Seeking Moats: Lower Costs

Navigating the building blocks of moats

In my last post, we discussed the key drivers of high prices and how they can be maintained to create your own moat. You can reference back to that post here. In this post, I will be discussing the next competitive advantage: lower costs.

Going back to the book "Pitch the Perfect Investment" by Paul Sonkin, there are three main factors that drive lower costs: proprietary technology, lower cost inputs, and distribution.

Proprietary Technology

The definition of proprietary technology according to Investopedia is “any combination of processes, tools, or systems of interrelated connections that are the property of a business or individual. These combinations provide a benefit or competitive advantage to the owners of proprietary technologies.” These could be any existing or combination of tools that a business has that gives it a competitive edge. It could be unique systems around point-of-sale (POS), surveillance tracking, order placing, or scheduling or a combination of all that brings out value to the entire organization.

Consider AI, for instance. We manage a publication and we collaborate with a team of ghostwriters across Southeast Asia, working on a per-article basis. Thanks to AI (particularly ChatGPT) our editing process has become significantly faster. This not only provides our writers with more time to write other articles but also translates to increased earnings for them. I view AI not as a replacement for humans, but rather as a tool for increasing human potential—a form of leverage that enhances the productivity of each worker.

In the developed world, robots are gradually replacing humans across different sectors, from manufacturing and design to service industries. This automation, with its reduced reliance on human labor, serves as a strong alternative in regions where labor costs are much higher. Nvidia stands at the forefront of these advancements, as shown by Jensen Huang's statement at the latest Nvidia GTC Artificial Intelligence Conference: 'Everything that moves in the future will be robotic.'