Hello and welcome to The Download. I'm your host, Dave Richardson, and I'm really happy to be joined again today by Dominic Wallington, who is the head of European Equities with RBC Global Asset Management. Dominic, welcome.
Good morning, Dave. How are you doing?
I am great. And you look fantastic. You had a good summer thus far?
Yes, it's been lovely, though the weather was awful, but got better. British, basically. We make the most of it.
Very good. And, you know, Dominic, your last visit was one of the most popular podcasts we've had thus far, in terms of listenership and feedback. It was around the whole idea— and we're going to extend the concept a little bit here— around the fashion industry, and giving basically credit to the fashion industry for the level of innovation. We often think of the innovation in big technology firms, emerging technology firms, but there's lots of innovation going on in other businesses as well. You've been talking recently about the digitization of the industrial world and the industrial world has become a little bit more popular, particularly early in the year, from an investment perspective; some of the value there. But you've got some thoughts about what's evolving with technology in this world, which again, pushes these companies forward and makes them more attractive investments. Why don't you tell us what you've been thinking about?
Yes, great. You're absolutely right, it's about digitization. It's about manufacturing companies, the industrial companies broadly. We've said for a while that we thought that digitization and the new technology is coming through at the moment. That they were predominantly enabling technologies and that we were very early within the overall process of having a cycle of renewed innovation and technology. Andy Grove, who ran Intel, wrote the book «Only the Paranoid Survive»— the book that makes us look over our shoulders when we're at work. He also said that all companies would become Internet companies. There would be no choice. I think that's proving to be correct. We're seeing it in the industrial landscape at the moment. Some great opportunities from a European perspective. I'm just trying to think of the best way to describe what's happening, and I think the example of the A380— the big Airbus, the super jumbo— is a good example. It was the design of it. The innovation of it. It started in 1998 and by 2000, it was estimated that the cost of the entire project would be 9.5 billion euros. But there was a big delay over two years and the project ultimately came in at about 25 billion dollars. And that was the difference— because they don't make them anymore— between the project making money or not making money, and it didn't recover its costs. The primary problem was the cabling in the aircraft, believe it or not. There's three hundred and thirty miles of cabling in an A380, there's thousands of wires and forty thousand connectors. The people who are undertaking the installation were provided with twenty-foot-wide schematics, paper maps, if you will, of how the wires had to be put into the aircraft. My brother-in-law, who's an aeronautical engineer, worked on this project. He said it was almost impossible. This is one of the primary reasons for the delays that we saw. But now Boeing and the other major manufacturers, they use augmented reality. So, the engineers who put this wiring in, they wear the glasses, they walk into the aircraft, they roam around the aircraft, and they can see the wiring rendered into the aircraft. So, they know where to put it. They can communicate with the AI that's helping to drive this on a hands-free basis. This has improved the first order quality of installation by 90%. It's a remarkable change. We're seeing these sorts of things affecting the industrial landscape all the time. And the kinds of companies that are selling it are very attractive investments for us.
These companies, are they primarily found in the United States? Or are there some really interesting technology plays in the European market?
That's a great question, because it's really something where we can celebrate Europe, to a certain extent. But it's a question of the fact that it was more difficult to run the industrial automation and software companies in Europe, because we can never get the scale that you do in North America. There's a lot more operational technology in North America, because a lot of that takes advantage of economies of scale. It's easy to roll out and they have the volumes to support it. The European manufacturers of these sorts of products, they move towards information technology. It's the symbiotic relationship between industrial machinery, automation and information technology that's really leaping ahead. There are some great players of these sorts of products within the European market. One, which is in the portfolio, very recently produced results that were well ahead of GDP growth, double digit growth, improving margins, reducing capital intensity. That means it costs them less to grow than it did before and less just to sustain themselves, and therefore much higher levels of free cash flow. They were talking about a product whereby they're running digital twins. Everything they make, they can now construct a digital version of it, all the way from the beginning, whether that's 3D maps that are built by sensors or computer aided engineering underpinned by AI and machine learning; all of that can be manipulated. Then you can simulate these things on a digital basis all the way through to having predictive maintenance. So, it's end-to-end and it's going to completely change the industrial process, I believe.
Wow, fantastic. I have one more question, just to tie your two appearances together. I take it the virtual reality glasses— because they're designed in Europe, with the innovative fashion sense— are quite fashion forward and stylish?
I'm not sure you could say that, for the moment. They're OK, inside an aircraft, but no doubt we'll get there.
Not something we'll see out on the street any time soon. Well, Dominic, it's always fascinating to talk to you and understand what you're looking at and thinking about, because you're always thinking about big picture trends that are emerging. It's a big part of the way you think about investing. So, thanks for your time. Please enjoy the rest of the summer. Hopefully the weather keeps up over there in England.
Thanks very much, Dave. Have a good day.