In late 2013, Cisco chief executive John Chambers used a portentous phrase while telling analysts that sales in emerging markets were spiralling downward, forcing the networking equipment company to cut its three- to five-year revenue growth target: “We’re the canary in the coal mine.”
It was meant to be a candid assessment of the instability in global markets. But rather than being the harbinger of danger, Cisco was just the latest victim of globalisation, the tantalising but perilous business principle that has counted among its casualties some of the world’s largest companies.
Indeed, although multinational executives avoid talking about it publicly, profits in global markets are underwhelming — and doing business internationally is full of unanticipated risks. “Even for the most successful multinationals, profit margins in international markets are on average lower than margins in the domestic market,” said Robert Salomon, a professor of international management at the NYU Stern School of Business.
“It’s the liability of foreign markets. By virtue of the fact that you are foreign, you are at a disadvantage.”
That’s a far cry from the way globalisation was pitched, as the strategic imperative du jour nearly two decades ago. It was supposed to act like a rising tide, lifting all boats in poor and rich countries alike. Buoyed by hundreds of thousands of new assembly line jobs courtesy of multinationals in emerging nations, the middle-class would swell, which in turn would propel higher local consumption.
More factories would be needed to meet the demand, further raising local standards of living and handing the largest non-domestic companies a vast and enthusiastic new customer base.
Meanwhile, in the US and Europe, consumers would have their pick of inexpensive items made by people thousands of miles away whose pay was much lower than theirs. And in time trade barriers would drop to support even more multinational expansion and economic gains while geopolitical cooperation would flourish.
Western corporations moved to set up shop in far-flung regions like China, Brazil, Russia and India, where the greatest GDP gains were anticipated, as well as in second-tier emerging nations such as Thailand, Malaysia, the Philippines and Nigeria.
Yet despite all this, hardly any of the promised returns from globalisation have materialised, and what was until recently a taboo topic inside multinationals — to wit, should we reconsider, even rein in, our global growth strategy? — has become an urgent, if still hushed, discussion.
“We have believed for some time that a large global footprint is critical to our success and to the success of any company in the auto industry,” said an international executive at a top-six multinational auto company. “But given recent events, we can’t help but wonder if we should be a little more hesitant, less eager and more discerning about where we invest our efforts.”
Or put more diplomatically, General Motors President Dan Ammann told a Detroit investors conference in January that the Chinese auto market “is maturing rapidly ... (Its) rate of growth will decrease year-to-year.”
This is a surprisingly tepid forecast for an executive whose company has, in essence, gone all-in on globalisation, and particularly in China. GM has invested upward of $20 billion on joint manufacturing ventures there, and is No. 1 in auto sales in the country.
However, in 2014 GM made $2.1 billion in China, about a third of its earnings in North America, where it sold 130,000 fewer vehicles. The problem is, around half of the vehicles that GM sells in China are Wulings, inexpensive, low-margin minivans designed by one of General Motors’ Chinese partners, targeted mostly at commercial buyers. Indeed, Chinese customers bought 1.6 million Wulings and only 79,000 high-profit Cadillacs in 2014.
The shortcomings of globalisation manifest in any number of ways. For one thing, international trading patterns point to an increase in protectionist attitudes rather than a golden age of open borders. Between 1986 and 2005, global trade volume increased at a rate of about two to three times that of GDP growth, but the ratio since then has fallen dramatically (except for one year) and is now close to one to one, according to research by UBS strategist Bhanu Baweja.
Moreover, the recovery in world trade volume is much slower in this post-recession period than prior ones. Part of the problem is that the G20 countries (the biggest economies and trading partners in the world) added more than 1,200 restrictive export and import measures since 2008 — 12 per cent more in just the past year — despite a so-called standstill agreement.
Somewhat surprisingly, cross-border capital flows are equally anaemic. Despite the common perception that multinationals these days manufacture their products anywhere but the west, global foreign direct investment has fallen to a mere 2 per cent of global GDP from 4 per cent before the recession.
Still, the most tangible metric that belies the Pollyannaish depictions of globalisation is corporate financial performance. Although most companies don’t separate out geographical earnings, revenue comparisons provide an apt picture — and few multinationals can boast big returns in global markets.
In the first quarter of 2015, for example, IBM revenue fell 3 per cent in the BRIC (Brazil, Russia, India and China) countries. Caterpillar, which is a bellwether for global construction and agricultural activity, reported first quarter revenue shortfalls of 13 per cent in Asia and 18 per cent in Latin America. Meanwhile, Unilever announced a 2.4 per cent revenue decline in 2014, chiefly driven by a steep drop in consumer activity in emerging nations, which are responsible for 60 per cent of its sales.
Those vast new consumer markets in globalised nations have not emerged either. For example, Chinese household consumption accounts for about 34 per cent of GDP — down four points in the past decade — compared with a healthier 70 per cent in the United States. And Chinese consumer diffidence is not an outlier.
“Growth in consumer spending in 2014 hit multi-year lows in many countries,” said Unilever CEO Paul Polman, analysing his company’s results. “In South Africa, it is half to less than 2 per cent, and in Brazil it had fallen to just 1 per cent. There was no volume growth in these markets.”
There are myriad reasons why these markets have lagged, some of them unique to specific countries or regions. For instance, China’s one-child policy has produced a penurious generation of young adults who are the sole support for ageing family members. And in parts of Southeast Asia and Africa, the infrastructure in rural areas is too primitive to support extensive retail activities.
But equally problematic is that the growth of the middle-class in China and most other developing economies has been slow. And these newly minted consumers face volatile, often expensive prices for housing, food and other staples.
“The biggest contribution to Chinese growth for many years has been government investments, about 50 per cent of GDP, off the charts compared to any country in the world ever,” said Geoffrey Dennis, UBS’s head of global emerging markets strategy. “The current structural reform programme hopes to move more toward a consumer-supported economy. But that will take time.”
To protect the market share of domestic firms, emerging nations have attacked foreign multinationals. For example, in February, In the past year, as many as 30 multinationals were placed under investigation — some were penalised and others raided — by Chinese government authorities for any number of dubious infractions.
No surprise, then, that more than half of multinationals responding to a survey by the American Chamber of Commerce in China said that Chinese regulators “targeted” foreign firms and that laws and regulations favoured domestic companies.
Last August, Russia shuttered four McDonald’s locations in Moscow, the chain’s busiest stores in the country, citing sanitary violations. Russian authorities produced little evidence; the step came after sanctions were imposed by the West for Russia’s role in destabilising Ukraine.
“Multinationals are very nervous now, and they should be,” said Mark Leonard, co-founder of the European Council on Foreign Relations. In the past, only some sectors — mining, oil and gas, commodity companies — had to worry about geopolitics. Now companies that make fizzy drinks or handbags or chocolate are finding their supply chains, their markets, their operations completely blown apart by geopolitical risks and unfavourable treatment.”
— Washington Post
