Karen Harris: Companies like Airbnb changing the economics of distance

Alec Hogg speaks to Bain’s Karen Harris on the sidelines of the World Economic Forum for Africa in Cape Town, South Africa. She says the most interesting developments with companies like Airbnb and artificial intelligence is that the confluence of these trends is changing the economics of distance.

Karen Harris is with Bain & Co. in from New York. What did you do at the forum this year?

This year, we just hosted a very interesting breakfast this morning with some business leaders, talking largely about some of the global trends on the balance sheet and capital that are affecting businesses across the continent and how they might take advantage of them or avoid the headwinds that those trends create.

Karen is the director of Bain & Company’s Macro Trends Group.

That’s a big job and clearly, you’ve been following what’s happening in the exponential organisations or growth of companies such as Airbnb and Uber, etcetera. In Africa, we’re a little bit behind the curve on these technologies. Maybe we’ll start a little bit with artificial intelligence. Is that an area that you’ve looked at and been following?

If you step back and think about Airbnb, artificial intelligence and all of the technological trends that we see, the most interesting developments are not any individual slice of those, but the confluence of all of those trends. What they’re achieving is changing what we call the economics of distance or spatiality. The cost of moving goods, moving information, and moving people is declining at a rate unknown before in history since really, the advent of the motor and the car. If you think about how disruptive the car was to the way we live, work, and play, and think about the technological advances, the order of magnitude changes that can happen and it becomes very interesting ,particularly for countries on this continent that are thinking about how they can develop going forward.

If you’re thinking in a linear fashion, you might build another factor whereas if you’re thinking exponentially (as you’ve just described now), you might instead, be thinking of building a self-driven car.

Well, I think the two areas that are most interesting for the African continent are ‘what is happening in terms of the scale of business’ and some of the implications of the growth paths that might exist for countries looking to perform the kind of economic miracles we saw taking place in Asia over the last 30/40 years. Starting with the scale point, up until now, the modern age of industrial manufacturing has been based around the assumption that you get economies of scale – bigger businesses are better businesses/more profitable business, or the ones that survive. What we’re seeing today is a bar belling of business so because of companies that can provide logistics in scale; in the United States you see companies like Amazon or wireless providers here in Africa (the mobile networks), small businesses can piggyback at a much lower scale. You can have an SME that used to need a brochure, a secretary, an office, and a fax machine, that has nothing but a website to mobile phones that can produce goods at a much lower cost in that sense. The other scale we’re seeing is in things like 3-D printing. It used to be that all the costs for business were fixed but with the 3-D printer, the costs become much more variable. It’s the ink or the filament that goes through those drives that cost the production, and not the changes or the customisation. That is just the beginning of a vanguard of changing the scale of business, serving it more locally with more specialised and more customised models.

If you’re thinking from an African perspective, many on the continent will want to employ workers – what you just suggested/discussed now on 3-D printing. You don’t employ too many people to produce something that a plant might have in the past. Is this a threat of an opportunity?

It’s both and I’m not sure that you necessarily employ fewer people because if you can have smaller scale businesses, it means you can have more of them. The barrier becomes less one employer than the innovation, the knowledge, and the ideas. The one thing we know about people is there are no shortage of good ideas. There’s an even distribution of intelligence, innovation, and ideas across the planet. There may not be an even distribution of capital, wealth, or GDP but that comes from the innate abilities of people. There’s no model that says one country has more of that than the other does. Regulatory environments and access to capital can allow those to come to fruition more easily but as you remove those barriers and scale, suddenly opportunities come. What it does mean to your point about threats is the model for growth that has worked for the past half-century has been export-led growth. It’s been ‘create a giant supply and send it to someone to consume elsewhere’ and now you’re talking about a model where needs are served more and more locally at customised levels, which means the markets that developing countries may have targeted are more and more, able to serve their own needs  domestically. It’s an entirely different growth model.

How do you get people to think differently?

Well, the good news is services that used to be inaccessible like education are suddenly exportable. I have my children watch the Khan Academy on the Internet. We’re in New York City where arguably, you can get access to some rather good education, but on the Internet. it’s available to anyone with a mobile phone – free. The democratisation or the greater access to services that used to be trapped and only used to be accessible if you could be in front of the teacher helps with that. The sharing of knowledge across the economy helps with that. Collaboration can be helpful but again, that mindset, the regulation, the excitement around it is certainly, critically important.

The regulation’s falling behind in so many regards and you think in Africa, it must be even further behind. Does that open the way for the human spirit, for entrepreneurs, for people who’re seeing the same programs your kids are seeing in New York City, to change the world?

I should hope so. I’m optimistic about the capacity for innovation. I think we’ve seen more and more rapid innovation over the last decade than people anticipated. If you look 15 years back, much of the literature was the peak oil, the end of oil. We’re going to run out of resources. We’re going to run out food. We’re going to run out of ideas. Now that we’ve invented the flush toilet, there’s nothing more to look forward to in terms of massive innovations. There was that tenor in the literature. I think we’re seeing that that was misguided and I tend never to short human innovation. We’re not running out of food. We’re actually innovating with agricultural yields in ways we never have before. Again, threat and opportunity because people think about Africa (and I hesitate to use that term for 25 percent of the world’s land mass) but I think agriculture is a growth area because there’s so much uncultivated land. Well, much isn’t accessible and yields go up by the places that makes farming less competitive. On the other hand, the yield on ideas will be the same here.

In South Africa, it’s sad for us to see some of our best brands are helping to transform, for instance, renewable energy in the U.S. Elon Musk and the Rive Brothers are making huge strides on that side. When will that come to South Africa – or to Africa, generally? When will the birth of these ideas be able to generate the capital that will ensure that this continent can start growing its own rather than having to pull from elsewhere?

For example, I think Nigeria is a place where we see tremendous local ideas and local content. That is a market where the innovations and things like consumer products have been entirely focused on that domestic market coming from within many entrepreneurs there. It helps to build the rise of a middle class. The build-up of critical mass certainly helps but creating communities and clusters of innovators… I’ve seen in South Africa in my very brief time here during this visit, shared works base, for example, which helps people share ideas. The critical mass around that is two dozen people. It’s not hundreds or thousands. It’s having enough people in the room with the same mindset, to share and collaborate, and to start that cycle going. I can probably throw a rock at two dozen innovators just at the World Economic Forum, so I’m hopeful that way.

From Bain’s perspective, you do consult big companies. There must be serious challenges in this new environment for them, too.

Yes. At Bain, we see many of our larger companies doing things. There’s M&A that will help them expand their capabilities so scale M&A is the classic build-up. You buy a business the same size in your area and grow your scale but now that the economics are changing, we see more and more scope innovation, which is company buying its way into a new business, using a purchasing and more innovative model as a new platform for growth. They tend to have to pay a higher multiple for that, but then they have the platform that allows them to growth. It’s a different strategy for growth, going forward.

It’s a good time to start a bit business and it’s not a bad time to sell a business either, because there’s a lot of potential buyers.

There’s tremendous interest. We saw in our Global Equity Report at Bain, that there is more dry powder (as we call it) – more investors looking for opportunities than really, almost ever before with a tremendous demand for good assets and tremendous competition. What we’ve seen in our research is that a globe of capital superabundance… good ideas are really, at a premium. Human capital and good ideas are the two most valuable assets any company can have, from small to large.

Karen Harris is with Bain at the Africa Economic Forum in Cape Town.