Despite a decade of disruption, Australia’s largest public companies of 2009 are still holding on to their positions at the top of the ASX100.
Australia’s newly-listed tech companies are starting to replace some of the traditional incumbents, but their failure to build genuine scale offshore is slowing their rise up the ranks.
It is a very different picture in the US, where Apple, Microsoft, Alphabet and Amazon have cemented their dominance over ten years — all hovering around $US1 trillion in market capitalisation.
The nine most valuable companies listed in Australia in 2009 — the big banks, miners, retailers and Telstra — have shuffled positions but can all still be found in the top 12 positions at the end of 2019. On the surface, they appear relatively immune from disruption despite the industries they operate in being radically reshaped by the rise of the internet and mobile technology.
Further down the list there is evidence of the erosion of value the internet has unleashed on traditional industries, particularly in the retail and media sectors. Of the companies that have disappeared from the list over the last decade, the majority have been acquired by foreign companies or swallowed by larger local players in their sector. Think Fairfax’s coupling with Nine Entertainment, CBS taking control of a flailing Network 10 and South Africa’s Woolworths buying David Jones — thwarting plans for the department store to merge with its rival Myer.
Australia’s experience contrasts with that of the US, where the story is of technology companies sucking up the oxygen and capital to dominate the index, giving rise to the term “big tech”.
The pace of disruption has claimed casualties along the way, around the world.
According to PwC’s Global Top 100 Companies by Market Capitalisation report, just 53 companies from the 2009 Global Top 100 survived to be in the list on 31 March 2019.
Amazon and Apple added the most to their valuations over the decade, followed by Microsoft and Alphabet. From China, internet companies Tencent and Alibaba — which were founded in 1998 and 1999 respectively — are also among the top ten most valuable global companies, illustrating the astronomical growth in the tech sector.
Kent Kwan, co-founder of investment company AtlasTrend, noted Australia has not experienced the growth of “big tech” like the US or China markets.
“Perhaps in some ways, it could be termed as the Australian market being immune to disruption. Certainly the large banks are dominant, as are the likes of our two largest resources companies, BHP and Rio. All these companies have dominant domestic positions and market power locally — the same could be said for the likes of Woolworths and Wesfarmers,” Kwan said.
“However, I believe it’s also a matter of how challenging it is for Australian companies to build global businesses of scale.”
The exception, Kwan pointed out, is the global biotechnology company CSL, which has risen from Australia’s 13th most valuable company in 2009 to the second position.
The fund manager also argued that it is the inability to expand globally that has kept Australia’s newer digital companies — which have managed the crack the top 100 in recent years — from encroaching on the positions of the top 20.
“Seek, REA Group, Carsales.com and Xero have all done a fantastic job at focusing on a core product and becoming the local dominant player. They have benefitted from the structural growth story of consumers and businesses moving their consumption online and the market has recognised their market leadership locally,” he said.
“However, they have yet to grow larger and become part of the top 20 ASX companies because they have not yet scaled globally, which is something that big tech in the US has accomplished. In China, big tech has succeeded less because of global scale but more because of domestic scale — given how large the Chinese market is.”
The rise of the disruptor
While other stock markets around the globe reflect the rise of the technology behemoths, this trend isn’t reflected in the Australian equities market. That’s in part due to structural differences, said Daniel Petre, co-founder and General Partner at venture capital firm Airtree.
“If you look at other stock markets you see the rise of disruptors — but not so much here. Partly it is due to the dominance of the banks and telcos — not so much in the US, where you have a more fragmented banking sector and also the forced breakup of AT&T into minibells a while back.
“Even allowing for these structural anomalies the US has seen the rise of Microsoft, Intel, Apple and now Google, Facebook, Netflix etc.”
Petre questioned whether Australia has the sophistication and depth of a public market to support a technology company to grow to $30 billion.
“One issue we will have is that, due to the lack of liquidity for tech stocks — not a deep market of informed analysis so therefore not a deep market of institutional tech stock buyers — my guess is the bigger disruptors take the path of Atlassian and go to the Nasdaq.”
Australian-born enterprise software company Atlassian, valued at $US31 billion ($A45.8 billion), would make it the tenth largest company on the ASX.
But that doesn’t mean technology has been absent from the ASX, proving particularly attractive for small- to mid-cap stocks.
The ASX has added 100 tech IPOs in the last five years, many of which were mid-cap listings such as Xero and Wisetech, and this year Prospa, Life360 and Fineos.
“Going forward, I expect there to be more quality disruptors listing in Australia — less than $500 million, maybe up to $1 billion or $2 billion — but it is hard to see an Australian disruptor having the size to be in the top 20 to 40 stocks and staying an ASX-listed stock.”
Nicki Hutley, Partner at Deloitte Access Economics, said that compared to the US, which provides the clearest example of big tech’s impact on the financial markets, there are noticeable distinctions in Australia.
“We have a very different structure to our economy, to our financial markets and to the way that we raise capital,” Hutley told Which-50.
Part of that story is about the decline of manufacturing in the US, with value replaced by internet companies which were given the capital, oxygen and population to emerge from Silicon Valley and Seattle.
In comparison, Australia had a far smaller manufacturing footprint, much of which was owned offshore and not reflected in the ASX data, Hutley explained.
Although the market is showing signs of changing, Hutley also noted that financing has been difficult to attain locally, with companies like Atlassian turning to the New York Stock Exchange to raise the capital they wanted.
The technology story also plays out differently in Australia, Hutley said. Just because we haven’t got pureplay technology companies listed in the ASX doesn’t mean technology isn’t making a significant contribution to the companies that sit at the top of the index.
“You can argue that a lot of the companies [in the top 20] are innovating in lots of ways. They are using technology, they are buying out smaller companies. They’re not a pure technology play, but they are still a quasi-technology play.”
For example, within the mining sector, BHP or Fortescue using technology to extract resources from the ground more efficiently in the first place.
“In every aspect of those big companies, technology and technological innovation is playing a really important role in helping them keep up being competitive, to keep the costs down and improve their shareholder return.”
For Hutley, the stability of the ASX 10–20 isn’t necessarily a bad thing, so long as they continue to put technology to work.
“Having companies that are strong and steady and more resilient is a good thing for our economy,” she said.
“What we don’t want to see though is companies that don’t manage to innovate, that don’t become more competitive and productive, because that’s bad for everybody.
“I think probably in five or ten years’ time you will see a difference and I think that’s because the world is changing so rapidly. It’s adapt or die, but our biggest companies have shown they are very good at adapting.”
A lagging indicator
The resilience of the ASX10 does not inoculate them against future waves of disruption — particularly as global disruptors like Amazon put down roots in Australia. The experts Which-50 spoke to urged caution when drawing conclusions based on market cap data.
“Change in market value is a useful way of looking at longer-term disruption and seeing the winners and losers in that respect. It’s amazing to see that in the span of a decade Apple has increased its market value by 6x — or almost $US1 trillion — while ExxonMobil has lost over $US60 billion in market value,” said Kent Kwan from AtlasTrend.
“However, this is backward-looking in some respects and it takes a number of fundamental measures to assess future growth and disruption and the winners from it. For example, by now we understand that it is likely that fossil fuels are being gradually replaced by renewable energy sources — but who will be the winners going forward? To form a view, we need to assess multiple factors such as growth rates within the renewable energy sector (e.g. solar, wind etc), government policy and cost structures.”
The vulnerability of Australian companies to disruption was highlighted by Australian tech pioneer and venture capitalist Paul Bassat who was speaking at an investor forum in Melbourne last week.
“Our largest companies are really, really threatened by these globally driven software business models that, in industry after industry, are solving big problems on a global, not a local basis,” The AFR reported.