Overview
The late Jack Welch, the longtime widely acclaimed CEO of General Electric, claimed that he wanted GE to be first or second in each industry. The benefits of being a market leader are multifold, including greater profitability, typically greater sales gains, and early opportunities for innovation.
The term “Blue Chip”¹ is often applied to these market leaders:
“A: a stock issue of high investment quality that usually pertains to a substantial well-established company and enjoys public confidence in its worth and stability
also: a company that offers such stocks.
B: a business or undertaking with an outstanding record or likelihood of profitability.”
Our view is that market leadership in numerous industries is changing rapidly. (We apologize for the length of this installment; there was a lot to cover.)
“Better, Cheaper, Faster”
Automobiles – historically the “Big Three” in the United States (i.e., General Motors, Ford, and Chrysler) dominated the auto industry, including in many markets outside America. As of the middle of the last century, the adage “What is good for General Motors is good for the country” was well accepted.
Since losing their dominance to Japanese competitors in the 1970s, numerous strategic missteps and technological developments are resulting in another seismic shift in leadership. The challengers worth watching are BYD and, of course, Tesla.
The chart below suggests that electric vehicle prices are likely to drop further, which, when combined with BYD’s announcement of vehicles with a range of 1,300 miles, suggests that the traditional manufacturers will continue to be pressured.
Figure 1: Rapid Decline in Lithium-ion Battery Pack Prices in China
Aerospace – For decades, Boeing and Lockheed dominated the aerospace industry, serving both NASA and commercial users as the premier firms for any launch. For those who have been watching, SpaceX has changed the industry with masterful improvements in technology and reductions in costs, such that the traditional firms are afterthoughts.
The latest reminder is the technical difficulties of Boeing’s Starliner, where a one-week trip has become a 60-day journey with no end in sight². The comparison below of the different generations of SpaceX’s rocket engines underscores the massive technology improvements made over the past several years. Fewer, simpler parts have reduced costs and weight, improved performance, and increased dependability. It is now hard to consider Boeing a market leader in this area.
Picture 1: Evolution of SpaceX's Raptor Engines: Raptor 1, Raptor 2, and Raptor 3
Airplane Manufacture - As if conditions were not bad enough in the aerospace industry, Boeing also faces major challenges in the airframe business, where it is increasingly being viewed as a distant second to Airbus. The chart below says it all, with Boeing slipping dramatically over the past several years.
Figure 2: Annual Jet Aircraft Orders: Airbus vs. Boeing (2014-2023)
Banking - Banking is one business that is not supposed to change, at least not very quickly. Deposits were intended to be near-permanent sources of funding, and any institution that invested in “safe” (i.e., low credit-risk) assets was assumed to be in good shape. The travails of Silicon Valley Bank changed all that, with long-dated agency assets suffering steep declines because of rising interest rates and rapid deposit flight facilitated by electronic banking apps.
Another massive development is the emergence of UK-based Revolut, which recently obtained a UK banking license. Per Wikipedia:
Revolut is a global neobank and financial technology company with headquarters in London, UK that offers banking services for retail customers and businesses.³ It was founded in 2015 by Nikolay Storonsky and Vlad Yatsenko. It offers products including banking services, currency exchange, debit and credit cards, virtual cards, Apple Pay, interest-bearing "vaults", personal loans and BNPL (where it has a banking license), stock trading, crypto, commodities, human resources and other services.³
Revolut’s “edge” is offering no foreign transaction fees and competitive foreign exchange rates. Traditionally, regulators could be relied upon to support incumbents, but in the UK, many of the major banks needed government support after the 2008 credit crisis, and therefore, the usual barriers were reduced. Time will tell whether Revolut evolves into one of the leaders, but if not them, there appears to be a variety of challengers in the fintech space.
In fact, the stricter capital rules, that emerged from the 2008 credit crisis, have had a dampening effect on investment banks’ historically most profitable division – their trading desks. Along with the increasing importance of trading algorithms, a new player has emerged.
“Inside Ken Griffin’s Citadel Securities, a new strategy for handling even more of Wall Street’s trading is starting to take shape — with implications for struggling banks and brokerages around the world.
The goal is to offer such firms a white-label trading service: They would deal with customers while Citadel Securities manages the guts of their trading desks, including technology, analytics, and order execution.
The nascent plan, described by people with direct knowledge of the matter, could be pitched as a solution for units where profits are getting eroded by stiffer capital rules, competitive pressures to lower fees, and the need to make costly upgrades. Firms including Deutsche Bank AG have responded to narrowing margins in stock trading in recent years by shuttering some desks, ceding market share to top players such as JPMorgan Chase & Co. and Goldman Sachs Group Inc.”⁴
Defense - The current heavy expenditure for supporting the war in Ukraine is masking the shifts in the industry. However, it is increasingly apparent that small, flexible, inexpensive weapons, notably drones, are creating a paradigm shift away from older “smart” weapon systems. Drones are much more cost-effective either as a standalone weapon (the drone delivers the payload) or as the reconnaissance arm of a weapon system (the drone provides coordinates for artillery).
In fact, cheap drones could be so effective as to render small arms less important. Regardless, a shift in leadership among defense companies appears likely. Turkey’s Baykar, Israel’s Elbit, and US Ascent are several of the many worth watching.
Picture 2: Military Personnel Deploying a Surveillance Drone in Field Operations
Energy - In the good old days, one could count on Exxon, Mobil, Chevron, Texaco, Gulf, BP, and Royal Dutch Shell (i.e., the “Seven Sisters”) to produce attractive, regular gains. However, with the emergence of new technologies such as fracturing, solar, wind, geothermal, and other sources, along with the restructuring of many of the majors, life is more complicated. Our sense is that solar has the greatest potential for disruption, based on the massive declines in costs.
Figure 3: The Average Cost of Energy in North America
Figure 4: Decline in Solar PV Module Costs with Increasing Global Installed Capacity
Entertainment - Recently, the NBA signed a broadcasting contract with a company that was originally a seller of books!⁵ That’s correct, Amazon was part of the three-firm group that secured a massive 11-year $76B package. You might question what business a bookseller has investing such a massive amount in sports. Well, the world has massively changed, and both Amazon and Netflix need programming to keep their subscribers. Not mentioned is another trend in the sports programming field is the increasing influence of the sports betting firms FanDuel and DraftKings which from our perspective, can extract more revenue from the typical event than typical broadcasters. Hence, Disney’s ESPN, a traditional powerhouse in the area, has been squeezed by challengers. Our view is that we have not seen the last of it, and the controllers of programming are likely to break apart their programming into subsegments such as data to facilitate betting, live broadcast, and replayed broadcast (or whatever other segmentation makes sense). Additionally, in a few more years, there is likely to be a greater geographical reach to attract additional viewers. Lastly, the NCAA’s decision to allow players to be paid is likely to change the dynamics in college sports.
Retailing - Well-established is the notion of internet retailing with Amazon garnering an increasing portion of the retailing spend. Less recognized is the apparently diminishing share of department stores among brick-and-mortar sellers. The below WSJ article addresses the preference of many shoppers to bypass department stores.⁶
Figure 5: Decline in Department Store Sales and Closings Over Time
Technology - Gone are the days when IBM was the font of industry knowledge. There have been so many shifts in the industry and fracturing into industry subsegments that it is hard to keep track. Even this past week there appears to be another major shift as a result of a federal court’s ruling that Google engaged in illegal, monopolistic practices. Additionally, the technologies and consumer (and business) preferences are constantly changing such that this area needs constant vigilance. Nonetheless, here is our attempt to identify some pending shifts:
Chips – Nvidia recently rose to prominence based on the massive need of the AI industry, but as usual, challengers are in the wings. Among the most promising is the focus on quantum computing, which appears to have massive speed advantages.
Communications – Starlink appears to have a speed and cost advantage.
Data Center – if computer chip speed and capacity are increasing at reported rates, data center growth might slow.
Mobile Phones – Google’s world was shaken by the recent court ruling. AAPL might be harmed by a reduction in the fees paid by Google and vulnerability to its own business model.
Personal Computers – the need for fully-loaded computers might yield to a slim model whereby most functions are offered on an SOS (software as a service) basis.
Search – the advance of artificial intelligence and the courts’ decision suggest some changes are likely.
Counter-Trend - While faster, better, cheaper works in most industries, sometimes customers prefer the opposite. The below quote for a recent WSJ article highlights Lenovo’s staid approach to personal computers resonating with its corporate clients.
“But unlike consumer-focused tech companies, which gain followings through captivating innovations, the Think-Pad’s cachet is in large part thanks to the consistency of its design, which resonates with large, change-resistant legacy companies that simply want an offering that’s familiar and dependable, said Enderle. For corporate tech leaders, too much change in a go-to product like a PC simply equals cost and aggravation, he said.
Lenovo’s ThinkPad is known for its resiliency. Butler said the company regularly puts the laptop through “torture tests” that includes falls and extreme temperatures. “The Lenovo devices physically just are not sexy. They look a little bit dated compared to what Dell and HP have to offer these days,” said John Wei, CTO of technology provider Integreon. “But IT guys—we like Lenovo.” He added: “People put coffee over it. It doesn’t die. People drop it when they travel. It doesn’t die.”⁷
Conclusion - Paraphrasing General MacArthur, like old soldiers, Blue Chips never die – they just fade away. Blue chips brand names are often picked up by successors, but for Fixed Income and Equity investors, the outcome can be disastrous.
Sources
[1] https://www.merriam-webster.com/dictionary/blue%20chip
[2] https://www.cnn.com/2024/08/07/science/boeing-starliner-nasa-astronauts-return/index.html
[3] https://en.wikipedia.org/wiki/Revolut
[5] https://www.nbcnewyork.com/news/sports/nba/new-nba-media-rights-deal-breakdown/5590041/
[7] https://ereader.wsj.net/?editionStart=The+Wall+Street+Journal