Analyse

A small number of stocks, mainly American ones, dominate the global stockmarket league table. They consist principally of companies that originally launched in the technology sector and have now conquered the digital world.

The internet and other technologies are omnipresent in our day-to-day lives, particularly through the computers, smartphones and services we use. Seven of the world’s top 10 companies by market capitalisation operate in the tech sector. Five of them are known as the GAFAM stocks, i.e. Alphabet (parent company of Google), Amazon, Facebook, Apple and Microsoft, and the other two are Chinese (Tencent and Alibaba). There are still three “outsiders” in the top 10: Warren Buffet’s conglomerate Berkshire Hathaway (market cap of USD 503 billion), pharmaceuticals giant Johnson & Johnson (USD 351 billion) and banking group JP Morgan (USD 348 billion). 

The rankings fluctuate according to newsflow affecting the companies. Last summer, Apple became the world’s first company to achieve a market capitalisation of over USD 1,000 billion. This is roughly the same as the market cap of the world’s entire aviation industry. At the end of 2018, however, a build-up of bad news and fears stemming from the trade war between China and the USA caused a major stockmarket correction, resulting in Microsoft (market cap USD 816 billion) rising to the top of the league table, pushing Apple (USD 779 billion) down to second place. Microsoft owes its success to its firm grip on intellectual property, large sales of its Windows software services, its acquisition of social network LinkedIn and its Cloud Enterprise storage solution.

Reasons for tech dominance 

The reasons for this stockmarket dominance can be found in industrial innovations. Although technology is now in the limelight, in the past it was railway companies, airlines and oil majors. In 2011, Exxon Mobil reigned over the stockmarket, having been the world’s largest company by market cap for a long time. But then came the digital revolution, which has completely disrupted all sectors. The internet and social media control connections across the world and store private data, to the great benefit of consumers, who can access information (for example through search engines) at lower cost. 

This near-monopoly results in unrivalled profit margins. The tech giants are making colossal profits. They are also buying up successful small companies and start-ups in order to avoid competition. 

Winner takes all

The success of tech companies is causing a “winner takes all” effect. Before coming up with products and services that are now unavoidable, these “winners” operated in niche businesses. Originally, Amazon sold books, for example. It now leads the market for storing data in the cloud and even owns a chain of organic food shops. Google used to be just a search engine. It now owns YouTube and is developing self-driving vehicles. Apple, which was almost bankrupted by its Mac computers, now makes luxury smartphones. These companies take advantage of large network effects and economies of scale.

Chinese giants lying in wait

Does the sharp correction in US tech companies’ share prices in late 2018 spell the end for their dominance? The answer is no, at least not yet. These giants have billions of users and vast amounts of data, which gives them a strong foundation. However, their power is being challenged by fast-growing Asian rivals. They include the Chinese web giants known by the acronym BATX (Baidu, Alibaba, Tencent and Xiaomi). China intends to step up its “Made in China 2025” plan, through which it aims to become self-sufficient in all key technologies. 

Unlike Europe, China has put in place measures to protect its domestic market by favouring local players. This is the real issue in the trade war that Donald Trump is waging against China. Beijing’s desire to become a major technological power worries Washington. It is a reasonable concern, given that US tech companies are struggling to maintain the constant pace of innovation and that their new products are cannibalising the ones they already have on the market.

Text written in collaboration with Le Temps.

Fig. 1. The BATX are jostling for position with the GAFA

Source: Bloomberg, Statista

Fig. 2. Market cap of GAFAM stocks (USD bn)

Source: Bloomberg

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