Overview
The benefits of being a market leader are multifold, including greater profitability, typically greater sales gains, and early opportunities for innovation. However, once leadership is lost, the implications for investment and risk managers are massive. The lucky survive to become an “also-ran”, capable of servicing debt and serving legacy customers. The unlucky collapse, leaving investors and risk managers bewildered regarding what and how things collapsed. The refrain, from many prior to a collapse includes:
“It can never happen”,
“This company is a fixture”,
“I have known them for decades”,
“Too big to fail”
Our view is that it is helpful to identify some of the symptoms of shifts and thereby facilitate proactive behavior.
Figure 1: Smartphone Market Share in China
Technology Developments – Changes in technology appear to be occurring at an ever-increasing rate, and if they are material, have the potential for upending industries. We have addressed this issue in prior installments with the change from internal combustion engines to electric and/or hybrid vehicles. Unfortunately, it does not stop there, with some recent developments in the smartphone area. As can be seen in the above chart, Apple has lost leadership in China to some of the domestic manufacturers. One of the reasons is that Apple has been slow to include Artificial Intelligence features in its phones, apparently not because of hardware issues, but rather because it is still waiting for government approval to tap into the correct databases.¹
Government Actions – After extending Steve Jobs’ brilliant introduction of the iPhone, and building an ecosystem around it, Apple is now being attacked by regulators in the U.S. and E.U. for an illegal monopoly.² Regarding the U.S. suit, per the AP:
“The suit takes aim at how Apple allegedly molds its technology and business relationships to “extract more money from consumers, developers, content creators, artists, publishers, small businesses, and merchants, among others.”
In the case of the E.U., in March 2024 it issued a nearly $2 billion fine against Apple for antitrust violations.
While the fines are damaging, it is highly likely business practices will also be forced to change, thereby causing further challenges.
Consumer Preferences – Shifting consumer preferences can cripple or make industry leaders. The broadcast media firms have been buffeted by the cable channels (draining off viewers), streaming services (including Netflix), gaming, video platforms (such as YouTube), and soon via the online sports betting firms, which should be able to extract more revenue per viewer than the typical platforms.
Government Pressure/Support – Depending on the action taken, pressure or support can have a massive impact on a firm’s market position. Per Jeffrey Sachs, supposedly during the credit crisis, a previous US Treasury secretary provided support to his alma mater but refused such support to a competing firm (note, a counter argument is that the competing firm was too weak to be saved). In the smartphone area, Huawei was harmed via curtailments on chip exports but was subsequently supposedly helped via financial support from its government.
Costs – Typically, one of the major factors in consumer choice is the cost of the product. With the dispersion of technology, acceptable sources of production have shifted, thereby altering industry norms.
Conclusion – Everyone loves a winner, that is, a market leader which can provide dependable, attractive returns and have little difficulty in meeting its obligations. Fortunately (or unfortunately, depending on one’s position), leadership is constantly changing, thereby requiring intelligence and vigilance.
Sources
[2] https://apnews.com/article/apple-antitrust-monopoly-app-store-justice-department-822d7e8f5cf53a2636795fcc33ee1fc3