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Finding those growth niches prospering in the shadow of ‘big tech’

Finding those growth niches prospering in the shadow of ‘big tech’

03-12-2021 | 投資觀點

Common wisdom has it that ‘big tech’ is a winner-takes-all industry. As a result, thriving in the shadow of technology giants is extremely difficult. Yet, we see many niche players challenging this notion. So, while the number of long-term winners of the broad digitalization trend is likely to remain small, we also think investors should strive to see the wood for a few giant trees.

  • Jack  Neele
    Jack
    Neele
    Portfolio Manager
  • Richard  Speetjens
    Richard
    Speetjens
    Portfolio Manager

Speed read

  • Big technology firms dominate, but they too face disruption
  • Not all innovation happens within large technology giants
  • Look beyond ‘big tech’ to find the next winners of the digitalization trend

Long-term success in the internet sector is often seen essentially as a matter of scale and scope. This is consistent with the fact that, over the past two decades, a small number of technology companies have been able to expand their businesses dramatically, and become the dominant ‘tech giants’ we know today.

These tech giants are typically characterized by an expanding range of products and services, distributed across the world to an ever-growing pool of potential consumers. Companies that have adopted the marketplace or platform business model, in particular, have proved extremely fast at expanding their reach far beyond their initial market segment and geographical footprint.

Uber, and Airbnb are some of these once-confidential platforms, which turned into conspicuous global trailblazers.1 These companies started by disrupting their domestic traditional market, and then succeeded in replicating their model across geographies. In doing so, their brand names have become synonymous with everyday activities such as hailing a ride, or finding accommodation.

The success of today’s internet giants has been so spectacular, that they are often perceived as unstoppable juggernauts. As a result, regulators across the world have increasingly taken them on, in an attempt reign in their dominant position in many areas. China’s crackdown on various emblematic firms is a good illustration of this.2

Despite the apparent supremacy of a few internet giants in large swathes of the digital realm, competition remains intense below the surface

Yet despite the apparent supremacy of a few internet giants in large swathes of the digital realm, competition remains intense below the surface. Disruptors get disrupted by new entrants. An example of this constant battle for market share is the now famous ‘unbundling of Craigslist’, that was initially drawn up over a decade ago by an analyst from Spark Capital, a US venture capital firm.3

New entrants are able to wrest market share from leaders by offering products and services that are far better at addressing the specific needs of at least part of these incumbents’ customer base, through faster and more convenient delivery modalities or better client support, for example. This challenges the widespread notion that most innovation takes place within large tech giants.

Ecommerce giants with feet of clay

Ecommerce, for one, is arguably one of the industries in which the digital revolution has triggered the most profound change. Over the past two decades, online shopping experienced a spectacular surge, across the world, resulting in a reshuffling of the cards among retailers. This phenomenon was further boosted by the social-distancing measures taken in the wake of the Covid-19 pandemic.

In this context, the most obvious winners of the ‘great acceleration’ of ecommerce have been the online retail giants. Yet these large online retailers are far from being the only ones to benefit from the massive shift towards online retail seen over the past few years. In fact, many smaller, niche players have also been thriving in the sidelines.

Some of these challengers are local retailers typically adopting better digital strategies. Similarly, thousands of small local merchants have gained access to cutting-edge digital tools through software and services. But there are many other examples of companies offering innovative solutions for ecommerce. These range from running fulfillment centers, to providing loyalty programs.

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Remote working tools thrive in the post-Covid era

Collaboration tools represent another area where Covid-19-related lockdowns have triggered a great acceleration on the demand side. As people were forced to stay home and work remotely, products enabling smooth communication became a vital necessity, for individuals and companies alike. Internet giants saw demand for their online collaboration tools rise dramatically.4

But these giants were not the only ones to benefit from the bonanza. Many smaller players also saw their business flourish. Zoom Video Communications, for example, went from the relative obscurity of the world of enterprise software solutions, to becoming a global household name virtually overnight.5

Figure 1: Zoom annualized minutes (in billions)

Source: Company data, Robeco; fiscal year (FY) ends on 31 January, data reported as quarter-ending month, annualized.

As economies reopen, the future of work remains uncertain. In many companies, however, a consensus seems to be forming around a more flexible and hybrid design.6 Keeping everyone connected, whether in the office or working remotely, will likely expand reliance on digital collaboration tools, as well as other related services.

Financial services: big tech vs. fintech

Over the past decade, big tech firms have been increasingly taking on the financial services sector, venturing into areas such as payments, insurance, and credit provision. These incursions into financial services have had varying degrees of success. But their breakthroughs have become significant enough to sound the alarm among financial regulators.

Yet, despite big tech’s impressive efforts, their progress is still far from overwhelming. Incumbent financial institutions have so far proved remarkably resilient, while countless fintech disruptors have continued to emerge and thrive. Rapid growth experienced by companies active in areas such as mobile payments, digital lending, or wealth management, illustrate this dynamism.

This is also evidenced by the record flows of venture capital-backed funding into the fintech sector since the beginning of the year: second-quarter 2021 funding was up 192% year on year, reaching USD 31 billion.7 In particular, the payments subsegment has been in the spotlight, raising considerable amounts of money.

The advent of local champions in emerging markets

In recent years, the internet has been experiencing a powerful shift in its usage, its speed of development, and in where and by whom new technologies are created. The shift is especially evident when evaluating the global composition of internet users: the internet’s center of gravity is gradually moving away from developed countries and towards emerging ones.

This phenomenon has led to the emergence of local technological ecosystems in many emerging markets. China, with its well-developed internet sector, is the most obvious example, but it is far from an isolated case. These local ecosystems are now maturing, and have led to the creation of new products and services, as well as to the emergence of local and regional internet champions.

Figure 2: Geographic origin of tech companies founded in emerging markets 2014-2020 (%)

Sources: BCG analysis; BCG Center for Growth and Innovation Analytics, November 2020. Note: CapIQ extracted data on more than 10,000 companies founded since 2014. Tech focus defined on the basis of CapIQ industry classification.

These firms are challenging global tech giants’ by offering products and services tailored to the specific needs of local populations, as well as to their regulatory environment. In a 2020 study,8 the Boston Consulting Group found that these challengers, while still relatively small, were growing revenues on average six times faster than the tech companies included in the S&P 500 Index.

1 See for example: Wu, K., December 2020, “The platform economy”, Sparkline Capital report.
2 Source: Lockett, H., 27 October 2021, “China tech stocks rebound on hopes peak regulatory risk has passed”, Financial Times news article.
3 Source: Parker, A., 21 January 2010, “The Spawn of craigslist”, blog post.
4 See for example: ResearchAndMarkets.com, 12 March 2021, "Team Collaboration Tools Market - Growth, Trends, COVID-19 Impact, and Forecasts (2021 - 2026)", market report.
5 See for example: Braithwaite, T., 18 June 2021, “Tech’s pandemic winners offer clues to the future of work”, Financial Times news article.
6 See for example: De Smet, A., Dowling, B., Mysore, M. and Reich, A., 9 July 2021, “It’s time for leaders to get real about hybrid”, McKinsey article.
7 Source: CB Insights, 22 July 2021 “State Of Fintech Q2’21 Report: Investment & Sector Trends To Watch”, report.
8 Source: Chan, T., Dantas, O., Ivers, L., Kotov, I., Kurbay, A., Lang, N., Meyer, M., Rival, O., Verma, S. and Kim, Y., November 2020, “2020 BCG Tech Challengers”, report.

Important information

The contents of this document have not been reviewed by any regulatory authority in Hong Kong. If you are in any doubt about any of the contents of this document, you should obtain independent professional advice. This document has been distributed by Robeco Hong Kong Limited (‘Robeco’). Robeco is regulated by the Securities and Futures Commission in Hong Kong.
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This document is intended to provide the reader with information on Robeco’s specific capabilities, but does not constitute a recommendation to buy or sell certain securities or investment products. Investment decisions should only be based on the relevant prospectus and on thorough financial, fiscal and legal advice.
The contents of this document are based upon sources of information believed to be reliable. This document is not intended for distribution to or use by any person or entity in any jurisdiction or country where such distribution or use would be contrary to local law or regulation.
Investment Involves risks. Historical returns are provided for illustrative purposes only and do not necessarily reflect Robeco’s expectations for the future. The value of your investments may fluctuate. Past performance is no indication of current or future performance.

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