I wrote this mail to myself after reading several articles on the coming capex in coal and thought of sharing it with you.
Begin forwarded message:
From: Sanjay Bakshi <sanjay.bakshi>
Subject: Very balanced article on India’s dependence on Coal
Date: 27 May 2015 17:47:06 IST
To: Sanjay Bakshi <sanjay.bakshi>
Apart from huge investments in solar power, India is going to see huge expansion of coal mining capacity.
Abundant and cheap energy could make many businesses vulnerable to disruption (e.g. genset, inverter, and battery manufacturers). Overall, I am very cagey about investing in businesses that generate or store energy. But there will be other businesses which will benefit from this huge capex – businesses which facilitate the capex or benefit from that capex.
The idea is analogous to what Ralph Wanger calls “downstream effect.” Here is an extract from one of his interviews which I quoted in an article I wrote for ET in 1997.
“The airline example was a good case of a transforming technology. The jet engine was a terrific invention, and General Electric and Pratt & Whitney and Rolls Royce, I suppose, made reasonable money making jet engines. But for every dollar the jet engine manufacturer made, probably the airline made more. And the airline customers turned out to be the big beneficiary.
A good reason the western United States grew rapidly in the last 40 years was the jet plane. It made travel very practical… So the concept of transforming technology is that the big money is downstream…
…The railroads transformed the United States in very dramatic ways. The guys who made steam locomotives and railroad cars made some money, but you may not be able to name the major makers of locomotives, because they barely exist today…
…As you go downstream the dollars spread out. Now you probably can name the railroads that made a lot of money buying the steam locomotives and using them to build the railroad industry. The railroads made some good money. But the people who made even bigger money were the people along the right of way who could use the railroad to develop mines and factories and cities. So the guys who owned the silver mine here in Aspen saw the value of their mine at practically nothing before the railroad showed up, because they couldn’t ship the ore out on a practical basis without the railroad. But as soon as the railroad showed up the mines became economically profitable, the city grew, and the people who owned the land and built stores made a lot of money…
…Another example – one that is the most obvious and the most lasting trend is the whole idea of electronics, computers, communications, and information processing of all sorts. Here your transforming technology is really the semiconductor. It made computers practical, it made telephones much cheaper. All of the things you didn’t have in your house you can’t get along without today. Things like your cellular phone, your fax machine, your PC, your e-mail and your phone mail.
…Well until a few years ago I would guess the amount of money made by the American semiconductor industry was zero. There are many companies that made some money, but there were many companies that went out of business and made no money at all. Now everyone remembers how well Intel and Motorola have done, but they’ve forgotten about the Fairchilds and dozens of others who started barely and failed. Some of them took a lot of money down with them.
Intel was the exception. But when you think about the amount of money that Intel has made, I think you would easily find that Intel’s customers made more. The people
who are making real money on it are people like you. The reason you are in business is because of cable TV. That is a new technology and has enabled people to sell blue jeans and pantyhose to millions that they couldn’t have reached otherwise. And it needed electronics to make it possible. And we’ve made a whole lot of money owning cable TV stocks than we ever would have owning semiconductor stocks.”
One should think both upstream (businesses that benefit from supplying goods and services to facilitate the capex that is coming) and downstream (businesses that benefit from cheap energy – a cost benefit they will be able to retain because they have a moat).
- Which businesses will benefit from being facilitators of this capex?
- Which businesses will benefit from being beneficiaries of this capex?