SPATIAL ECONOMICS

Spatial economics is set to be the next big economic shift. It will reshape industries, social patterns and the global economy. Not only will industries be able to operate at a scale and scope that were previously unprofitable, sophisticated logistics and the declining cost of delivery to the last mile will enable new services as well as new business models. Most importantly, new ways of working, including cloud-based collaboration, will make working at a distance more productive. This combination is set to give rise to a diverse scope of niche services available in remote locations.

According to the 2016 Bain Report, Spatial Economics: The Declining Cost of Distance, the next two decades will see the cost of distance decline sharply. Consequently, this will alter the way we live and work. The report states that this shift will happen much faster and, more broadly, than anyone expects or imagines. For leaders steering their businesses through this transition the changes may feel bumpy, even alien. On the upside, this economic shift will create an amazing range of opportunities for both businesses and those who invest in them. Unfortunately, for the unprepared it will also create unexpected risks.

This historic shift is being driven by an array of new technologies which include robotics, delivery drones, 3-D printing, logistics, autonomous vehicles and Low-Earth-Orbit (LEO) satellites. These will give rise to new products and services that will rapidly erode the cost of moving people, goods and information. The result of all this new platform technology will be an acceleration of change.

The shifting urban landscape

In today’s global economy distance can inhibit business growth because it is more expensive to ship a product or the consumer finds it less convenient to visit a store location. Up until now the key to reducing the cost of distance has been to use less of it. Looking at our cities it is easy to see that they are designed around spatial economics, with dense urban hubs that reduce the cost of moving raw materials, labour and finished goods.

Over the next decade it is expected that a shift will occur away from these urban hubs to rural areas and, while some cities will continue to grow successfully, another segment of householders – especially middle-class families – is likely to opt for more space at a lower cost. At the same time traditional suburbs will be caught in the middle; neither spaciously rural nor conveniently urban, they run the risk of decay unless they can improve their offerings. This also applies to small or medium sized cities that lack urban appeal.
Three key changes are set to sustain the new economics of distance

We live in a time of constantly advancing technologies and it is believed that as these develop there will be a change in how industries operate.

Three key changes are set to occur:

  1. Small-scale production of goods and services will become more efficient.

    Companies may opt for smaller manufacturing units close to the consumer, which in turn, allows products to be tailored more quickly for evolving local tastes. And by storing designs electronically and using a standard set of 3D printer substrates to build products, a company can shift to smaller warehouses near the end user rather than having huge storage depots on cheap land near major transportation arteries. Furthermore, the use of this type of manufacturing technology allows for an increase in the variety of parts these smaller units can inventory. These reduced economies of scale and scope will open up opportunities to live and work in more places.

  2. High-speed connectivity will become prevalent

    In this new economy, instead of moving people and goods, companies will use technology to move ideas and information. This will lead to new business models where part or all of a physical item will be substituted with a digital equivalent. Simultaneously, we will see the acceleration of some existing trends such as telecommuting.
    The cost of physical transport will fall sharply

    With technological advances that enable autonomous vehicles and the use of delivery drones, the coming decade will see transportation become more efficient, lowering costs. New commercial delivery services that use both autonomous vehicles and drones, such as driverless trucks with drones that deliver to the last mile, could have an even bigger impact, reducing household transportation time and costs. Globally, Australia and New Zealand already allow more liberal use of drones for commercial activity than the US or Canada. However, fully driverless cars will not be widespread until they are safe under all driving conditions, including rain and extreme sunlight. This is most likely to occur around the second half of the next decade. Nonetheless, driver-assist features, such as highway autopilot and the ability to change lanes automatically, are already commercially available. In late 2015, electric car pioneer Tesla launched a software update enabling a highway-autopilot function on its existing cars, and highway driving will be nearly autonomous by the early 2020s.

  3. Beware of impending stranded assets

    It is believed that as people move out of urban centres and settle in rural areas the value of fixed assets in some locations – including ‘real’ property such as apartment buildings, shopping centres, telecom fibre and toll roads – may fall sharply. This creates a risk factor that today’s investments can become tomorrow’s write-offs. To minimise the risk of stranded assets it is recommended businesses keep a close eye on population migration patterns, remembering to look beyond cyclical economic swings that can mask these migration flows. With the declining cost of distance and the dispersion of the population out of city centres, new opportunities for retailers, restaurants and other businesses will be created.

Learn to identify the key pinch points of spatial economics

It is important for leadership teams to put themselves on the front lines of the transformation by starting now to incorporate new technologies such as robotics, 3-D printing and drones into their workflows. Unfortunately not every bet will pay off, but be assured that these experiences will help position early movers to benefit as the transformation accelerates. Starting now will allow most businesses time to determine how to best make use of new technologies. Forerunners will experiment with these new technologies even if they aren’t flawless.

The importance of staying alert to the migration of human capital and talent

Developing technologies will allow spatial freedom which, in turn, will pool talent in some locations, drain it from others and generally disperse it more widely than in the past. Each business will have differing talent and human capital needs and this shift may require rethinking the core locations for centralised business functions. In fact it is possible that teams of the future may no longer be located together. As such, businesses will need to embrace tools to enable seamless virtual collaboration at all levels. Of equal importance will be the need to adjust culture and corporate tradition where it stands in the way of adaptation to a new era.

Be amongst the first to spot trends

It cannot be emphasised enough that right now businesses need to be able to spot trends while staying abreast of enabling technologies. Most importantly, the pace at which these trends are adopted and combined will help to trigger new developments. Some of the investment themes emerging from spatial economics include:

  • businesses that solve the ‘last-mile issue’ of getting goods and services to the final user (transportation efficiency)
  • investments in other enabling technologies, including service robotics and connectivity
  • housing growth in prosperous areas beyond a city’s suburbs and consumer-oriented services and businesses to serve new rural communities
  • technology to support small-scale manufacturing and the host of automation technologies required to take the physical consumer experience in stores and restaurants to much lower minimum scale points, and
  • service-sector productivity improvements to bring the minimum scale points down for the provision of consumer services.

Learn to embrace spatial economics

To date, most companies have not even begun to think about spatial economics and what the increase of new technology will bring. But the declining cost of distance and the impact on their business as well as the transition to a new economic era has begun. The good news is that there is still time to adapt and brace for disruptive change. Leadership teams that start preparing now will be best positioned to minimise the risks and make the most of the opportunities as the transition accelerates.

Even though no-one can predict the exact evolution of the economy and society as these changes occur remember that leadership teams can take four early actions to keep one step ahead of this coming transformation:

  • Evaluate the risk of developing stranded assets.
  • Review supply, distribution and logic chains with an eye to stripping out distance costs.
  • Incorporate new technologies into existing workflows to test and learn.
  • Anticipate the migration of human capital and talent.

Although much will depend on the speed of technological change and the convergence of these breakthroughs, spatial economics is set to shake up long-held beliefs about opportunities for growth and economies of scale in ways that are both expected and unexpected. Still, one thing is clear: visible changes are under way – don’t let your business get left behind.

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