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Friday, March 11, 2005

Nanotechnology & the Dow Index of 2025

In his book, Quantum Investing, Stephen Waite suggests that by 2025 at least half of the companies comprising today’s Dow Jones Index will have been replaced. He bases this prediction on his understanding of quantum physics which, he notes, is the under-lying science behind 30 percent of today’s Gross National Product. He further suggests that the influence of quantum physics will only grow more pervasive by 2025 and, in doing so, fundamentally alter the make-up of Dow.

It is a thoughtful proposition—and one which I agree—but it begs the question: Which companies will survive and which are fated to go the way of Tennessee Coal & Iron and, more recently, International Paper and AT&T?

Waite offers the first clue when he writes in his book that “The mother of all quantum revolutions—the nanotechnology revolution—has the potential to be the twenty-first century what microelectronics was to the twentieth century.” A second clue can be found in the research of the Lux Research—the country’s preeminent nanotechnology research firm—which reported last year that nearly half of the 30 companies listed on the Dow mentioned nanotechnology on their web sites.

While it is not my intention to suggest that the mere mentioning of nanotechnology on one’s web site holds the key to retaining a position on the Dow Index, a company’s involvement in the field does offer an attractive first screen for discerning which companies will survive in the future because it implies, at a minimum, that those companies are at least sensitive to how nanotechnology and quantum physics could change the economic and competitive landscape of the first part of the 21st century.

Among the companies mentioning nanotechnology are 3M, Boeing, Proctor & Gamble, Microsoft, United Technologies, SBC Communications, DuPont, Exxon-Mobil, GE, General Motors, Hewlett-Packard, Honeywell, IBM, Intel, Johnson & Johnson, Merck and Pfizer. A cursory review of these companies involvement in nanotechnology suggests that most of them are approaching the emerging science in a very pragmatic way. They understand nanotechnology has practical applications which can make their existing products better today, while simultaneously possessing the ability to transform their business tomorrow.

It is this balanced approach of applying near-term nanotechnology applications to improve the company’s next quarterly financial statement, together with a long-term commitment to nanotechnology research and development that just might allow these companies to successfully navigate the uncharted waters of the future.

For instance, 3M has developed a new nanocomposite for tooth filler that is stronger, more durable and keeps its polish longer. Hardly sexy, but such advances are the stuff that sustained annual growth is made of. Longer term, 3M is looking at developing nanocomposites for bone regeneration and nanomembranes for water filtration. If the company can master these techniques, it will have gained entry to two new, large and potentially high-margin areas—the type that might allow it stay on the Dow for another two decades.

General Motors and DuPont are following similar strategies. GM is employing nanocomposites to make a number of its newer vehicles more resilient and fuel efficient —including the Chevy Impala and Hummer H2. Down the road, it is looking to nanotechnology to improve both hybrid battery technology and fuel cell technology. Both advances might help the company survive the end of the century-long reign of the internal combustion engine.

DuPont, on the other hand, recently signed a licensing agreement with a very promising nanotechnology start-up, Nanomix, to manufacture flat panel displays using carbon nanotubes. The displays will be flatter and more energy-efficient than today’s state-of-the-art displays and offer to make DuPont more competitive in this lucrative market. The company, however, is also investing millions into the U.S. Army’s Institute of Soldiering Nanotechnologies. Why? Because it knows the Army is interested in producing clothing that can monitor the health condition of its soldiers, change thermal properties, produce its own energy, and maybe even change colors on demand. If DuPont can stay abreast of such developments, it will have a leg up on developing the next great material science advances which could very well revolutionize the textile industry.

Hewlett-Packard, Intel and IBM are also investing millions in nanotechnology, and it is why all three have entered into partnerships with some of today’s most promising private nanotechnology start-ups. They understand that nanotechnology can not only improve the performance of computer chips today, it could well be instrumental in ushering in the era of either carbon- nanotube-based chips or molecular electronics.

The pharmaceutical industry is no different. Johnson and Johnson, Merck and Pfizer all recognize that in the near future a number of their most lucrative patents will expire and that proprietary nanoparticles could help extend those patents. Longer term, they realize that a variety of nanoscale devices might make for more effective new drug delivery platforms, and if they want to survive they need to be developing these nanoscale platforms today.

The very size and diversity of these large companies makes it unrealistic—and imprudent—to evaluate these companies short-term stock performance solely on the basis of their involvement in nanotechnology, but for investors who are interested in positioning themselves for long-term growth, a company’s involvement in nanotechnology today is one practical way of gauging whether they, at least, understand the forces which will allow them to still be in existence in 2025.

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Jack Uldrich is the author of the The Next Big Thing is Really Small: How Nanotechnology Will Change the Future of Your Business and the editor of NanoNovus.com. His forthcoming book, Investing in Nanotechnology: Think Small. Win Big is due out later this summer.