What It Takes to Escape Disruption

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disruption proof

Disruption is as old as commerce, but the pace is accelerating of late. The rise of the sharing economy threatens incumbents in retailing, banking, and car insurance, while new financial and environmental regulations are increasing costs for banks, utilities, and autos. Chinese businesses, their home country’s economic troubles notwithstanding, pose an increasing competitive threat in the global steel, aluminum, railway equipment, power generation, and bulk chemicals industries.   But some industries are less vulnerable to disruption than others.  For investors looking for companies with better-protected flanks, equities strategists in Credit Suisse’s Global Markets division are looking into telecommunications and tobacco, both of which are also in a position to benefit from industry-specific tailwinds. (To learn more about the disruptive threats facing global companies, as well as which industries are most vulnerable to those threats, see our companion story.)   Telecommunications   While the advent of the smartphone and the app economy that came with it has put pressure on a number of industries, it’s been great for telecoms, which benefit handsomely from rising data usage. And it’s likely to keep rising: As more people turn their houses into “smart homes,” they’ll be using their smartphones to do things like turn up their air conditioning before arriving home from work on a hot summer day.   As appetites grow for ever-faster Internet speeds, telecoms are happy to provide them – at a price. Though the U.S. instituted net neutrality in 2014, telecom companies profit from “peering ” or “interconnection” arrangements that connect paying Internet companies’ servers directly to telecom providers, allowing for faster Internet speeds without running afoul of net neutrality. Netflix, for instance, pays for peering from Verizon. In Europe, meanwhile, the European Commission recently permitted telecom companies to offer faster Internet speeds for “specialized services,” such as those provided to hospitals, as long as existing user speeds don’t slow. Telecom giants in both Europe and the U.S. could also benefit from the depreciation of China’s currency. China exports 36 percent of the world’s telecom equipment, and a weaker renminbi lowers the cost of telecom equipment.   Tobacco   The tobacco industry is heavily regulated, but for the industry’s titans – four companies account for 97 percent of global market share – some of those regulations have helped keep out new competition: Advertising bans and limitations make it more difficult for upstarts to challenge established brands. Companies may also find ways to benefit from new regulations. A proposal to put larger health warnings on cigarette packs sold in Japan, for instance, could lead companies to charge higher prices. “Smoking rates in Japan are already approaching those in major Western European countries, but cigarette prices still have ample room to rise,” Credit Suisse Japanese consumer staples analyst Masashi Mori writes in a recent note, who noted that increases in cigarette prices largely don’t hurt demand. “We therefore think stricter regulations could end up working to tobacco companies’ advantage.”   China has also introduced more smoking regulations, but global tobacco giants have very little exposure to the Middle Kingdom. Nor do they have to worry about Chinese competitors in their own markets. The massive China National Tobacco Co. has a monopoly on supplying China’s 300 million smokers but, for the most part, it doesn’t sell cigarettes outside the country.



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