The many hurdles that global businesses face

Emerging markets are not providing the growth trajectory that global businesses have been looking for and on which they had committed massive investments to make it happen. Returns from such exposures are turning out to be less stellar, and prospects this would improve soon falter against the slackening rate of growth for the key emerging markets.

Less visible but arguably more harmful are cyber strikes. In 2013, at least 3,000 US companies were victims of data theft and network disruptions, according to published reports.

In some cases, the hackers are believed to have ties to rogue regimes in Asia and Eastern Europe and their aim appears to be to destabilise global commerce. One example: the digital break-in at Sony in November — which paralysed the entertainment company’s computer systems and led to the release of sensitive e-mails and documents — was backed by the North Korean government, the Obama administration said.

That incident pales against other cybercrimes targeting multinationals. Possibly the biggest is an ongoing infiltration that began in late 2013 of a hundred of the largest financial services firms by cybercriminals from China, Russia and Ukraine. These hackers are essentially electronic mercenaries who are expanding their operations to Asia, the Middle East and Africa, according to Kaspersky Labs, a software security firm based in Moscow.

In all, as much as $1 billion may have been stolen from the banks in this digital heist, Kaspersky said.

Back on land in developing countries, state-owned enterprises, or SOEs, pose competitive challenges. They are financially backed by central and local governments and are notorious for crony capitalism in which they gain access to local contracts, markets and capital unavailable to foreign firms.

Well over half of all companies in China, Russia, Indonesia, Malaysia and Vietnam, to name a few, count their governments as stakeholders. These enterprises — in mining, telecom, banking, construction, manufacturing and even retail — receive preferential treatment in lending rates, government investment and subsidies with little accountability for their results.

Armed with cheap money, undisturbed by impatient investors and inured from the threat of failure if they underperform, SOEs are often guilty of “overcapacity, inefficient cost control and slow industrial upgrading,” said analyst Li Jin of the China Enterprise Research Institute.

Indeed, the return on assets for Chinese SOEs is about 5 per cent, less than half the return of private domestic companies, according to data compiled by the Carnegie Endowment for International Peace. These results would be even worse if multinationals weren’t forced to form joint ventures with state-owned enterprises.

Given the failures of globalisation, virtually every major company is struggling to find the most productive international business model. Several approaches have emerged.

Rescoring — or relocating manufacturing operations back to Western factories from emerging nations — is one option. As labour costs escalate in places such as China, Thailand, Brazil and South Africa, companies are finding that making products in, say, the US that are destined for North American markets is much more cost-efficient.

The gains are even more significant when productivity of emerging countries is taken into account. For instance, despite significant activity by multinationals in Brazil and Mexico, the GDP per employed person in those countries hasn’t budged since 1980.

By way of comparison, in the US during that period, productivity has nearly doubled. Moreover, new disruptive manufacturing technologies — such as 3-D printing, which allows on-site production of components and parts at assembly plants — make the idea of locating factories where the assembled products will be sold more practicable.

There is some debate about how much rescoring is actually underway. Anecdotally, there is evidence of its strength: GE, Whirlpool, Stanley Black & Decker, Peerless and many others have reopened shuttered factories or built new ones in the US. Nonetheless, some economists argue that it is a drop in the bucket compared to the multinationals that fled a decade ago.

Still, recent data compiled by UBS negates the strength of this point. For one thing, US manufacturing output has recovered faster since the recession than it had after other downturns; output is now about 97 per cent of what it was in 2008; six years out in prior post-recession periods, output struggled to top 90 per cent.

Meanwhile, imports are lagging significantly compared to earlier post-recession eras. In addition, private sector business investment in the US is growing at almost twice the rate of foreign direct investment by US multinationals.

A few companies are choosing a relatively unorthodox globalisation strategy, an approach that could be called localisation. The motorcycle and auto manufacturer Honda has been in the forefront of this strategy, which involves setting up full-scale operations — factories, engineering sites, research facilities, suppliers and logistics channels — in regions around the world to provide customised products.

In doing so, Honda has quietly remade itself from a Japanese multinational with smaller operations elsewhere into a company whose largest subsidiary is an autonomous US-based producer of cars for the Americas, followed by similar operations in China, Japan, Thailand, Brazil and numerous other places, as well as separate businesses making motorcycles, power products and new technologies such as robots and alternative energy equipment.

In the year-and-a-half since Cisco’s John Chambers made his comment — “We’re the canary in the coal mine ...” - about the deepening problems in emerging markets, the company has painstakingly attempted to rebuild its relationships in developing countries. Primarily, its management has worked more closely with governments and local businesses to assure them that Cisco is not in league with the National Security Agency in global eavesdropping schemes and that the technology company would be more sensitive to cultural differences.

The strategy has produced some results. Instead of tumbling revenue in emerging markets, the company has eked out about 1 per cent growth. “It’s a very dynamic situation,” said Chuck Robbins, who heads Cisco’s worldwide sales organisation.

That’s about the best way to sum up globalisation now. Instead of flat and seamless, globalisation is full of hurdles and obstacles.

There’s money to be made for multinationals the world over, but they are going to have to rethink their strategies for making it. Though presented as a way to eliminate economic disparities and magically expand multinational revenue streams, globalisation is, simply put, still a barely profitable and perplexing strategy for most companies.

— Washington Post