Thursday, April 26, 2012

Implications of the Third Industrial Revolution

Last week's Economist magazine carries a lengthy article about the the changes in global manufacturing.

I strongly encourage you to read the whole piece; it's very well-written, and also offers a number of interesting insights about how technology has transformed the way items are made and distributed.

Here's an excerpt:

Everything in the factories of the future will be run by smarter software. Digitisation in manufacturing will have a disruptive effect every bit as big as in other industries that have gone digital, such as office equipment, telecoms, photography, music, publishing and films. And the effects will not be confined to large manufacturers; indeed, they will need to watch out because much of what is coming will empower small and medium-sized firms and individual entrepreneurs. Launching novel products will become easier and cheaper. Communities offering 3D printing and other production services that are a bit like Facebook are already forming online—a new phenomenon which might be called social manufacturing.

The consequences of all these changes, this report will argue, amount to a third industrial revolution. The first began in Britain in the late 18th century with the mechanisation of the textile industry. In the following decades the use of machines to make things, instead of crafting them by hand, spread around the world. The second industrial revolution began in America in the early 20th century with the assembly line, which ushered in the era of mass production.

I was reminded of  the Economist's article earlier this week while I was listening to a presentation by Scott Davis.

Scott follows the U.S. Multi-Industry stocks for Barclays. This means that Scott tracks such companies as General Electric; 3M; Danaher; and Emerson.
I won't go into all of his thoughts - he's generally positive on the group, with "buys" on Honeywell; Tyco; and GE, among others - but I was struck by his comments on the global corporate environment.

Financial results so far for the industrial sector have been generally better than expected, especially in light of what is going on in Europe.  Scott said he has been pleasantly surprised that European sales trends have been essentially in-line with last year's results, despite all of the political turmoil and unusually cold winter.

Asia has been generally weaker than last year, but many of the countries are showing signs of revival (especially India), in Scott's opinion.

However, thanks to the incredible revolution in manufacturing processes, corporate earnings have continued to impress, for the most part.

At the same time, unemployment rates remain unacceptably high in most parts of Europe and the US.

The "third industrial revolution" may be good for corporations and their shareholders, but little benefit seems to be trickling down to the ordinary worker.

I noted with amazement yesterday the ability of Apple to ramp up production of its iPhones to nearly double the rate of a year ago, but I doubt that there was any need for a significant increase in workers.

This seems to be a common theme:  higher production does not mean more workers. Margins therefore can be maintained even if the environment is less than friendly, since output can be adjusted accordingly.

This in part explains the angst that many investors are experiencing.

The world feels bad - stagnant wages, civil unrest in Europe, etc. - yet corporate earnings continue to surprise on the upside.

For example, as of yesterday, of the 201 companies that have reported earnings in the S&P 500, 150 have beat earnings expectations, 26 have missed, and 25 have matched.

Can the stock market continue to rise even if the general living conditions do not improve?

For now, at least, the answer seems to be "yes".