There is a reallocation of capital from advertising to R&D evolving. Elon Musk may be the typifier. Tesla spends nothing on advertising, relying on Elon and social media, plus all the commentary he generates. Meanwhile, Tesla put $1.5 billion (in 2020) into R&D, representing triple the amount spent/car of the next biggest spenders, Ford, and Toyota.
R&D is the new differentiator, replacing the confected differentiators of the age of ‘mass marketing’
This is a sea-change, the old model was to make mediocre products, and use money to drive mass distribution, and big advertising budgets on TV to drive volumes. The amount of R&D was small, advertising budgets big.
The Korean vehicle maker Hyundai announced in December 2021, that it will close the internal combustion engines R&D group, and redirect funds to Electric development. All carmakers currently reliant on internal combustion will be thinking along the same lines, although to date they seem to have hedged their bets. They must look longingly at the market cap of Tesla, hovering over $1,000 a share, with a PE ratio in the stratosphere. Tesla is worth more than the next ten biggest carmakers in the world combined, astonishing, and unsustainable in my view. Even the second and third US pure EV plays, Rivian (101 billion), and Lucid (72 billion) start-ups who sell almost nothing, are worth more than all but the top 3 carmakers we all know of, Toyota, Volkswagen and General Motors.
This capital reallocation is happening all around us; vehicles are just a convenient metaphor for the trend across economies.
Telcos have been busy spending money on mobile infrastructure over the last 20 years. Coverage has been the competitive differentiator. What happens when technology takes over, as is happening, and you can run a 5G network via an AWS type server farm? Suddenly physical infrastructure becomes redundant, and the location of competitive advantage moves dramatically.
FMCG suppliers used to be major contributors to media profitability via TV advertising. Now, as a result of supermarket chains exercising their power over the point of sale, consumers have a vastly reduced brand choice as the margin pool shifts towards retailers. On the other side of the equation, retailers are themselves facing aggressive competition for the customers attention and orders, a trend evident before 2020, but turbocharged by covid.
I ask myself where can technology drive innovation in FMCG that cannot easily be copied, so the investment by the supplier has a chance to pay dividends?
Plant based packaged meat substitute foods may be one answer. As we learn how to edit genes to produce the enzymes that generate flavour and texture, capital and technology can be applied to intensive farming, replacing low tech and land intensive meat production. The evolution of some produce types in capital intensive glasshouses and aquaculture combinations may be the thin edge of the wedge.
The marketing differentiator in the future will be the leverage technology and intellectual capital offers to the smart marketers, not a line extension or modest evolution of current products backed by mass advertising. Put more simply, ideas, and the intellectual capital that generate them are the new competitive differentiators.
