My Takeaway from Economists The World Ahead 2023

I bought 'The World Ahead' yearly, hoping to have some idea of what may happen in the coming year. Here are my takeaways from this edition.

Energy

There are so many things that we need electricity for.

Nations, including Singapore, that can't produce the fuel for it will have to import them and will be at the mercy of the market price.

Thanks to the Russia and Ukraine war, oil and gas price rocketed & some nations have little choice but to refire their coal power plants, some even use their nuclear power plants.

 

A blow to climate change efforts.

But some countries benefitted from this war, as they have a good relationship with Russia. Russia can sell its oil & gas to these friendly countries at a cheaper rate while these countries can either use them or resell them.

 

To top it off, renewable energy isn't going to replace fossil fuels fast anytime soon.

 

Yes, there are a lot of countries aggressively developing infrastructure and investing in technology to green our electricity needs. But it isn't going to replace all the fossil fuel consumption in a short period.

 

In short, we still need fossil fuels for the time being.

And those oil and gas companies, I am sure they will have some business in the meantime.

Semiconductor industry

Countries realize the importance of semiconductors. Semiconductors are necessary for communications devices, high-tech weapons like missiles, infrastructure management, and many more.

It is hard to say what areas in our lives have no impact despite our technological progression.

 

However, many of the semiconductor components are imported. This means the supply chain of 

Semiconductors are vulnerable and fragile. A disruption may hurt a nation's technological improvement.

 

Governments around the world are well aware of this problem. And they are building their in-country manufacturing Semiconductor companies, or becoming a major shareholder of the existing ones in their country.

 

This most likely helps these companies to grow, as the governments most likely award contracts to their home-grown companies.

 

This also means it is very hard for these companies to expand to other countries. Thus, another Natural Monopoly will happen, and this time, it will be within each country, with its homegrown semiconductor companies.

 

But how long will it take to achieve this state? I am not sure. Is it a good thing?

 

I believe so, as each country is aiming to be technologically superior over the others, be it for economical or military purposes, they will research, hire the best talents in the field, nurture their own citizens' children to be in that field, or attract foreign talent (I know, a sensitive topic) to their country to work on this.

 

So it is good overall.

 

Countries building up their semiconductor Manufacturing capabilities, making them resilient to supply chain disruption. This also results in creating a high demand for jobs; a reliable income for these companies and spurs innovation greatly. Of course, these companies will get the bulk of their revenue from their native country. Expansion from overseas may be tough, but not impossible.

 

Therefore these Native semiconductors will have an economic moat within their country. Those international semiconductor companies may see their economic moat erode due to their ‘forces’.

 

However, how fast will these happen? I am not so sure… but definitely not in the current and near future. 

Land, Properties, and Infrastructure

I believe that Land developers may have a harsh time soon. Thanks to inflation.

Why?

 

The construction sector required a lot of manpower.

Inflation will cause the workers to demand a higher salary.

So will the cost of building materials and related expenses.

 

If the construction company has yet to collect money from their prospective buyers, naturally they can raise their prices and check the demand and cater accordingly.

 

But what if the money was collected but the project has yet to start or is in the midst of construction?

 

The project may not be profitable due to inflation, and the weaker developers may have to make tough decisions.

 

I suggest taking a very close look at their respective balance sheet if planning to buy any construction companies.

 

Developers aren't the only ones facing problems. Home sales, mortgage lending, and house prices may suffer due to higher interest rates. Sellers and lenders may have a hard time finding customers & borrowers.

 

Despite the gloom, the USA still has housing shortages; 3.8 million citizens do not own a house. Though the demand is there, I am just not sure in the near future, what will happen to these companies.

 

Well… a wise guy told me… the best way to get out of trouble is to stay away from trouble.

Unless I am confident and sure of the company’s economic prosperity, looking elsewhere isn’t a bad choice. 

McDonald's Corporation’s Economic Moat

McDonald's Corporation (ticker: MCD) needs very little introduction. The company was founded in 1940 by two brothers, Richard and Maurice McDonald, and it has since grown to become one of the most recognized and successful brands in the world. MCD operates more than 38,000 restaurants in more than 100 countries, and it serves millions of customers every day, making it difficult to rival its reach.

Brand and Customer Loyalty

I am sure this is a common scene. When children pass by one of MCD’s restaurants and see its golden arch, they most likely pester their parents to go in and eat something. Not only that, if a person is in a foreign land, if he isn’t comfortable eating the local food, he might opt to eat at an international brand restaurant. If there is an MCD nearby and he may choose to eat there.

The loyalty of its customer is strong that when MCD leave Russia because of the war, one man handcuffed himself to one of the restaurants hoping that MCD wouldn’t leave Russia. I wish I made it up, but this one of the news reporting: https://www.mirror.co.uk/news/world-news/russian-mcdonalds-fan-chains-himself-26458955

The MCD’s brand is one of the most recognized and trusted brands in the world and this helps the company to attract and retain customers. When people think of fast food, burgers, or French fries, they often think of MCD, and this strong association has helped the company to build a loyal customer base that returns to its restaurants time and time again.

In addition, the MCD’s brand is associated with a high level of quality and consistency, which helps to further build customer loyalty and trust. This creates a strong intangible asset for the company and helps it to maintain its competitive advantage in the fast food industry.

Established Global Supply Chain

A global supply chain is a network of organizations involved in the production, handling, and distribution of goods and services from raw materials to end customers. The goal of a global supply chain is to maximize efficiency and minimize cost by coordinating the flow of materials, information, and capital across the various stages of production, distribution, and consumption. For example, getting the raw food from farmers, processing the food, and then selling it in restaurants.

McDonald's global supply chain helps the company to keep costs down in several ways. This isn’t an easy feat, due to the sheer number of restaurants this company has. Not to mention it is one of the largest numbers of restaurants in the world, based on https://www.alltopeverything.com/largest-fast-food-restaurant-chains/

First, the company has a large and diverse network of suppliers that allows it to take advantage of economies of scale and negotiate favorable prices for raw materials and other inputs. Suppliers love to receive bulk orders. Raw food is perishable, time isn’t in their favor. Thus, if their customers, like MCD, place a huge order, they will gladly give them a better price. It saves them the headache of storing or disposing of the food. Either way, there are costs involved.

Second, MCD has developed strong relationships with its suppliers over the years, which helps it to secure reliable and consistent supplies of high-quality ingredients at competitive prices. If their suppliers know what MCD wants, and their standards for their ingredients, and they deliver what MCD wants consistently, MCD most likely be their regular customer.

Finally, MCD invests in logistics technologies and inventory management systems to optimize its supply chain operations and minimize waste, which helps to keep costs down. This helps MCD to increase the efficiency and effectiveness of its global supply chain, which is an important factor in the company's ability to keep costs low in the long run.

Franchises

MCD operates a large network of franchises, which is a strong part of its business model and a pillar of its success.

A franchise is a business arrangement in which a company (the franchisor) grants the right to use its name, products, and operating system to another company (the franchisee) in exchange for a fee.

MCD has a franchise model for many of its restaurants, which means that the company sells the right to use its brand and operating system to independent business owners (franchisees) who operate McDonald's restaurants in their local markets.

This franchise model has several benefits for MCD.

First, it allows the company to expand its operations and reach a wider market without incurring the full costs of owning and operating all of its restaurants.

Second, it enables MCD to tap into the local knowledge and expertise of its franchisees, which are often well-connected and deeply embedded in their communities. One such example is that in 2013, MCD in China put rice products on their menu. The core reason is that the Chinese consider a meal without rice is not a complete meal.

MCD helps its franchisees in a few ways too.

First, the company provides training and resources to help franchisees get started and operate their restaurants effectively. This may include training in areas such as food safety, customer service, and management, as well as access to tools and resources such as marketing materials and operational guidelines. Second, McDonald's offers ongoing support to its franchisees to help them maintain high standards of quality and service and stay up to date with the latest products and practices. This may include training programs, marketing support, and technical assistance. Finally, McDonald's provides financial and logistical support to its franchisees through its supply chain and purchasing programs, which help to keep costs low and ensure a consistent supply of high-quality ingredients and other supplies. This creates a win-win situation for both MCD and its franchisees.

Therefore the franchise model helps McDonald's to build a strong and loyal network of business owners who are invested in the success of the company and committed to upholding its standards of quality and service.

Conclusion

McDonald's Corporation has several economic moats, including strong brand recognition and customer loyalty, a large and well-established network of franchises, and a global supply chain that helps it to keep costs low. In addition, MCD has a diversified menu and a focus on innovation, which allows it to appeal to a wide range of customers and stay relevant in an increasingly competitive marketplace. These factors help McDonald's to maintain its position as one of the most successful fast food chains in the world.

 

For a glance at MCD, please have a look over here: https://drive.google.com/file/d/15mBUGNRujk-4zwuDJlyxckGZOyjal2k9/view?usp=share_link

 

Google's Economic Moats

Economic Moat allows the company to keep its competitors at bay from taking its business & profitability.

Google is one of the most successful company will most likely have some advantages to maintain or even grow further its profitability.

 Here are some examples. 

Brand

I am sure at some point in our life we will use this phrase, " I google it". The activity of searching and researching something has become a simple word, 'google'.

How did it happen? To be honest, although Google was created in my lifetime, I can't recall why this phrase happens.

Despite the start of the internet, there were a few search engine websites. I even remembered watching Yahoo! advertisements on television, trying to create an impression on the public.

Yet, it becomes a verb in our language. Thus, Google has become an action word and also the search engine to use.

This makes Google the most visited website in the world. Followed by Youtube, which is also owned by Google. 

Source: https://www.semrush.com/website/top/

Android: Budget smartphones

Apple and Android are sharing the smartphone market share. Apple has a 27% market share while Android has almost 72% market share globally.

 

Source: https://gs.statcounter.com/os-market-share/mobile/worldwide

Despite Apple having a smaller market share, it does have larger revenue. Android, on the other hand, licenses its OS to phone manufacturers globally, which helps them save the time, effort, and cost of developing one. Then these phone manufacturers passed these savings to their customers, making Android phones very affordable for the public.

Google can charge a fee from these phones via Google Play. Google Play provides an easy distribution channel for Android users and app developers.

Thus Google created not only a low-cost moat for phone users, and also a distribution network for app developers to sell their apps.

Data Moat

Thanks to its search engine and YouTube, along with other services. Google can collect an extensive amount of data.

However, being able to collect a lot of data does not create a moat for the company.

A company needs to make sense of the data collected, also known as insight.

And to be able to get such insight, require analytic capability.

The better the analytic capability, the better the insights, and the company will be able to produce a better product.

This new product will bring in new customers & generate, not only new revenue, new data for the company to further improve or make new or better products. And also improving the existing products. This virtuous cycle builds up and repeats itself.

Google can achieve that thanks to the first-mover advantage it has in search engines. It is also able to analyze the data it has able get useful insights so that it can produce new products or improve the products or services it already has. 

Conclusion

Economic moats are a sign of a great company.

Google's economic moats create a virtuous cycle for Google to improve and create wonderful products and services. This makes Google very sticky to its users and customers.

For consumers like me who will keep using Google services like its search engine, YouTube, Google Docs, and Sheets. Not only they are free, but they also make good suggestions. I will most likely keep using them until those services don't work.

Thus, thanks to this ‘stickiness’, business owners will post advertisements on Google, hoping to improve their business income.

For a glance at Google’s profitability, please have a look at this pdf: https://drive.google.com/file/d/1xqJ0A4dxN0cxCIbR22awZIl3baJ4kLpf/view