부산시청 도서요약
   미디어 브리핑스내서재담기 

책표지






    • Seizing the Opportunities Created by Superabundant Capital


    For corporate leaders twenty-five years ago, capital was scarce and the cost of debt was high. The weighted average cost of capital hovered above 10 percent for much of the 1980s and ‘90s. In that environment, the best course of action was to avoid risky projects by using high hurdle rates. Only the projects with the greatest potential return on investment received funding.

    But today, capital is no longer scarce, and it is no longer expensive. In fact, research by Bain & Company’s Macro Trends Group estimates that the amount of financial capital increased nearly 300 percent, from $220 trillion in 1990 to $600 trillion in 2010, and it is now equivalent to 9.5 times glob- al GDP.1 Because capital is so abundant, it is also cheap.

    For most corporations, the marginal cost of borrowing capital, after taxes, is about 3 percent. That’s roughly the same as the inflation rate, so in real terms, the cost to borrow capital is essentially zero. That means companies can easily access all the capital they need to launch new product lines, build new facilities, purchase new technology, and acquire competitors.

    What caused this change? After the real estate market crashed and the economy collapsed in 2008, the U.S. Federal Reserve, as well as central banks in other developed economies, slashed interest rates to unprecedented lows in an attempt to spark growth. Instead, the economy has grown slowly, and rates have increased only slightly over the past decade.

    Demographic forces are also driving the explosion of capital. Aging Baby Boomers have passed their peak spending years and are now in saving mode as they try to build up a nest egg for retirement. The billions of dollars they are pouring into savings accounts are providing banks with capital that can be lent to businesses.

    This mountain of superabundant cheap capital is poised to drive the Deployment Phase of the Fifth Techno-Economic Revolution. Whether we’re talking about manufacturing and service robotics, ultra-high-speed networks, or infrastructure for emerging markets, they all require lots of capital. In the past, capital has been costly and technology has been expensive, making these projects infeasible. But suddenly, a revolution in technology is exponentially improving price-performance, just as the cost of capital is making investment cheap. The result is that we can now build things that will transform lives in places that formerly didn’t make sense.

    Superabundant capital is one of the key reasons that China can afford to transform Africa, as we discuss this month in our analysis of the trend, China Seeks to Unleash Africa’s Potential. Rather than close down factories and lay off workers, China can build mega-projects in Africa and elsewhere. South and Central Asia, as well as Africa and parts of Latin America have very low standards of living because they have no capital base. At a higher hurdle rate, no one could justify these investments. But the new reality makes it possible.

    The biggest challenge of this glut of cheap capital is to avoid investing resources into programs in which borrowers can’t afford even the historically low interest payments.

    That’s what happened with the sub-prime mortgages a decade ago and it may be happening today with student loans and sub-prime car loans. The challenge is to come up with solid opportunities to use huge amounts of cheap capital.

    This is precisely why President Trump’s $1 trillion infrastructure proposal is so encouraging. Just as the interstate highways and airports of the 1950s and ‘60s transformed our lives, these new upgrades will make the next forty years dramatically different than the past. As we’ll demonstrate in our discussion of the trend America’s Trillion Dollar Infrastructure Build-Out, the current glut of cheap capital suddenly makes these once-impossible projects seem not only possible, but necessary.

    For corporations, abundant capital means it will be necessary to change their approach to strategy. Instead of avoiding risk, leaders will have to learn to take risks and accept occasional failures as part of the learning curve. They will need to invest in experiments, just as Google does with everything from smart-home technologies to driverless cars. And they will need to invest in human capital, because talent is needed to generate and develop the ideas that lead to innovative new products and businesses.

    Based on this trend, we offer the following forecasts for your consideration:

    First, in an era of cheap, abundant capital, the basis of competitive advantage will change radically.

    It’s no longer necessary to be frugal and to be adept at picking one winning project from among a dozen possibilities. Going forward, companies will need leaders who are bold enough to take advantage of the opportunity to place several bets simultaneously. Instead of buying back their own stock, businesses will need to obtain and invest capital in new products, new services, and new markets. They’ll need to reduce the high hurdle rates that were necessary when capital was scarce and expensive; research shows that hurdle rates have barely changed over the past decade. And leaders will need to closely monitor performance so they can quickly abandon projects that are failing, while doubling down on those that succeed.

    Second, easy access to essentially free capital will fuel companies that will win markets by focusing on growth rather than profitability.

    Consider Amazon. As Porter Stansberry recently pointed out, Amazon has nearly doubled its revenues from $80 billion to $140 billion, yet its profit margins remain unchanged at less than 2 percent.2 Amazon can expand into a multitude of new businesses because it doesn’t need cash flow from its existing businesses since it doesn’t cost the company anything to borrow all the capital it needs. Incredibly, Amazon has invested $17 billion into its new and existing businesses over the past three years, while its profits have only reached $3 billion on revenues of $320 billion over that period. In its entire existence, Amazon’s retained earnings are less than $5 billion, yet it has been able to borrow $7.5 billion over the past two years, and now has a market capitalization of nearly $500 billion.

    Third, capital is likely to remain abundant until at least 2030.

    Bain & Company’s Macro Trends Group estimates that by 2020 the amount of financial capital will increase to $900 trillion, up from $600 trillion in 2010, measured in 2010 prices and exchange rates.3 By 2025, the world is likely to have more than 1 quadrillion dollars in financial assets.

    Fourth, developing countries will increasingly contribute to the growth in global financial capital.

    China, India, and other developing economies are just beginning to develop their financial markets. Bain’s research suggests that these countries will be responsible for creating more than 40 percent of the increase in global financial assets from 2010 to 2020 and beyond.

    References
    1. Harvard Business Review, March?April 2017, “Strategy in the Age of Superabundant Capital,” by Michael Mankins, Karen Harris, and David Harding. ⓒ 2017 Harvard Business Publishing. All rights reserved. https://hbr.org/2017/03/strategy-in-the-age-of-superabundant-capital2. Daily Wealth, May 4, 2017, “A Bubble in This Sector Could Trigger the Next Financial Crisis,” by Porter Stansberry. ⓒ 2017 Stansberry Research LLC. All rights reserved. http://www.dailywealth.com/3535/a-bubble-in-this-sector-could-trigger-the-next-financial-crisis3. Harvard Business Review, March?April 2017, “Strategy in the Age of Superabundant Capital,” by Michael Mankins, Karen Harris, and David Harding. ⓒ 2017 Harvard Business Publishing. All rights reserved. https://hbr.org/2017/03/strategy-in-the-age-of-superabundant-capital