Creating wealth in the world: The human factor

THERE were two news events last month that caught my eye and though seemingly unrelated, both involved one company, Apple Inc, the California based consumer electronics colossus, the maker of the iPhone, iPad and i-everything else. Taken together the two stories resonate across the world and are especially relevant to developing economies such as those found in the GCC.
First of all, during morning trading on Monday (Aug. 20) Apple’s market capitalization hit $ 623 billion, the largest value the US stock market has ever put on a public company. It is a truly mind boggling amount, and it beat a record that had stood for 13 years, set by Microsoft, designer of the dreaded Office software, during the Internet boom of the late 1990s (of course, this does not take inflation into account, but it is striking nonetheless). Some analysts are now predicting Apple will become the world’s first trillion-dollar company.
To put Apple’s growth into perspective, it is now worth half as much again as ExxonMobil, the second largest company by market value. The interesting point here is that Exxon sells a product it extracts from the ground and in dealing in mineral resources is following a pattern of human economic behavior that has changed little for many, many generations. This is not a criticism — far from it, the world runs on oil and of course oil has many different applications — but the observation still stands. Apple is quite different: It designs consumer electronic devices, a practice that only really began in the last century. I see a clear message here about the relative value of technology and human ingenuity. The better trained and more imaginative human beings are, the more value they create. Simple.
The second story is more complex. Apple has long claimed that the South Korean technology giant Samsung copied aspects of its famous iPhone. Apple was so sure of its case it recently sued Samsung in a South Korean court. Rather interestingly, judge Bae Joon-Hyun ruled last week that both companies had infringed the other’s intellectual property in some way, and both had to pay some damages. Both companies are suing each other in various other jurisdictions as part of a global multibillion dollar patent contest. Next up are courts in California itself, where Apple is seeking $ 2 billion in damages from Samsung, which has of course launched a counter claim. The teams of corporate lawyers employed by Apple and Samsung must be doing very well!
These court cases are merely battles in a wider war over intellectual property. If you design a new product and claim the invention as your own, you are granted certain exclusive rights. Importantly, ownership of intellectual property gives you the right to sue if someone copies your design. Apple and Samsung both have patents on various aspects of their products, hence a raft of claims when they think their rights have been infringed. Given the efforts they are putting in to defend their intellectual property, they clearly see huge value in those designs.
They are right to see that value and this is what connects the two stories. Apple is such a valuable company because it has created new markets — how many of us are glued to our iPhones and iPads for hours a day? It never used to be like that and we could easily live without an app on our smartphone that tells us the weather in every city in the world with a swipe of the finger. Like Exxon in a way, Apple executives had to mine a resource to build a business, but that resource was the ingenuity of their product designers and software engineers. Apple’s success, and therefore value, is based on human capital and it will make every effort to protect that capital.
Apple’s relative growth over the last couple of years proves the structural shift in the world economy to a knowledge based system, where real value will come not from the ground but from design, innovation, and specialty manufacturing. This is not a groundbreaking concept. The world’s major oil producers — many of whom are GCC members — have long recognized they will inevitably need to orientate their economies toward knowledge based industries if they are going to be competitive in the long term. Saudi Arabia, in particular, is pioneering the shift towards long-term competitiveness. The Knowledge Economic City close to Madinah, for example, was launched by King Abdullah in 2006 and is a $ 7 billion project to create a national center for knowledge-based industries.
The problem is this shift will take a long time, decades in my opinion. This slightly pessimistic view is not a comment on the Saudi economy. Silicon Valley took generations to take shape. What cannot be overlooked is the fundamental role of education in these shifts. Stanford University in California was founded in 1891 and from the outset played a major role in the development of Silicon Valley. Developing economies need to make the same long-term investment in their schools and universities.
But this is not about the United States and not about Saudi Arabia, it is about the value of entrepreneurship and human capital and that has little regard for nationality. When he died, many people were surprised to hear that Steve Jobs, the founder and driving force behind Apple, was born to a Syrian father. But business ideas and innovation will thrive wherever they are cherished. That can be in the desert in California or the desert just east of Madinah.

n John Burman, Ph.D., is Managing Director of an investment advisory firm based in London