Physical infrastructure networks are at the heart of the energy and transportation systems that have underpinned the industrial world over the past 100 years. The US electrical grid, for example, has more than 5 million miles of transmission and distribution lines connecting power generators with consumers, and over 2 million miles of pipeline. Over 4 million miles of road enable the daily travel of more than 260 million American vehicles. In just the past 15 years, China has built 25,000 kilometers of high speed rail which moved more than 1.7 billion people in 2017 alone.
These networks are creatures of 20th century infrastructure design principles, heavy on top down planning, centralized command and control with unidirectional service delivery. Users of these networks passively consumed whatever energy or transportation service was offered to them (often by regulated monopolies). In fact, enormous industrial and investment ecosystems emerged to separately build and finance the physical delivery networks (construction, equipment and infrastructure capital) and the products allowing consumers to access services on those networks (appliances, vehicles and consumer financing). For better or worse, this created energy and transportation industries that didn’t interact much with their own consumers – largely because they couldn’t do so in an analog world. But that is now changing.
But that is now changing.
The digitization trend that has transformed industries such as media, communication and retail in the early 21st century is now occurring in energy and transportation. These sectors are being upended first and foremost by technology – the proliferation of low-cost wireless communication, sensors, data analytics and artificial intelligence capabilities. New services and business models such as car sharing and distributed power generation are eating away the traditional network model by putting the end consumer at the center of decision-making and increasing their level of choice. Digital technologies are forcing top down, one-way networks to evolve into dynamic, decentralized and multi-directional networks more like the internet.
In transportation, this means traffic lights adjusting to the real-time needs of cars, pedestrians and cyclists at the intersection. It means cars talking to road infrastructure and each other. In energy, it means home owners generating their own electricity on-site with solar and battery storage. In this new energy and transportation paradigm, the end users are the network, and their choices and behaviours are the real engine of change. And the fuel of this new paradigm is data.
As these networks become more digital, decentralized and responsive, they also become more complex, a collection of millions of real-time individual choices and actions that need to sum up to a coherent whole. This would not be possible without the recent advances in computing power and data analytics that enable the creation, processing and analysis of tremendous amounts of real-time data. The digital layers of these networks become as important as the physical one in ensuring their smooth operation.
So what does this mean for businesses in the sector?
For those that have been involved in the construction and operation of traditional energy and transportation networks, it means adapting to a world where consumer engagement and digital innovation become essential features of their activities. For businesses that have sold products such as vehicles and appliances to consumers on a one-off basis, it means adapting to a world where the new network service and its data could become more valuable than the physical asset itself. This type of transformative change is not always easy for large incumbent organizations, however, and in many cases it is smaller, more dynamic companies emerging in these sectors that will lead the way.
So what does this mean for investors?
The lines between infrastructure and technology are blurring more and more every day, and rules of thumb applied in traditional energy and transportation investment approaches are becoming less relevant. The new networks are hybrid models at the juncture of infrastructure and technology, and the investment community needs to break down its traditional silos to find the value in the new opportunities this is creating. It is becoming riskier to invest in large-scale physical infrastructure without being aware of the network disruptions caused by digital technologies. In return, it is risky to invest in technologies selling into energy and transportation without being aware of the realities of essential service markets, such as regulation and security concerns, and how these are fundamentally different from providing consumer applications over the internet.
Is it infrastructure? Is it technology? It is both, and at the same time something new. At MKB, we focus on businesses that are leveraging digital technologies to build and operate these new networks and provide a whole new class of energy and transportation services to citizens and consumers.