JOHANNESBURG - Whether we like it or not, the fourth industrial revolution is here and is aptly summed up by Klaus Schwab in Wikipedia as fusion of technologies that is blurring the lines between the physical, digital and biological spheres.
The big question, however, is what industries are likely to benefit from the fusion.
The best possible answer lies in the spending of industries on research and development. The 2017 edition of the EU R&D Scoreboard comprises the 2500 companies investing the largest sums in Research and Development in the world in 2016/2017 with a cut-off of 24 million euros. For all practical purposes I concentrated on the listed companies worldwide.
From a JSE perspective Anglo American, Sasol, Sappi, British American Tobacco and Richemont made the cut.
The largest amount spent on R&D was in the Pharmaceuticals & Biotechnology industry which accounted for 20% of the total R&D spent by listed companies. R&D accounted for more than 15% of sales and more than 4% of the total market capitalisation of the companies. Technology Hardware & Equipment had the second highest R&D with 16% of the total R&D spent. More than 8% of sales revenue was spent on R&D.
Automobiles & Parts took up third place with 15% of R&D spent. R&D took up 4.3% of total sales and amounted to more than 9% of the market capitalisation on the industry. On a comparative basis Elon Musk's Tesla, spent 12% of the company’s sales revenue on R&D while R&D was 2.6% of the company’s market capitalisation. Yes, a lot of blue sky in Tesla’s share price.
Software & Computer Services had the fourth highest R&D spending with 12% of the total R&D spent by listed companies. The industry spent 11% of sales on R&D and R&D amounted to 3.1% of the market capitalisation of the industry. With Tesla evolving into a high tech company, the company’s shares may not be as expensive as commentators want us to believe. Electronic & Electrical Equipment had the fifth highest R&D with 7% of the total. R&D spent was 4.7% of total sales and 4% of the total market capitalisation of the industry.
In contrast, Sappi, Sasol, Richemont and British American Tobacco each spent 1% of sales on R&D and their R&D spent were less than 1% of their market capitalisations.
Miki Tsusaka of the Boston Consulting Group expressed the view at the World Economic Forum that the Fourth Industrial Revolution affects and transforms every industry. According to her five-year mortality rates for U.S. public companies are now running as high as 33% and 20% will not survive the next five years. “Inventing the future will require individual corporations to escape the constraints of our previous models of success …”, she said. South Africa’s research and development expenditure runs at less than 1% of GDP and is far behind the R&D of 3% and 4% of the market capitalisation and net sales of all the listed companies in the EU R&D Scoreboard.
It comes as no surprise that the valuation of industries with high profit margins and future profit growth driven by significant investment in research and development tend to have higher market capitalisation to operating profit ratios.
Ryk de Klerk is an independent analyst.
The views expressed here are not necessarily those of Independent Media.
- BUSINESS REPORT