TECHNOLOGY AT WORK

February 2015
Citi GPS: Global Perspectives & Solutions
71
Figure 55. Growth per year
18%
16%
Employees
EBIT
14%
CAPEX
12%
10%
8%
6%
4%
2%
0%
US
EM Asia
Source: Citi Research, Factset, Worldscope
Stock markets care about investor returns —
whether these are maximised by robots or
people is less of a concern
people) compared to just 4 million in 2003. As a consequence, EM Asia net income
per employee has been flat in the past 10 years (Figure 55). It is harder to argue
that there has been an automation-driven shift that has helped shareholders relative
to workers. Unlike the US, EM Asia profit margins have fallen over the period
(Figure 52).
To summarise all these differences, Figure 55 compares the growth in employees,
EBIT, and capex for US and EM Asia non-Financial companies. In the US,
employee growth has lagged well behind EBIT and capex growth, perhaps
suggesting accelerating automation. But for EM Asia companies, the divergence
between capex and employment growth has been less intense (Figure 55). Capex
has been more of a complement than substitute for labour.
The Market Cares about Returns
Investors are becoming increasingly obsessed (again) with technology stocks. This
has distorted the relationship between market valuations and company employees.
For example, internet company WhatsApp, with just 55 employees, was recently
bought by Facebook for $19 billion. This is a similar valuation to retailer Gap which
has 137,000 employees. WhatsApp is priced at $345 million/employee compared to
Gap at $124,000/employee. We suspect this reflects a potential bubble in selected
IT stocks rather than an explicit investor desire to buy more automated companies.
Indeed, across the broader market, there is little evidence to suggest that investors
value capex-heavy/automated companies much more highly than their more
employee-driven peers. For example, we have already seen that the US Energy
sector was responsible for 32% of total market capex in 2013. But it currently
accounts for only 12% of equity market valuation. New capex, and associated
technological innovation, can be disruptive for incumbents and highly profitable for
the innovators. But it can also end up being highly deflationary for the industry as a
whole. Shale oil is an obvious current example of this theme.
In the end, stock markets care most about investor returns. Whether these are
maximised by using robots or people is less of a concern. For US-listed companies
a sharp profit recovery in recent years has been associated with strong capex but
sluggish employment growth. For EM Asia companies, strong profit growth has
been associated with strong capex and strong employment growth. Even if the
employment profiles look quite different, shareholders have benefited from higher
profits in both the US and EM Asia, but those profits have been achieved in different
ways.
As labour costs start to catch up with those in the US, perhaps Asian companies will
increasingly turn to automation in order to keep costs down and profits up. A USstyle
gap between profit growth and job creation could start to open up. This may
keep shareholders happy but could also be associated with stagnating labour
markets and subsequent social and political tensions. It may also bring a slow-down
in end demand growth. After all, machines may make model employees, but they do
not make particularly enthusiastic customers.
© 2015 Citigroup