Key themes for 2020 and beyond

Opinions expressed whether in general or in both on the performance of individual investments and in a wider economic context represent the views of the contributor at the time of preparation.

Executive summary: Thematic investing is a core part of our investment process at Heptagon. Since 2011, we have published notes on 45 distinct themes, and this constitutes our eighth annual review of the key long-term secular trends that we expect to grow in importance over time. The themes we have investigated – many of which are discussed in more detail later in this commentary – not only have the power to capture the imagination, stimulate and cause debate, but also drive a core part of our investment process. Investors can access a range of leading businesses exposed to these trends via the Heptagon Future Trends Equity Fund.

Introduction
2019 has proved to be another busy year. In addition to having published notes on five new themes (agtech, smart cities, cannabis, alternative meat and longevity science), your author has travelled to 14 different countries across three continents in order to understand the future better and share his conclusions with potential investors. From Manhattan to Munich and Copenhagen to Connecticut, we met with management teams from over 60 corporates. We also attended a handful of trade fairs, including the IOT Expo, TechXLR8 and Wind Europe. Other highlights from the past year included touring the largest Amazon fulfilment centre in Europe and visiting the world’s biggest production plant for kidney dialysis machines and consumables.

All the themes we uncover share two common factors: their exponential growth potential and an inherent element of disruption: there is a challenge laid in the face of existing business models by often doing things better and more efficiently. We are reminded of Charles Darwin’s idea that the species (read: businesses) that survive are not the strongest nor the most intelligent, but those that are “most responsive to change.”

We present over the following pages our key insights into how we see the world changing. This is not meant to be a definitive review of all that we have learned in the past year. Rather, our comments provide an overview of how the trends that we follow have evolved. Our aim is to highlight simply how quickly the world is changing. Please note, this summary is non-exhaustive; think of it, rather, as a series of interlinked high-level perspectives. As diverse future trends overlap and intersect, they become mutually reinforcing. Few areas of the world will remain untouched. Please read on…

Data

• First discussed: “The data deluge” (March 2011)
• 2019 blog posts: #11, “What happens in an Internet minute” (18 March); #20, “Bright clouds” (9 May); #25, “Five things I just learned from Mary Meeker” (18 June); #41, ‘Thinking – still in fashion’ (16 October); #45, “The data deluge, revisited” (15 November)
• Key statistic: Boosting a country’s mobile internet penetration by 10 percentage points correlates with a 2 percentage point increase in GDP (source: Bloomberg)
• Key quote: “Every company is a software company,” (Satya Nadella, Chief Executive of Microsoft)

Impressive as it is that over 50% of the world now has access to the internet, there is still a lot more runway ahead, both in emerging and developed nations. Begin in the former, and the importance of expanding internet access in less wealthy economies is evidenced by the idea that growing a country’s internet penetration by 10 percentage points can generate a 2 percentage point increase in GDP. Not surprisingly, 9 out of 10 new internet users over the next 3 years will come from emerging markets, with digitally-influenced consumption in the emerging world set to double between now and 2022 (all data per Bloomberg).#

However, in the developed world too, do not under-estimate the importance of technology. Matt Garman of Amazon Web Services highlighted at its London summit that some 95% of start-ups in the UK would have been prevented from launching if a traditional IT model had been deployed rather than a cloud-based service. Cloud results in developers doing tasks 5 times more quickly than would otherwise be the case, with a 20% uplift in general productivity. Or, as the Right Honourable Jeremy Wright, the then Secretary of State for Digital, Culture, Media and Sport put it, at the TechXLR8 event in London in June, “technology is at its most powerful when it is ubiquitous and cheap.”

Last year, the world generated some 33 zettabytes of data. To put this in context, 1 zettabyte is equivalent to a 1tr gigabytes or the storage capacity of 250bn DVDs. If you were to store all the data in current existence, the stack would reach to the moon 23 times over. If you think this sounds like a lot, then consider that on current forecasts, by 2025, the amount of data produced is set to increase fivefold (all statistics per IDC, as was the earlier data point on global internet access).

While much of this data pertains to mission-critical things we take for granted (such as ubiquitous electricity and water that is constantly safe to drink), it is also remarkable to consider that daily we send 294bn emails and 65bn WhatsApp messages, while undertaking 5bn Internet-based searches (per Visual Capitalist). Looking forward, smart homes and connected cars, to name just two examples, are likely both to become more mainstream. Of course, there remains a trade-off. Data provide convenience and many appear to value this over the pervasive panopticon it creates (everyone knows more about you). We continue to believe wholeheartedly that for data to have any value, it needs to be effectively secured, stored and analysed, regardless of the use-case (consumer/ business) and end-market.

Cybersecurity

• First discussed: “Watch out! The growing privacy invasion and cybercrime threat” (April 2014)
• 2019 blog posts: #30, “$3.9m is a lot of money; $1tr is a lot more” (23 July)
• Key statistic: 41% of the emails processed by Mimecast, a cloud security and risk management business, in the first half of 2019 were rejected for displaying malicious characteristics (source: Mimecast)
• Key quote: “It takes 20 years to build a reputation and a few minutes of a cyber-incident to ruin it,” (Stéphane Nappo, Global Chief Information Security Officer, OVH)

The World Economic Forum ranks cybersecurity as the second biggest risk facing the global economy, behind only fiscal crises. More than $60bn is spent annually on cybersecurity. Yet it still yields ineffective defences, with cybercrime having cost the world economy over ten times this figure last year, equivalent to more than 1% of global GDP (per the Ponemon Institute). The WannaCry and NotPetya attacks of 2017 brought the issue firmly into the public domain. High-profile businesses including British Airways and Facebook among many others continue to suffer data breaches. Indeed, since the start of this decade, there has been a 60% compound annual growth rate in cybersecurity incidents globally (per PWC), while at least 80% of European companies experienced some form of breach during 2015 (the last year for which the data is available, per the European Commission).

The importance of cybersecurity is only likely to grow as more ‘things’ become connected to the Internet. Estimates vary, but the number of connected devices is set to increase at least to 20bn within the next 5 years (per the GSM Association), while more optimistic forecasts put the figure at 75bn by 2025 (per McKinsey). Nonetheless, a recent survey of managers by Bain found that worries about security were the single biggest barrier to companies thinking about adopting IOT (internet of things) technologies. Meanwhile, a different survey of 2,500 consumers by EY found that 71% were concerned about hackers getting access to smart gadgets. Good security costs money.

Only 7% of organisations are ‘extremely confident’ of their IT security protocol (per a 2017 survey by Check Point), with Chief Information Officers citing cybersecurity as their second highest spending priority (after cloud computing, per a recent study by Morgan Stanley). This should imply an acceleration of growth in spending, with the market for cybersecurity forecast to grow from $101bn in 2018 to $170bn by 2020, per Gartner. Fail to invest in cybersecurity at your peril!

Automation and robotics

• First discussed: “The robot revolution” (July 2012)
• 2019 blog posts: #6, “Do we need a national robot strategy?” (25 February); #19, “Better big boxes” (3 May); #39, “Automation and the future of retail” (4 October)
• Key statistic: By 2025, there may be 1 robot for every 3 people globally (Boston Consulting Group)
• Key quote: “If you woke up as an industrial company today, you will wake up as a software company tomorrow,” (Jeff Immelt, former Chief Executive of General Electric)

Critical when considering future trends is to separate hype from reality. Where the internet of things is likely to become initially most entrenched is ‘behind the scenes’ in the corporate world. Consumers may not even be aware of some of the developments at work. 9 out of 10 businesses say that they are currently investing in digital initiatives for their factories (per PWC). Industrial companies plan to spend up to $90bn over the next seven years on the industrial internet of things (sometimes also referred to as ‘Industry 4.0’) and are expecting $420bn of cost reductions and a $500bn revenue uplift by 2020, data again per PWC.

Much of this forecast expenditure is likely to be allocated to robots. There are currently around 1bn robots in operation globally. However, with the cost of robots falling at around 15% a year (per BCG), by 2020, this figure could reach 2.5bn, equivalent to 1 robot for every 3 people. The cost savings for a well-placed robot can be substantial. According to an example cited by the Robotic Industries Association, a trade group, a typical $250,000 installation, including training and parts, can pay for itself in two years in reduced payroll costs and increased productivity. Seven or eight years in, the cumulative cash flow gained can reach $1.5m, Once the upfront costs are paid, medium-size robots can cost just $0.50 an hour to operate, and large robots, $1.00. Robotic systems operate 24/7. Robots don’t get sick, go on strike or take holidays (yet).

Early adopters are gaining a competitive advantage. Amazon pioneered the use of robotic systems in supply chains, and now utilizes 100,000 robots across its warehouses worldwide. An Amazon warehouse can process a package in 13 minutes versus 90 minutes in standard fulfilment centres, only needs half as much floor space, and uses purchasing data to optimize item positioning for faster execution. We visited the largest Amazon fulfilment centre in Europe earlier this year and were impressed with what we saw (see Blog post #5, “Fulfilled by Amazon,” 13 February)

The flipside of automation is the potential loss of jobs that may arise. Oxford Economics predicts that manufacturing could lose 20m jobs to robots by 2030. Citigroup has said that it will shed 50% of its technology and operations staff in the next 5 years as machines replace people at a faster rate. Meanwhile, the number of human cashiers may have peaked. Amazon Go currently has 16 locations but aims to reach 3,000 by 2021.

Cashless society

• First discussed: “Cash dethroned” (May 2013)
• 2019 blog posts: #13, “Avocadoes to Rotterdam” (29 March); #36, “Messages from MasterCard” (13 September); #44, “China rising” (6 November)
• Key statistic: ~80% of all global payments by volume are still transacted via cash (source: Visa)
• Key quote: “We want to digitise every form of payment,” (Ajay Banga, Chief Executive of MasterCard)

Might we see our fridges becoming payment devices, another ‘thing’ connected to the Internet? In one word, the answer would be yes, for Visa expects some 30bn items – including fridges – to be loaded with customer account data within the next five years. More broadly, as the boxed quote from the Chief Executive of MasterCard highlights, every form of payment has the potential to be digitalised. With around 80% of all global transactions by volume still conducted using cash (and approximately 50% even in a mature market such as the US), the runway ahead is significant.

The operating principle of almost all businesses active within the space is to reduce friction and make payments easier. Contactless is a great example of this dynamic, with around 1-in-5 of all transactions on both the Visa and MasterCard networks now being contactless, almost double the level of a year ago. As in other segments of the economy, businesses operating in emerging markets may have a late-mover advantage, bypassing conventional technologies. Consider that even in 2017, more than 50% of payments in China were conducted digitally, and by value, the size of the country’s electronic payments market is over 50 times the size of America’s (per 13D Research). Innovation continues apace. Blockchain will also likely offer a number of exciting medium-term opportunities.

The car ofthe future

• First discussed: “The long road to autopia” (April 2015)
• 2019 blog posts: #9, “Uber for X” (9 March); #31, “Turning Japanese” (26 July); #37, “Postcard from Silicon Valley” (18 September); #38, “Planes, (no trains), forklifts and automobiles (25 September)
• Key statistic: Over 50% of consumers don’t believe autonomous vehicles to be safe (source: Deloitte)
• Key quote: “We will not stop until every car on the road is electric,” (Elon Musk, Chief Executive of Tesla)

As exciting as the idea of our fridge potentially becoming connected to the internet might seem, by far and away the biggest opportunity for ‘things’ to be connected lies in cars. Many have already begun to describe cars as ‘computers on wheels’ and, for sure, the percentage of a current vehicle’s input costs constituted by software has more than doubled to around 40% since the start of the century (per Infineon).

However, it is important to nuance discussions on this topic in two respects. First, two key future trends are simultaneously at work when it comes to conceiving the car of the future – electrification and increased autonomy – albeit that they are developing at different speeds. Next, any debate about the future car needs to be placed in a more holistic discussion about transportation. The emerging paradigm seems to one of mobility as a service. In this vision, cars should be thought of as just one option among others within the broad sphere of both public and private transport. More broadly, the decisions made by a combination of public urban planners and private businesses need to be seen in the context of the smart city, a topic on which we have also written extensively (see, for example, Blog post #17, “Livin’ for the smarter city,” 23 April).

Back to the future car. Electrification is likely to be a more significant near-term driver (no pun intended), simply because the technologies necessary for it are established. The cost of Li-on batteries for vehicles has fallen 90% in the last decade (per Bloomberg). Against this background, while it took five years to sell the first 1m electric cars, in 2018, it took only 6 months to reach this same figure (per Statista). With regard to the autonomous car, the debate is less about technology and more about regulation and consumer acceptance. More than 50% of consumers surveyed by Deloitte do not believe autonomous vehicles to be safe while just 39% trust automakers to bring driverless technology to the market. We see the autonomous car as complementary to other transport modalities. Such vehicles will only likely work well in some circumstances, such as on pre-defined routes in cities when the weather is good. Consider that sometimes a bike may, for example, be better than a car. Roughly 7,500 bikes can pass through a single 10-foot lane in an hour, which compares to between 600 and 1,600 cars (per the National Association of City Transportation Officials)

Healthcare solutions

• First discussed: “Reinventing healthcare” (November 2012); “Healthcare transformed” (April 2013)
• 2019 blog posts: #26, “German road trip and kidney dialysis” (28 June); #28, “The future of healthcare…” (10 July); #42, “Coming soon: a word-processor for your DNA” (24 October); #46, “Diabetes – we are just at the beginning of the innovation curve” (15 November)
• Key statistic: At $2.8tr, or 2.8% of global GDP, the annual cost of obesity is estimated to be roughly the same as armed violence and war (source: United Nations)
• Key quote: “The biggest innovations of the 21st Century will be at the intersection of biology and technology,” (Steve Jobs, former Chief Executive of Apple)

Technology has undoubtedly changed how we lead our lives, but can it also help us live longer? This question matters since demographics and health are two of the most important drivers for long-term economic growth. Viewed from a high level, it seems increasingly clear that medicine is becoming a data issue. The human body is estimated to contain nearly 150tr gigabytes of information. This is equivalent to some 75bn fully-loaded 16-gigabyte Apple iPads that would fill London’s Wembley Stadium around 40 times over. Each human genome alone consists roughly 3.2bn base pairs of DNA, equivalent to a text file of around 300 gigabytes (data per Visual Capitalist). Understand this data and scientists may understand how to save more lives.

The cost and time required to sequence DNA has come down rapidly and should continue to fall. Contrast 2011 figures of $6m per genome and a time to sequence of 10 days with current levels of less than $1,000 and around 4 hours respectively. Sequencing costs have fallen at a rate three times faster than Moore’s Law would dictate. Some 12m DNA samples have been genotyped or sequenced to-date (all data per Illumina). Today, genome analysis helps diagnose roughly half of rare disease cases six years earlier and ten times cheaper than conventional tests. Over 3,000 hereditary diseases have been identified using genome analysis, while genomics has already produced over 25 personalized drugs that are prescribed only when a patient has a specific mutation (per 13D Research). Looking ahead, the Broad Institute (a medical research centre operated jointly by Harvard and MIT) is currently decoding one human genome roughly every 30 minutes, and estimates that by 2025, some 1bn people globally may have had their DNA sequenced.

These developments are important, since many drugs used on ill patients today are not effective (some $50bn is spent in the US on ineffective cancer drugs alone according to McKinsey), while many people that carry chronic conditions remain undiagnosed. Novo Nordisk, for example, estimates that around half of the people who have diabetes are not aware of their condition. The implications both for the healthcare industry (and for food manufacturers) are considerable. The global cost of diabetes – at almost 3% of GDP, as we highlight above – is far from trivial.

The related dynamic is that there is increased scope for more efficient healthcare monitoring. 80% of consumers interviewed say they would adopt wearable/ implantable healthcare technology, if it made the treatment of their health more convenient. Anecdotally, doctors only make correct diagnoses around 80% of the time, yet consumers believe that computers will give them the correct answer on every occasion. Forecasts suggest that by 2020, some 50bn devices connected to the Internet will track healthcare data, creating a market worth up to $1.6tr. Remote patient monitoring technologies could save the US healthcare system alone some $200bn over the next 25 years (all data per McKinsey). At a more extreme level – yet perhaps also an interesting window into the future – globally, there are currently some 100,000 cyborgs, or people with dedicated mechanical implants (per Bloomberg). Expect this figure only to grow.

Food innovation

• First discussed: “You are what you eat” (October 2014)
• 2019 blog posts: #10, “Hungry for agtech” (12 March); #15, “Eat nuts!” (12 April); #29, “Too good to be true?” (17 July); #33, “A bigger part of the plate” (8 August); #40, “Unbundling the cow” (11 October)
• Key statistic: Forecast population growth means current global food supply levels will need to increase by 70% before the end of the century (source: World Health Organisation)
• Key quote: “Unlike the cow, we get better at making meat every single day,” (Pat Brown, Chief Executive of Impossible Foods)

Any discussion about healthcare needs also to encompass food since it is paramount to find solutions to a wide range of problems including how to feed a globally growing population and how to influence eating habits in order to minimise the burden on the medical system. We know that climate change – discussed below – and environmental pollution are causing land degradation and limiting water access. Without any technological innovation, farmers will have to sustainably generate ~50% more yield by 2050 in order to feed the world population (per the United Nations). Whether this is achievable remains to be seen.

Against this background, investment into agtech projects is growing substantially. Total funding in this segment reached $16.9bn in 2018, a 43% annual increase. This is the second consecutive year in which the figure has grown by over 40%. For further context, even 5 years ago, just $2.1bn was invested in the area (per AgFunder). More broadly, many are beginning to think of food as a service (or food as software). In this world, potentially all foods could be engineered by scientists at a molecular level and then uploaded to databases. These could then theoretically be accessed by food ‘designers’ anywhere in the world. In this world vision, genetic engineering and synthetic biology would be paired with distributed cloud and machine learning technologies to create new outcomes.

Climate change/ alternative energy

• First discussed: “What if the sun always shone?” (September 2015)
• 2019 blog posts: #1, “Winds of change” (21 January); #14, “Postcard from Bilbao” (4 April)
• Key statistic: Solar and wind are now the cheapest energy option for two-thirds of the world (source: Bloomberg New Energy Finance)
• Key quote: “The world will not be destroyed by those who do evil, but by those who watch them without doing anything,” (Albert Einstein, theoretical physicist and philosopher of science)

As the world has industrialised and its population has grown, so has its climate warmed, by 1.5 degrees centigrade, on average, in the last 150 years (per the United Nations). Despite such global progress, over 1.2bn people still live without electricity (per the World Bank). How then to reconcile the negative impact to the planet with the need to provide more energy? The solution we, and many others, believe lies in renewable energy.

Importantly, the economics of renewable energy have improved markedly in recent years. The cost of solar power has, for example, fallen by 84% since 2010, while the cost of lithium-ion battery storage has dropped by 76% over the same period (per 13D Research). Against this background, solar and wind are now the cheapest energy option for two-thirds of the world. In the US, constructing new wind and solar projects is more price effective than continuing to run 74% of existing coal plants. As costs fall further, this figure could reach 86% by 2025. Forecasts therefore suggest that the world could garner half of its power from wind and solar by 2050, with hydro, nuclear, geothermal, fuel cells and ocean power providing another 21%. Coal would be the biggest loser, with its share of global-generation falling from 37% to 12% (all data per Bloomberg New Energy Finance, or BNEF).

Governments also have a crucial role to play in terms of setting and enforcing renewable energy targets. Europe has taken a clear lead in this respect, with the continent targeting 32% of its energy needs from renewable sources by 2030 and 50% by 2050. Denmark, at 41%, leads the way with Ireland (28%) close behind, per data from the European Commission. The role of corporates in this respect is also significant, particularly since much of the investment community is attributing an increasing importance to ESG factors. Globally, Alphabet/ Google is the largest purchaser of clean energy (per BNEF), yet businesses as diverse as Amazon and Novo Nordisk have committed to 100% renewable energy generation within the next ten years.

A final note on a subject close to our heart, but one we expect also to become more pronounced as a future trend: plastic pollution. Every minute, we dump a garbage truck of waste into the ocean (per McKinsey). Think of it like this, some 5.5m plastic bottles alone are dropped into the ocean each minute; on a daily basis, this adds up to 1.3bn, equivalent to 40bn a month (per Reuters). Put simply, humankind is polluting water faster than nature can recycle and purify it. This is only storing up future problems, both environmental and health-related. Governments, businesses and consumers all have a clear role to play in changing these dynamics. Per Charles Darwin, those that survive are the ones most responsive to change.

Endnote/ looking ahead
All the pieces referenced can be found on Heptagon Capital’s website, as is more information about the Heptagon Future Trends Equity Fund. Looking forward, our aim is to continue researching new topics and publishing our conclusions. The world is never boring, and we are continuing to learn daily. Interested readers can also follow our Future Trends Blog. Expect more in 2020.

Alexander Gunz, Fund Manager, Heptagon Capital