Abstract of Presentation
2016: Leading in Low Visibility
The world economy struggles with an elusive recovery. With the exception of the US, growth remains uncertain almost everywhere. Some scholars even fear another recession, which generally occurs every 7-8 years. A conjunction of slow growth and corporate debt in emerging economies, poor household consumption and collapsing commodity prices are worrying realities. The «new normal" in many economies may now be one of a slow or negative growth interrupted by short periods of more vigorous economic activity. Cost efficiency and resilience are priorities in such an environment.
Cash Rich and Investment Poor
Central banks in the US, Europe and Japan have embarked on massive quantitative easing measures that have more than tripled their balance sheet. But to little effect as the impact on growth in Europe and Japan has been minimal. Despite Keynes theory, the money thus created has never reached the consumer. If the massive inflow of money had done so, inflation would be the main concern today. Instead, we have deflation, low or negative interest rates and negative yields which mainly benefit governments, financial institutions or large corporations. Household consumption remains unaffected and small enterprises continues to face hefty borrowing costs. In the long run, this situation of low or negative yield will jeopardize most pension systems, which cannot adequately invest their capital. In general, when savings are not rewarded sufficiently, the strength of an economy is in danger.
Easy Money and Corporate Debt
More than 40% of global transactions are still in dollars and 27% in Euros. In recent years, low interest rates and a weak dollar have induced companies, especially in emerging markets, to heavily borrow on the US market. The rise in interest rates will expose them to volatility in currency exchanges and an untenable debt burden. In a global world, the domino effect on currencies unfold rapidly and expose the vulnerability of weaker companies. Meanwhile, and as a sign of the economic power of China, the Yuan is gradually gaining more importance in international markets; in the future it may also offer an alternative for many companies “trapped” in a dollar world.
The Hunt for Global Profits
Nations fully control domestic taxation but have little access to global profits. The US administration values at more than $2’000bn overseas profits of US companies not returning home because of the level of taxation. Thus, global companies are overloaded with liquidities which result from global profits sheltered by tax ruling and other tax advantages abroad. Most of this cash is used for dividends, share buybacks, and mergers & acquisitions. Governments are thus developing a coordinated action to gain access to this money, by creating new taxes, closing loopholes and harmonizing procedures. The new basic principle is territorial taxation that can be summarized as follows: companies must pay taxes where they make profits, not where they are registered…
Compliance and Complexity
The aftermath of the 2008 crisis has a created a maze of laws and regulations which have become a considerable burden for financial institutions and companies. Although safeguards are understandable, complexity has a cost and the compliance systems put in place both at national and international level slow down decisions and hinder business activity. Fines are proliferating and are said to exceed $240bn in the past 5 years for global financial institutions. In parallel, medium-size enterprises are often victims of a lending freeze on conventional markets. Many have turned to “shadow banking”, i.e. non-regulated financial institutions, a $76,000bn market world-wide. And a time bomb in the making…
The Consumer Revolution
Meanwhile, consumers evolve from a “First Buy Economy” – I need it – to a “Replacement Economy” – I want it – to a “Peer Pressure Economy – I have to have it… Many companies thrive on the advice of George Bernard Shaw “Our needs are limited but our desires are endless…”. However, an economy which does not rely anymore on what consumers “need” but increasingly on what consumers “fancy” becomes unpredictable and volatile. In such a paradigm, consumers can stop buying non-essential goods for a long period of time without experiencing a drop in their standard of living. In the end, consumption deteriorates and becomes unpredictable.
An explosion of New Global Brands
Emerging economies increasingly use their money to buy assets (companies) abroad, but also to globalize their local champions. As a consequence, a proliferation of new companies and new brands from emerging economies has appeared on the global market. It is estimated that some 1,000 companies from emerging economies, with revenues in excess of $1bn, can be qualified as global companies today. In addition, many such companies are family owned, and/or in their entrepreneurial stage. Today, 65% of the companies in Latin America with a global turnover of $1bn and above are family owned; in the Gulf countries, it is 75% and in South east Asia 85%! Their vitality and willingness to take risks is often in contrast with the more cautious and bureaucratic approach of long established corporations.
Energy: Clearing the Market from High Cost Producers
The volatility of energy prices, especially oil, has triggered a “domino effect” in many emerging economy, reducing their revenues and increasing debt. To the balance budget, Venezuela needs a barrel of oil at $160, Russia $110 and Saudi Arabia $90. Despite this situation, many oil producers, especially in the Gulf region, have maintained their production volume to hold off expensive producers (Artic or deep sea drilling) or new entrants (Iran, Iraq, etc.). Moreover, energy price has a significant impact on company competitiveness. It is estimated that in 2020, the cost of electricity in the US will be 50% cheaper than in Europe and Japan: a formidable competitive advantage for American companies!
A Mindset for Competitiveness and Success
The world competitiveness landscape implies new attitudes and new approaches to managing people. Crises are periods that reveal strength of character. It is not only being good at "what you do" that counts, but also being good at "what you are". Winners will need to deal with more uncertainty and a higher degree of discomfort. They should nurture a healthy sense of ambition for their organization and themselves. Resilience and the ability to quickly re-invent oneself are key objectives.
Companies need to stimulate a mind-set of imagination (why not?), of energy (why not now) and of commitment (why not me). Finally, companies are increasingly questioned about their contribution to society, beyond their financial results. The “legality” of the actions of companies - conforming to the law - is no longer enough in a world where public opinion also demands "legitimacy" - conforming to a higher standard. In such a world, companies will need to answer the broader question: why us?