Is the Old Economy Taking Revenge on the New Economy?

"The old economy is taking revenge on the new one."

The old economy that we associate with the traditional flagships of the manufacturing, aeronautics and automotive industries, as well as with luxury products, pharmaceuticals, agriculture, real estate, construction and banks, is apparently taking revenge on the new economy represented by complex software, the web, smartphones, the cloud, blockchain, AI, FAANG, Tesla, etc., which is experiencing not only unprecedented redundancies but also some surprising stock market downgrades. Is it the end of a reign?  

The End of a Reign!

The list of lay-offs in multinational tech companies continues to grow: Alphabet, Twitter, Amazon, Facebook and Microsoft, and the trickle-down effect to many start-ups in the industry means that all are affected. The most high-profile case is, of course, Twitter, which has culled 50% of its workforce. After the euphoria of the Covid years (so to speak) and the needs of an economy in lockdown, investment has gone too far, too fast. During the pandemic, no fewer than one million people were recruited and joined the FAANG teams. It was even said that FAANG were at the cutting edge of the lockdown economy. Amazon ticked all the boxes, with the cloud for working from home, e-commerce for shopping and Prime Video for entertainment; a whole lockdown economy before its time! $26.9 billion in profit between April 2020 and March 2021; $2 billion more than the cumulative profit between 2017 and 2019. But the redundancies are there and many critics are starting to emerge: apparently Silicon Valley is particularly creative in the field of “bullshit jobs”! The years 2020-2022 may therefore have been merely a period of stock market overvaluation. The strong pressure on financial markets in 2022 simply corrected these overvaluations. In European tech, nearly $400 billion in value went up in smoke in 2022. A fall to compensate for all the excesses? Perhaps. In any case, all the excuses are valid: difficult years with the conflict in Ukraine, followed by inflation, as the sector naturally consumes a lot of energy and raw materials, and rising interest rates, to levels not seen since the financial crisis. So much for the economic climate. On the structural side, several regrettable adjustments have had to be made. First, we have, let’s face it, reached a certain limit, having captured a million or even a billion users. The model has reached saturation point. Nothing can carry on growing forever. What can you sell to someone who already has a computer, a smartphone and a TV? Watches and other connected objects are not intended for such a global market. Last but not least, we have also come to realize that the immaterial world relies on a lot of materials. Digital technology requires streamlined, global logistics designed during Pax Americana, with the dollar as the driving force of the global economy. When the slightest component from China becomes unavailable, however, the whole house of cards collapses, factories close and the product can no longer be manufactured. Especially as the shortage may occur upstream of manufacturing, in raw materials. As the world digitizes, metals like cobalt, copper, aluminium and lithium are becoming critical.

The Resilience of Both Old and New Economies

The old economy appears very robust in the face of geopolitical uncertainty, inflation and the cyclical upheavals of any economy. The old economy seems to pass through history without ever disappearing, leading us to wonder today whether it may end up winning in the long term. With a constant high rate of job creation in manufacturing, from Airbus in France to LVMH, real estate and the automotive sector, banks seems to be in surprisingly good shape, with stock market valuations in contrast to FAANG. In France, AXA and Stellantis reported excellent results in 2022, like most of the large traditional CAC 40 multinationals. The car manufacturer resulting from the merger of PSA and Fiat Chrysler has, for example, posted outstanding results, as has Renault. Should we conclude that this is the end of the new economy? No! Certainly not, for several reasons: 

First of all, both the new and the old economies are today experiencing a certain degree of saturation. An excessive process-oriented vision is behind a certain loss of meaning in the world of work, with the emergence of post-Covid job-quitting trends and silent resignation in Europe. As in all sectors of the economy that reach fever pitch, the new economy is experiencing a certain fatigue similar to that suffered by the old economy in the 1980s but, above all, an indisputable process of transformation and creative destruction. In reality, it is simply experiencing a slowdown and refocusing of activity and therefore a transformation process. In fact, sales are not that bad, except for Meta and Spotify. Google reported a net income of $13.9 billion in the third quarter of 2022. Amazon posted profits of €2.9 billion and revenue of €127.1 billion. The heavyweights of this global sector, with the exception of Meta, which seems to be running out of steam, throwing itself body and soul into the metaverse and experiencing an ageing user population, are nevertheless far from being on the brink of collapse. What we are seeing is therefore a transformation process. Before, the advertising model of Meta predominated, on the large social platforms, aiming wide in terms of age bracket. Today, firms have better knowledge of their customers. They can therefore publish less, with very good conversion rates. Projects that were too adventurous, however, have had to be stopped and the focus shifted to more profitable activities (refocusing on the cloud, particularly for Microsoft). In the context of this transformation, let us not forget the many strings that these firms have to their bow: AI, for example, and the metaverse, which is not (in our opinion) as dead as it may seem. Above all, let us not forget that creative destruction is the DNA of these tech companies. 

So What is the Outlook?

Today, the United States is leading the offensive in the global war for electronic chips. Chinese hopes of catching up are fading. ChatGPT has exploded onto the market and Pasqal, the French start-up incubated on the Plateau de Saclay, has just raised €100 million to develop its quantum computing technology based on neutral atoms, a strong point for French tech. Labour market prospects are also excellent: Unemployment in tech is 2% in the EU and talent quickly finds work almost immediately, according to certain Twitter users. We should also bear in mind the tech sectors that are booming, in particular cleantech to optimize energy consumption and start-ups in parcel tracking. The best example is that of Next40 in France, linked to the ecological transition. In effect, start-ups linked to the ecological transition are outperforming others by offering cross-cutting services to the three major sectors of the economy. Finally, the future of the new economy is almost certainly dependent on its cross-functionality with the old economy and not on the creation of completely separate services; a process of transformation for a marriage with the old economy, you might say. A kind of hybridization of the old and new worlds, then, based on success stories such as cleantech and addressing issues connected to the challenges of the new economy of the future, the jobs of tomorrow, AI, the environment and, of course, CSR.