Forty years ago, the competition for the global business market was among US, European and Japanese companies. Then the tiger-economies joined the fray; and by 2000, several emerging markets also jumped in. As the competitive intensity rose with so many suppliers, demand took a hit after 2008.
This slowdown is felt even now, as IMF data shows global GDP de-grew by 1% CAGR for the five years till 2016. But while globalisation thrives on competitiveness, all cannot be equally competitive at the same time. This has created an over-supply of companies fighting for the same demand pool. Globalisation dates back to history. But as far as 21st century globalisation is concerned, three features differentiate it from, say, 20th century globalisation. Businesses should take cognisance of these.
First, over-supply with sluggish demand in the 21st century has intensified the battle for market share rather than market size. The 20th century saw new markets opening up. The combination of untapped markets, unmet aspirations, along with reasonable growth, meant businesses could concentrate on the market size.
Conversely, in the 21st century, sluggish demand has dampened investments and jobs, constraining purchasing power. Businesses concentrate on those segments of demographics that have purchasing power left. Firms grab those few from competing firms – hence market share. The market size may not expand across the width of the consumer base. Pricing power gets constrained in a hyper-competitive market share battle, and reducing profits further limits future growth.
As per Bloomberg data, the last six-year CAGR of the average profit-per-company of the largest-200 listed companies in 17 emerging/frontier economies grew in only 4. Retained profits are the best source to drive expansion in a stressed environment when banks go slow due to asset quality concerns, so this strain on profitability and growth is a double-whammy. Tackling this means going flexible in stock-unit sizes and pricing, improving customer service, and providing value-addition.
Second, the 21st century is seeing a stress on sourcing from and exports to the regional markets around the investee. In the 20th century, a lot of the production migration that occurred, say US auto-makers to Brazil or US chip-makers to Taiwan, was done to export the final product back to the investor country. But now, such factories are increasingly used to supply the final product to several countries around the investee’s region, and not just the investor country. This has picked up as a cost-effective expansion strategy. For example, Korea’s Hyundai set up a car factory in India from which it sources cars to regional markets around Asia, not just Korea.
Even regional value-chains are picking up. Originally centred on large manufacturing nations like China, Japan, etc, it is picking up even in smaller manufacturing nations where production is migrating. The trade of materials moves accordingly. For example, production migration of apparel from China to Bangladesh has meant 40% of Indian cotton exports now go to Bangladesh alone. Enabling this further by streamlining the transport and customs linkages with the regional countries would help ease the flow of global sourcing, and thus win more business in a tight environment.
Third, while technology has made many jobs redundant, it has opened up new types of jobs. That means a demand for new skills. The direction for skills seems to moving towards two areas in the 21st century – innovative, ideation jobs that will think the next breakthroughs and process-based jobs that will execute. The short supply of critical/analytical thinkers means businesses will be willing to pay high. Process-workers will earn less because there is an over-supply of such talent graduating each year from the many mediocre universities. Businesses under profit pressure may have to accommodate the higher costs of innovative thinkers from what they give to process-workers, impacting the cycle of income and demand for the latter segment.
As it is, the 21st century world is seeing a return to protectionism, a turnaround from the 20th century when the call was to open up. That would not only impact the ability to import innovative talent from abroad, but if the domestic wage-disparity and income inequality widens further, such calls for protectionism would grow even louder. Businesses would be more impacted by the political economy, not just market-forces. Tackling this would require a closer alignment with the policy-makers to make representations.
These are three ways in which 21st century globalization differs. Businesses should acknowledge of them to remain competitive while devising financially-viable models to reach a broader-base of consumers.
This article was originally published here.