Reindustrialization is enabled by disruptive innovation, and historically, great transformation times offer opportunities to create powerful returns for investors. It is often hard for analysts to develop a perspective that allows them to make sense of such powerful developments.
Why Financial Analysts miss the Reindustrialization Opportunity?
Analyzing a new technology is never easy but the current processes, approaches, and methods of analysis make it impossible for traditional analysts to understand the powerful dynamics of reindustrialization. Reindustrialization is not like any other times. It is a great transformation with a massive potential to create change. Here are some of the attributes that make reindustrialization analysis hard for traditional analysts:
Nature of Innovation: The nature of innovation in reindustrialization is not the same as in ordinary times. Analysts are used to analyzing innovations that do not exhibit the unique features of innovations that initiate and propel reindustrialization. At the most fundamental level, in reindustrialization the scientific process itself becomes more efficient or is enhanced by a more efficient process. This change happens at epistemological, ontological, and ethical constructs of science. The scientific efficiency enables new and unexpected technologies to appear on the horizon. The rate at which technologies appear and their novelty increase significantly. Analysts are trained to observe the technologies based on their adoption trends, market share, and features and function – and not on their scientific paradigms.
Analyst’s Positioning: Analysts occupy a certain placement in their corporate positions. Their respective position determines their vantage point. The reindustrialization dynamics are different as they requires simultaneously analyzing multiple industries, various sectors, multidisciplinary developments, and competitive structures.
Competitive Dynamics: The competitive dynamics of reindustrialization are different than normal competitive times. Specifically, the traditional competitive boundaries and moats do not exist during reindustrialization times. The shape, structure, and boundaries of industries and sectors are in flux. Nontraditional actors from one industry can enter other industries unexpectedly. Industry analysts are trained to think in terms of industries. As recent experience with Tesla shows, Tesla cannot be analyzed as an auto company.
Technical Characteristics: The technical characteristics of reindustrialization companies and innovations are widely different than that of ordinary innovations. For example, the artificial intelligence technology is about systems that are developed from data vs. regular IT systems that are made for data.
Operating Models: The operating models for reindustrialization are different. In many cases the innovation transforms the operating models itself. The operational and execution plans and strategies need to be analyzed from the reindustrialization viewpoint. Both product and production platforms change.
Go to Market Strategy: The market entry strategy of a firm, its positioning, and go to market plans change. The change happens at the most fundamental level.
Geopolitical Rivalries: Reindustrialization often resets the global friendships and rivalries and changes the rules of competition. Supply chains are realigned and remapped. Analysts often attribute such changes to political developments – even though such changes are often due to realignment of global competitive forces due to reindustrialization. For example, China and US relations changed with the advent of artificial intelligence and quantum computing.
Value Mapping: Understanding and mapping value creation in reindustrialization is not as straightforward as analysts are used to. It requires rethinking the production, distribution, and sales process.
Narratives: Reindustrialization carries its own narratives. Understanding and acting upon those narratives require developing new research methods. They include the use of natural language processing and ethnographic studies.
Behaviors (expectations): Deciphering shareholder, investors, and customer expectations is an important element of sensemaking.
Financial Models: The standard valuation models may not offer the best base to understand asset prices. Reindustrialization requires the introduction of new methods to study asset values.
The above factors greatly contribute to the inability of research analysts to understand the dynamics of reindustrialization.