Software (and software ecosystems) is seen as the engine behind the fourth industrial revolution, after the invention of the steam engine, mass production and the computer.
Software makes it possible to collect data during the production process, analyse it and thus render production more efficient – not only faster, but also more sustainable. The rapid developments in the field of software come under a number of names including 'Connected Everything' and 'Internet of Things'.
Software ecosystems: key to success
We are only at the beginning. Not so long ago, individual operator-controlled machines made most products. Software ecosystems can now let machines 'talk' to each other and it is expected that the extent to which industrial companies can build good software ecosystems will largely determine their success. We now see traditional industrial companies developing software ecosystems from the bottom up to make their processes more efficient (e.g. General Electric), while traditional software firms are developing industrial products (e.g. Microsoft).
Software firms are potentially better positioned to use the equities of software. They can build on existing knowledge and apply it differently. Software is often new territory for industrial companies. It is therefore important, as an investor, to ensure that if industrial companies fail to develop a good software ecosystem themselves, they will establish a connection with a software firm on time. All major car manufacturers are now active in Silicon Valley. For software firms, the step towards industrial products can be more difficult. Google Cars has not got off to a good start so far.
Software ecosystems: advantages of scale and barriers to entry
Those who can develop good software ecosystems face the prospect of a monopoly. Examples include the office software Microsoft Office or the Google browser. Added to this, a software-based business model offers many advantages. First, in terms of finance: software firms generally have lower (fixed) costs, more stable (service-related) revenues, more consistent profit margins and lower debt. Operationally, their activities are easier to scale up and down and a good software ecosystem creates easier access to networks and high barriers to entry for potential competitors. For the investor, finally, there are more stable revenues and higher cash flows.Food is wasted because we put too much on our plates, we buy food and don't eat it before it goes off, restaurants and/or school cafeterias serve portions that are too big, etc. Here are key messages and tips to help consumers reduce food waste: Source: Food and Agriculture Organization of the United Nations, as of 22/05/2017
Back to the contribution of software ecosystems to making processes more sustainable. More than 70% of all water worldwide is used by the agricultural sector. In addition, about 35% of all produced food never reaches our plate. If we can solve these huge waste problems through the use of smart software, that would help the world move forward.
Smart software in agriculture
Think of sensor-driven irrigation systems and smart water meters. Software that predicts in a timely manner when maintenance is needed can help to prevent the loss of water as irrigation systems are not renovated on time. For farms, software can add value in many areas such as the optimisation of the raw materials needed and of harvesting techniques and timing. John Deere has developed special GPS software for harvesting machinery that shows exactly how the machines can best move over the land, leading to maximum fuel savings. The farm thus evolves into a 'connected farm'.
Smart software to save energy
Research has shown that with so-called 'connected lighting' systems, 80% of the energy consumed in offices can be saved. Large savings are possible in 'smart cities': if all lighting systems in the infrastructure and houses and offices are connected to each other, up to 30% of energy can be saved. Smart software can adjust the light intensity in shops when customers walk through the store. This can lead to more sales as well as greater customer satisfaction. An eye for sustainability drives lightbulb manufacturers towards connected lighting systems now that long-life bulbs are out of favour.
This article is based on an interview in Financial Investigator (issue 7, 2017) with David Winborne, senior portfolio manager at Impax Asset Management, part-owned by BNP Paribas Asset Management. Here David discusses the disruptive power of software on the development of almost all companies and how Impax, as a leading investor in the field of sustainable investment in the world, incorporates software as a theme in its investment processes.For more information about our sustainable investment solutions: www.bnpparibas-am.lu