Thematic Global

6 March 2019

� Disruptive technologies are impacting the global economy and changing the way we live and work

� Common themes include smartphones, artificial intelligence, virtual reality, blockchain and autonomous vehicles

� We examine the impact on 17 sectors, including agriculture, education, healthcare, retailing and sporting goods

The quest to find the next game-changersDisruptive technologies

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� While “the only constant is change”, the trajectory, speed and scale of innovation is accelerating

� We look at disruptive technologies that may put pressure on industry leaders

� We also discuss the impact these technologies may have on the macroeconomy, including inflation and jobs

The impact of disruptive technologies is impossible to ignore – whether at the macroeconomic level or in our daily lives – and the implications for investors’ portfolios may be profound.

Tech themes

A whole raft of technologies has emerged in the past decade and their influence on our lives is growing by the day. None has had a greater impact than the smartphone, which, by combining mobility with the Internet, has put unprecedented computing power in our hands. We are probably just at the start of a multi-decade wave of disruption, particularly with new technologies such as artificial intelligences, virtual reality, blockchain and autonomous cars about to usher in the so-called ‘Fourth Industrial Revolution’.

Economic impact

The impact of disruptive technologies also shows up in economic data. Better price information for consumers makes it harder for companies to raise prices and can weigh on inflation, whilst automation is shaking up job markets, meaning different, not fewer jobs. Also, technology helps to reduce menial tasks, which may increase productivity in some sectors. However, as more consumption moves online and becomes virtual, this creates challenges in measuring economic growth.

Sector impact

All sectors will feel the effects of disruptive technologies. Some key examples include 3D printing in industrials and sportswear that will allow the production of unique and custom-made products. The roll-out of 5G in telecoms will offer faster and more reliable connections and enhance communication amongst devices, whilst biologics manufacturing in healthcare will pressure drug prices further.

Executive summary

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The disrupted economy

Source: HSBC

Disrupted economy

ArtificialIntelligence

Blockchain AutonomousVehicles

Technologies

Economics

?

Policy

Lower inflation

Re-defining cities

Disrupted jobs market EM convergence

End of cash Trouble measuringgrowth

Virtual RealitySmartphones

Inequalitychallenges

Other measuresof wellbeing

Inflation targetingBetter skilledworkforce

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1. Technology disruptors: the common themes

Artificial intelligence helps power autonomous vehicles, smart factories and robotics

Smartphones have room for growth as 3.85bn people still have no internet connection

1 “The state of broadband: broadband catalyzing sustainable development”, ITU, September 2017

� Many game-changing technologies are developing quickly…

� …which will play a role in shaping the modern economy…

� …especially as the adoption rates rise and the impact gets bigger

In this section, we outline the new technologies that are changing the global economy, including smartphones, artificial intelligence, virtual reality, autonomous vehicles, mobile payments and blockchain.

1. The smartphone and universal connectivity

Smartphone ownership has risen sharply across the world in the past decade, bringing a sea change in the way we consume products, information and communicate with each other. In key emerging markets the share of consumers with access to a smartphone or the internet has doubled in the space of three years and continues to rise exponentially – bringing a raft of new, useful information in terms of healthcare, education and best working practices.

However, there is room for growth as 3.85bn people have no internet connection and of these, 1.25bn live in an area without 3G or 4G networks, 95% of them in the developing world1. Low-Earth Orbit satellites, a new generation of mass-produced and low-cost satellite connectivity technology, could enable the beaming of affordable internet globally, which could particularly benefit emerging markets. In addition, 5G is set to be rolled out in 2019-20, allowing for faster and more reliable connections.

2. Artificial Intelligence (AI) and robotics

AI and its subsets such as Machine Learning (ML) and Deep Learning (DL) have been making significant strides in recent years.

If we take the assumption that AI is an increasingly important foundation technology, then it will certainly impact the economy on the whole. From powering autonomous vehicles (AV) of the near future, running smart factories, and robotics more productively, automating healthcare diagnostics to recommending the latest movies based around ones viewing habits and your smart home assistants like Amazon’s Alexa or Google Home – they all are powered by various forms of AI.

AI is one of the most important things that humanity is working on. It’s more profound than, I don’t know, electricity or fire.”

Google CEO Sundar Pichai

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3. Virtual Reality (VR) and Augmented Reality (AR) for new immersive worlds

VR technology is still to truly take off within the mass market. However, that could change in 2019 and beyond. AR devices could also be popular for putting a digital overlay on the real world, for example, by displaying reviews/ratings outside physical stores or even placing virtual TV or adverts in real physical spaces in relation to your physical movement, all tailored to your tastes.

There is a real possibility that VR could have high utility within the enterprise and social/entertainment spaces – meaning that remote meetings could feel much more like the real thing, reducing the need to travel and used in situations to keep workers safe whilst training in virtual environments. Widespread VR use could impact the way we think of travelling for certain activities due its convenience and costs saved and even shift the way we value physical real estate when virtual environments could offer an almost infinite exploration space for minimal costs.

4. Autonomous vehicles (AV)… on the road and in the air

A rollout of AV could push people away from car ownership and make it easier to commute from the edges of towns and cities, dramatically changing the way our urban areas look and work.

Whilst AV are still in the testing phase for personal transportation, they are already working today in some other areas. For example, a number of companies are utilising the technology in locations such as mining plants. Autonomous drones are another form of AI-powered transportation that could disrupt various parts of the economy, for example, for location scouting, inspection of sites and even retail delivery for e-commerce.

5. Mobile payments and blockchain

Mobile payments have been on the rise for many years – with various platforms such as Apple Pay and Google Play dominating the market. But in various parts of the world – apps and platforms such as AliPay in China, Venmo in the US and MPesa in Kenya are leading the way in rolling out mobile payments in a meaningful way. Mobile payments will accelerate the move towards a world without cash, creating efficiency gains for governments, businesses and households.

The invention of blockchain, the decentralised electronic ledger technology, has spurred much speculation and trials are underway to use it. Aside from the more famous cryptocurrencies, the technology is also being sought to eliminate the need for paper trails in areas like shipping, where up to 20% of the costs are dealing with paperwork.

Virtual reality could reduce the need to travel

Autonomous vehicles may reduce car ownership

Mobile payments are accelerating the move towards a world without cash

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� Technology weighs on inflation, and while it can create jobs as well as steal them, the impact is likely to be felt more so on wages

� We could see a pick-up in productivity from new technologies that support growth

� As the world goes virtual, measuring the pace of economic growth might be more challenging

The digital native wave

The impact of disruptive technologies is not lost in economic data. The young, digital native population around the world will continue to drive the adoption of these new technologies in everyday lives. The world’s young populations, who have grown up with the internet and mobile phones, are more open to new forms of consumption and this will have a material impact on prices, the labour market and interpreting economic data.

Technology impacts inflation

On the inflation front, the impact of technology on prices should not be ignored by economists and policymakers. Better price information for consumers, virtual consumption and cheaper production methods are all disinflationary – and not in a bad way. Newer disruptive technologies will only amplify this trend, with AI and the Internet of Things2 allowing businesses to produce products more cheaply. The spread of virtual reality may change the way we consume in such a way that raises consumer price information even more. Simply put, the spread of new technologies will continue to weigh on inflation and as Claudio Borio at the Bank for International Settlements (BIS) says3, central banks will need to be aware of this impact when setting policy.

2. The disruptive economy

The spread of new technologies will weigh on inflation

The young, digital native population will push tech adoption more quickly

Technology plays a role in inflation in a number of ways

Source: HSBC, Based on an original diagram from the Riksbank.

2 Joined-up devices, all communicating with each other over the internet3 See, e.g., Claudio Borio, “Through the looking glass”, OMFIF City Lecture given on 22 September 2017 in London (available on Bank for International Settlements’ website)

Technological Development

E-commerce

Increased Competition

Smaller price mark-ups

Better-informed consumers

Cheaper IT products for consumers

Automation Pressure on wages

Increased Productivity

Lower Inflation

Internet – based Production– based

Lower costs

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New jobs will appear, while many could disappear

Automation and better-equipped AI will only continue to displace jobs. While many new technologies create jobs as well as steal them, the impact is likely to be felt more so on wages rather than on total employment levels. As automation chips away at middle-skilled work, the displaced workers will have to compete against low-skilled workers for the jobs that remain. This weaker wage bargaining power will mean that many low-skilled jobs will see lower wage growth than a low unemployment rate would typically suggest.

Wage growth is being affected by technological changes

…but creates challenges in terms of measuring the pace of growth

New technologies could improve economic productivity…

6.31% of jobs today are in roles that are set to be redundant...

...and some will be replaced in the coming years

Source: WEF. Note: Based on roles that will be stable, new or redundant by 2022

Source: WEF. Note: Based on roles that will be stable, new or redundant by 2022

As these technologies evolve, the risk of automation grows higher but so does that of geographical replacement. Virtual reality could change the nature of needing to work in close proximity, completely changing the available labour pool for most jobs. When an office in London or New York can just as easily hire someone based in India, China, or Brazil, there will be a clear impact on wages. Across the skills spectrum new technologies are putting downward pressure on the wage bargaining power of workers.

Increased productivity but harder to measure

So, the lower the inflation, the lower the wage growth. This represents a new challenge for central banks. But what about output? Firstly, we could see a pick-up in productivity from these technologies that support growth. Many occupations – from manufacturing to taxi provision – are already seeing gains from AI technologies, and this may spread to other industries.

Secondly, as more consumption moves online and becomes virtual, it creates a challenge in terms of measuring the pace of growth in the economy. Disruption is hard to measure and interpret. Consider how Google Maps compares with a paper map, measured purely in terms of economic data. The data would indicate that Google Maps is worse for the economy (as there is income generated by selling a physical product in the form of a paper map), yet millions of people use the software every day to navigate without getting lost, so there is obviously some economic value.

Economists, investors and policymakers will need to think carefully about how to interpret economic data in 2019 and beyond: something that AI may one day help with.

48%

16%

31%

5%

Stable Roles New roles Redundant roles Other

Share of stable, new and redundant roles 2018

48%

27%

21%

4%

Stable Roles New roles Redundant roles Other

Share of stable, new and redundant roles 2022

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� We look at technologies that could prove to be disruptive within a variety of sectors

� Eye-catching examples include made-to-order sneakers manufactured within 60 minutes, courtesy of 3D printing…

� …and a homebot that can order you both dinner and airline tickets

In this section, we look at potential disruptions that could affect individual sectors. This is easier to do in more established technologies, where the competitive landscape is already starting to take shape, but it is more challenging in futuristic areas, where different technologies vie for dominance and where the pioneers may be start-up companies.

3. Disruptive innovations by sector

Sector Potential disruptive innovations

Agriculture • Precision farming using drones, intelligent sensors (gathering data), automated and connected devices allows farmers to monitor each plant on a real-time basis.

• Vertical farming is growing plants/crops in vertically stacked layers in warehouses, containers, or even skyscrapers. This benefits the environment through reduced use of land and water.

Automobiles • Electric vehicles: the challenge is still mainly regulatory driven; higher capital expenditure, and research and development costs are likely to dilute profits.

• Autonomous driving: robo taxis could permanently disrupt traditional revenue streams of incumbent automakers. Intelligent-connected vehicles can improve transportation efficiencies.

Data Security & Privacy

• Personal data is becoming a new economic ‘asset class’. While the explosion of data is disrupting many markets, the perceptions of personal privacy and security are also in flux.

• Potential disruptions from increased regulations, fading consumer trust, and security breaches.

Education • Convergence towards models incorporating best practices from distance learning and on-campus with an ever-increasing focus on using new technologies.

• Personalised education platforms use data to analyse the value of teaching and learning and provide personalised teaching and learning services for teachers and students.

Financials • Digital revolution in customer behaviour and regulations emphasises the shift to cashlessness and the growth of digital payments.

• Insuretech includes insurance purchased online and technology-enabled solutions to make insurance products more targeted, customised, and dynamic.

Food & Beverages

• Many traditional food and beverages companies have started to tap into new retail formats, such as e-commerce platforms and business-to-consumer (B2C) platforms, e.g. Tmall and JD.com.

Healthcare • AI in diagnostic imaging, robotic surgery in knee replacement and ceramic implants in dental care are promising technologies for the future.

• OTC hearing aids regulation could lower pricing levels.

Industrials • The Internet of Things (IoT) is likely to add value through the optimisation of operations and predictive maintenance, as firms are becoming increasingly data-driven.

• 3D printing is seeing increasing industrial usage, particularly for the metal-based submarket, given the durability of metal-printed parts.

Source: HSBC Global Research

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Sector Potential disruptive innovations

Metals & Mining

• Blockchain applications are considered for tracking the origin of diamonds, metals in electric vehicles, and also for metals like cobalt in electronics like smartphones.

• Tokenisation of physical assets (moving physical assets to blockchain) is being attempted in gold for frictionless trading, or trading without transaction costs.

Oil & Gas • Profound impact from ‘Digital Oilfield’, using digital technologies such as connectivity, automation, and machine intelligence.

Real Estate • Growing numbers of corporates are seeing “green” buildings as part of their sustainability goals, given a greater focus on operational energy efficiency and sustainable development.

Retailing • For non-food retailing, disruption from online is a major long-term threat as it offers lower prices made possible by lower cost structures from removing property costs.

• RFID stock tracking technology offers superior end-to-end supply-chain inventory management.

Shipping & Logistics

• Digitisation of the supply chain, currently still analogue in nature, is likely to be the biggest source of disruption in the next five years.

• New supporting technologies include blockchain, which helps supply chain visibility and smart contracts, and automated container terminals and freight loading.

Sporting goods

• 3D printing and lightning-fast production to cater for unique and custom-made products, revolutionising the sportswear industry.

Technology • Transitioning from the ‘mobile era’ to the ‘data era’, enabling many future disruptions.• Disruptors include, AI, IoT, perceptual computing (AR/VR), ambient computing (sensors and

devices that help the IoT work), quantum computing and robotics.

Telecom • Technological upgrades are becoming a constant process of evolution.• 5G will enable enhanced mobile broadband, massive machine-type communication, and ultra-

reliable low latency communication, which, for example, enhances video conferencing quality.

Utilities & Cleantech

• Diamond wire sawing, using wire with diamond dust to cut materials, and black silicon, silicon with low reflectivity and high light absorption properties, should help minimise the cost of solar cell manufacturing as well as improve efficiency.

Source: HSBC Global Research

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� Disruptive technologies are transforming how we live and work and have the potential to disrupt all industries

� Smartphones, artificial intelligence, virtual reality, blockchain and artificial intelligence are themes shaping these new technologies

� The economic impact from these technological should be considered by governments and central banks

Society is living in an age of rapid digital progress and we believe it is more important than ever for investors to consider these changes when building portfolios.

We identified the following themes that are helping to shape the new technological landscape:

• Smartphone ownership is changing the way we consume products and services

• Artificial intelligence is enabling autonomous vehicles, smart-factories and improved healthcare diagnostics

• Virtual reality could revolutionise entertainment, provide safer training environments and change the way we think of travelling

• Blockchain may help cut costs and improve security across a number of industries

• Autonomous vehicles could change the way we move around and push people away from car ownership

All these technologies also have implications for the economy and how growth is measured. With better price information for consumers and cheaper production methods, inflation wages and jobs will all be affected.

Conclusion

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1. This report is dated as at 6 March 2019.

2. HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its Research business. HSBC’s analysts and its other staff who are involved in the preparation and dissemination of Research operate and have a management reporting line independent of HSBC’s Investment Banking business. Information Barrier procedures are in place between the Investment Banking, Principal Trading, and Research businesses to ensure that any confidential and/or price sensitive information is handled in an appropriate manner.

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Disclosure appendix

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