The sky's the ceiling

Never mind Google and Apple. The new "disrupters" are playing to the developing world's rapidly growing middle class

The Big Picture
Globe Investor Magazine, May 22, 2008
Photograph by Frederic Soltan/Sygma/Corbis

You can do well if you invest in a company that makes good products people need. But you can do a whole lot better if you invest in a company that becomes the go-to source for something that is truly on the cutting edge. Some investors call these companies "disruptive," because they take on existing businesses and give them a good shakeup.

Apple was disruptive with online music retailing, selling four billion songs through iTunes and pushing many conventional music retailers out of business. Its share price rose from $10 (U.S.) in January, 2004, to a high of $199 (U.S.) in December, 2007. That means if you had bought $1,000 of Apple shares in 2004 and were fortunate enough to sell them at the peak, you would have had more than $15,000 in your pocket. You could have made a similar amount by putting money in Google a few years ago while avoiding a company such as the New York Times. On the other hand, if you had invested $1,000 in Warner Music Group, your investment would have shrivelled to $400 (U.S.).

But disruptive trades such as Apple and Google seem to be at the end of their lifespan, as they have fallen sharply in recent months. So, what are today's disruptive investments? Well, they're hard to spot at the beginning, but often, even if the disruption is already under way, you can still benefit. One to think about is India.

It's not a new investment theme. keep tipping for decades to come. India is now easy to invest in, thanks to exchange traded funds.With its entrepreneurial spirit, cheap labour and massive consumer base, India is on the verge of making life very difficult for some of the world's established companies.

For example, global auto manufacturers are currently engaged in a high-stakes race to develop cheap cars that can satisfy the growing market in developing nations, and India's Tata Motors Ltd. has an edge. Earlier this year, it unveiled the Nano, a five-passenger car that could become ubiquitous in India. No, it won't be the most sophisticated vehicle on the road. The disruptive part of the Nano is its price: $2,500 (U.S.).

The basic version has no air conditioning, power steering or radio. Besides lacking many of the comforts that are standard in other cars, it is also very light-the result of using less steel-and runs on a two-cylinder engine that produces just 33 horsepower. But the big breakthrough is its modular design: The car is sold in kits that can be assembled and serviced by local entrepreneurs.

If the car is a success in India, it could disrupt the plans of more established international car manufacturers, such as Toyota, Nissan and Ford, to grab a share of one of the largest, most important, growing markets in the world. And if Tata manages to export the Nano to other markets in Asia, as well as to South America and Africa, look out. It might sound crazy now, but that's how most disruptive ideas begin.

-David Berman