hauled over to America earlier this year to give a talk at a JP Morgan
conference for all their important clients, which in that league means
anyone with $500m [£330m] or more to invest,” said Suratgar. “They had one
room where there was a presentation about China and then me. The China room
was practically empty, and our room was overflowing, which surprised me. But
all those people are looking for the next big thing.”
What does Moritz think it will be? “Anyone who tells you what the future holds
probably predicted 15 of the next three big things,” he jokes, and he
probably has a better claim to be able to do it than anyone.
But if you look through the day-to-day movements of the economy you can see
already the kind of industries that will shape the next wave of global
expansion and eventually lead us out of recession.
In the wake of past collapses, new industries were created in part by the
stimulus inititated by governments as they try to spend their way out of
recession. Not many people have much faith in government any-more, but it is
hard for even the most inept collection of ministers to blow a trillion
dollars or so without getting anything in return (although Gordon Brown may
test that theory). In the 1870s, the American government gave away vast
chunks of land and mineral rights to kick-start the railroad industry. In
the 1930s, huge spending on new roads and electricity generation helped seed
the motor and electrical industries that flourished so spectacularly in the
“never had it so good” era of the 1950s.
The same will happen with today’s spending programmes. Take cars. Plenty of
governments have pushed through “cash for clunkers” schemes – and Britain
has just joined them. Trade in your rusty old gas-guzzler for a newer, more
efficient model and you get a cash rebate. In Italy, you now get at least
€1,500 (£1,340) back, and up to €5,000 if you go for a green petrol-electric
hybrid. The results are impressive: Credit Suisse just raised its forecast
for global car sales this year from 11m to 13m.
What’s really interesting is the change in consumer behaviour. In Germany,
where they love their big Mercedes and BMWs, it is modest cars such as the
Opel Corsa and Fiat Punto that are seeing big sales jumps – the Corsa is up
300% this year. Just over a century after Henry Ford launched his Model T,
this crisis will spell the end of the petrol economy.
In America, President Barack Obama is hurling money at new high-speed trains,
at healthcare research and at renewable energy, providing plenty of
opportunities for entrepreneurs.
Beyond that, the crisis will press fast forward on trends and ideas already in
motion. “Some of them aren’t even defined as industries yet,” said John
Hagel, co-chairman of Deloitte’s Center for Edge Innovation. “But they soon
will be.”
Where will the mega opportunities of the next 25 years lie? The adjoining
panel gives five. No doubt there are another dozen industries that will
spring out of nowhere. The one thing we can be certain of is that the
industries of the future will be hammered into shape by restless
entrepreneurs seizing whatever opportunities the crisis throws their way.
“We just have to get our products into the high street,” said Steve Bicknell.
“Children’s publishing isn’t a pretty business, never has been. Sometimes it
takes 40 e-mails or phone calls just to get a meeting with a buyer. It’s
just persistence, persistence, persistence. That’s what we have going for
us.”
In the end, it is what capitalism has going for it as well.
Making money in the future – and reinventing the bank
HERE are five areas where fortunes are expected to be made.
LOCAL MANUFACTURING
AS Boston Consulting Group’s George Stalk said, it doesn't make much sense to
use millions of barrels of expensive oil shipping and flying goods around
the world when new technologies and lower transport and storage costs mean
they can be made locally at much the same price as in China.
The same is true of food. Fruit and vegetables could be grown much closer to
their markets, perhaps using some of that renewable energy created by
government stimulus packages around the world.
Put globalisation into reverse and you create thousands of businesses and
millions of jobs. They will be opening factories on Tyneside again – and
using the buildings that were call centres selling 120% buy-to-let
mortgages.
AFRICA
A WHOLE continent has been largely excluded from the integrated global
economy, but in a world desperately short of natural resources that is
unlikely to continue. One London-listed company, Mwana Africa, has just
invested $7m (£4.6m) to restart production at the Freda Rebecca gold mine in
Zimbabwe. That is just one example among many. A new generation of
entrepreneurs will emerge out of Africa, and a host of British and
continental businesses will find ways of doing deals with them.
“The way that Africa has performed this last year – when history would imply
complete implosion – gives us confidence that the African renaissance has
real legs this time around," said Christopher Egerton-Warburton, a
partner in Lion’s Head Global Partners, a boutique emerging-markets advisory
firm formed by former Goldman Sachs staff. He points to industries such as
forestry and agriculture as well as mining as areas where Africa is making
real progress.
TALENT SCOUTS
“THE film, media and sports industries are very good at using talent agencies
to manage and develop the people they need,” said Deloitte’s John Hagel.
“But managing and accessing talent is going to become much more important in
growing the businesses of the future.”
Indeed so. In a hyper-competitive world, any tiny shred of creative genius
will become the difference between success and failure – and just about
every business will have to find ways to source and develop talent.
Think of a whole generation of Jerry Maguires running round shouting: “Show me
the money.”
FINANCE
PROBABLY the last thing the world wants right now is lots of clever young
bankers thinking up new, smart ways of slicing and dicing money. But while
that kind of investment banking might be dead for a generation, retail
banking could get exciting. The mainstream banking system has taken 100
years of trust and blown it overnight.
“After everything that has happened, it is hard to believe there isn’t space
for new ways of doing banking,” said Barry Maloney of Balderton venture
capital.
Plenty of web entrepreneurs are already experimenting with new ways of
bringing people with too little cash together with people with too much:
take a look at the way Wonga.com or Zopa.com are reinventing banking for the
Facebook generation. That certainly looks like a better business than Royal
Bank of Scotland.
DEMOGRAPHICS
ONE thing we know for certain about the economy of 20 years from now is that
it will have a lot more grey hair. The developed world will have a great
many old people, while the developing world will have huge numbers of young
people. They will have to get together: the old people need looking after,
and the young people need their money. If you can have call centres in
Mumbai, why not care homes in Bangladesh? And doctors who operate over the
web?
Meanwhile, as countries such as Germany and Italy depopulate, there will be
countless opportunities for new industries. In another decade, farmers will
be growing biofuel crops on the great empty tracts of Bavaria while elderly
Germans will be hogging the pools elsewhere.
