The Disruption Tidal Wave--it's not just AI!
We live in an absolutely remarkable time!
It's not just AI progressing at a furious pace and changing how we live! There are stunning advances and disruptive technologies in almost every field, from healthcare to construction.
Most of you likely know of Clayton Christensen, the Harvard Business School professor who popularized the concept of disruptive innovation. While academics may debate the precise definition, the core idea is simple: "a process by which a product or service takes root initially in simple applications at the bottom of a market and then relentlessly moves up market, eventually displacing established competitors." In other words, disruption occurs when new technology or innovation enters an industry and fundamentally changes how things are done.
That's the excellent business school definition. I also like the very simple: "what's stupid?". What do people or companies do today simply because "it's always been done this way," but when you look at it more deeply, that activity doesn't make sense anymore? Typically, in these scenarios, the original activity made sense when it was introduced, but now thanks to new technology or other improvements, it could be done differently/better/cheaper.
Manufacturing and Transportation Disruption
Let's start with a timely one: manufacturing! If you did not have a chance to see the Tesla Investor day last week, it's worth perusing the slides or watching this excellent summary:
While it's easy to think of Tesla as "just another car company," particularly as traditional car manufacturers start rolling out electric vehicles, Tesla has much bigger ambitions. They aim to be the underlying driver behind a global transition to sustainable energy. That alone is an ambitious goal worthy of further discussion, but what is really remarkable is how they are getting there in their manufacturing innovation. A few highlights:
A new "structural pack sub-assembly" manufacturing method makes building complex things like cars more like building out of Legos.
The gigapress lets them create large-scale complex parts in one shot, versus trying to assemble them from dozens or even hundreds of smaller pieces:
Eliminating the use of rare earth minerals in the motors down to zero!!
There is a lot more, of course (169 slides in the deck!), but this particular slide captures the philosophy well:
Ask questions and relentlessly simplify.
Obviously, there is a lot of hype and ambition in Tesla's presentation, but even achieving a fraction of those goals would be transformative to the world. Think of how much of our modern infrastructure revolves around gasoline cars driven by humans. Electric, self-driving cars would change everything from parking lots to eliminating traffic congestion to changing how we shop and eat (Grubhub is convenient, but the delivery fees are so expensive!)
The impact of manufacturing improvements is not limited to automobiles and transportation, of course! The construction industry, broadly speaking, is notoriously slow to adopt new technology, but this is starting to change. The Design and Construction Week expo in Las Vegas earlier this year showed a wealth of innovation. Just as Tesla is pushing for Lego-like building of cars, the same thing is happening with home and business construction.
Traditionally, homes and commercial buildings are built by hand on-site, largely with "raw" ingredients like concrete, wood, and sheetrock. It's a very labor-intensive process.
Now it's possible to get large portions of the house manufactured at scale elsewhere in a factory, and then the pieces are quickly assembled at the home construction site. For example, BuildBlock (https://buildblock.com) makes modular walls that connect together. Casita is essentially a "house in a box" that unfolds and turns into a small house or ADU within hours. https://www.boxabl.com
Significantly cheaper construction could go a long way to addressing the housing shortage in the US and, for that matter, making a significant dent in inflation.
Construction costs are only part of the issue. Zoning and other government regulations and processes (e.g., the permitting process) also play a large role in the cost and complexity of construction projects. Unfortunately, those processes are harder to improve and move quickly (generally speaking, there is no competition with government regulations!), but from time to time, there is progress. Los Angeles, Minneapolis, and Portland have all, in some fashion, removed single-family zoning, making it easier to build higher-density housing. Washington State is pursuing a similar effort, but statewide.
Needless to say, more affordable housing would impact much more than just inflation. I have yet to see how it will play out going forward, but history can be a guide. Much of American life revolves around suburbs, everything from schools to work commutes to the ubiquitous suburban mall. The full history of suburb development is fascinating—two highlights:
The GI Bill post WWII guaranteed low-cost home loans for veterans.
Home developers devised innovative ways to reduce costs by building standardized 'cookie cutter' homes on large, previously empty plots of land.
The combination of increased demand, affordable financing, and lower-cost homes significantly accelerated the suburbanization of America.
Knowledge Worker Disruption
Speaking of inflation, the American Enterprise Institute think tank recently published a fascinating chart on inflation.
There is a lot to unpack here. Much of the commentary on this data revolves around the role of government and government regulations in these different industries (the high-inflation ones tend to have more government involvement than the deflationary ones--see the earlier discussion on zoning!). For this note, we can also look at the data through the lens of how labor-intensive the different industries are.
AI breakthroughs could make a significant difference in industries where the cost of human knowledge work is predominant.
As a simple anecdote, I was talking to a long-time friend this weekend who happens to be a high school teacher. She was buried in work trying to grade over fifty term papers. A daunting and time-consuming project by any standard!
So I wrote a simple program that used the new ChatGPT AI API to let the AI take a first pass at grading.
The results were stunning. In under five minutes, the AI graded all of the papers for a total cost of $.42 of API usage. More importantly, it did an outstanding job! By and large, the AI commentary was spot-on and helpful. Of course, she still went through each paper to refine the AI commentary as needed, but the tool still reduced the time required to grade the papers by over half.
The impact of AI efficiency will be particularly challenging for public companies that rely on billable hours for their revenue--think large consulting firms like Accenture and law firms like DLA Piper.
I've previously written about the productivity improvements driven by the new breed of AI tools. I saw this in software programming, and now I've seen it in education.
How is a company like Accenture going to respond? Can they do work they are currently contracted to do at half the price? Would this mean their revenue drops by 50% as well?
Probably not. Wall Street would be very unkind to such revenue drops, and moreover, from a company culture perspective, Accenture and similar companies are built around billable hours. What middle manager at one of these firms will go to their boss and say: "Boss, I can do the work in half the hours"?
So while I am sure that Accenture will start offering "AI" flavored services, they will not likely reduce their fees anytime soon.
Until competitors come along, that is! There will soon be, if there isn't already, a new crop of AI-turbocharged services startups that will hire super bright people powered by the latest AI productivity tools. Such a firm could go to Accenture customers and say: "we'll take over that contract and do it for half the time and half the price." What happens then? Classic Clayton Christensen disruption: game over for the incumbents!
Healthcare is a huge topic, and for today I'll focus on one key area: obesity.
Many factors are driving the steady rise in obesity. Highly processed foods increasingly look like an underlying driver: https://www.nih.gov/news-events/nih-research-matters/eating-highly-processed-foods-linked-weight-gain If we knew 100% for sure the cause, then I think we likely would have solved this problem years ago.
Regardless of the cause, as we all know, excess weight causes various secondary health issues, from heart attacks to diabetes. It's not just the direct cost of managing health issues; lost productivity and work time from these health issues provides another drag to the economy. If we could waive a magic wand and eliminate obesity, it could easily be the single biggest driver in reducing inflation and simultaneously growing the economy.
That magic wand may exist now! A new class of weight loss drugs like Wegovy and Mounjaro are showing stunning efficacy--an average of 20% weight loss! It's quite simply incredible. The Economist has an excellent writeup on this topic if you’re interested in learning more: https://www.economist.com/briefing/2023/03/02/a-new-class-of-drugs-for-weight-loss-could-end-obesity
While not a disruption in the classic definition (pharmaceutical companies have been working on weight loss drugs for decades), the impact of Mounjaro and similar drugs will have an incredibly disruptive effect on the healthcare industry. Fundamentally, the economics of the healthcare industry revolves around treating the symptoms versus root causes. When you are sick, you go to the doctor or hospital, and they fix you up. Obesity creates more heart attacks requiring more heart surgeons, which in turn requires a slew of pills and other medicines to deal with the aftermath of the heart surgery. Ditto for countless other long-term care issues like diabetes. It's much harder and more expensive to deal with health issues reactively versus proactively fixing the underlying root causes.
Now, what happens when a third of the population becomes significantly healthier almost overnight?
This is just a sampling of the disruptions and innovations happening in the world right now. There is a lot more going on, of course! Power generation is undergoing a radical change with renewable power generation, and large-scale mass manufacturing of micro-nuclear power plants promises to accelerate that transformation further. New collaboration tools like Monday.com are paving the way for a dramatic reduction in the number of middle managers in a typical company. https://fortune.com/2023/02/06/middle-managers-tech-layoffs-efficiency-zuckerberg-facebook-google/ At least there may be fewer TPS reports in the future...
Bottom line: it's an exciting time to be alive!
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If you are familiar with Nassim Taleb's writings, you have heard of the Lindy Effect. The longer something has lasted, the longer it will last. There is a great story about Mr. Taleb where he was asked about whether a Walmart should be allowed to be built at a certain location. He didn't maunder on about destroying the small businesses in the area. He pointed out that at some point the Walmart will go away and what will people do then? Ironically, Walmart is leaving Portland. What are they going to do then. The problem with disruptive technologies is that they fragilize things. More dependencies means collapse is more likely. There is a reason I don't shop in Portland.
I am not sure the Lindy Effect is applying to Silicon Valley Bank right now though!