Friday , January 22 2021

The next era of globalization will be shaped by customers, technology and value chains



Executive Summary

New research from McKinsey looks in detail at 23 different industry value chains in 43 countries to get a better overview of which companies are already doing on the ground and how they complement basic changes that will shape the next era. It finds out that global demand for geography has changed radically over the last decade. China, India and other emerging economies that were originally connected to global value chains by making labor-intensive manufactured goods and exporting them to advanced economies. But now, their billions of new consumers are a strong force. It is an outdated assumption to think of them as "low-cost factories to the world." They are lucrative consumer markets in their own right and their businesses are a new source of competition. In addition, the developing country's share of global consumption has increased by about 50% over the past decade. China now imports as many final goods as Germany – and more than Japan, the United Kingdom or France. Businesses absorb and respond to these deeper shifts even when trying to cope with political uncertainty. With both industrial structures and the global economy in flux, this is for a moment to reassess where to compete along the value chain and where to work around the world in the future.

Hans Neleman / Getty Images

If you ask the average CEO what causes them to lose sleep these days, it is a good bet that the answer will be tariffs and trade wars. One third of respondents in a recent McKinsey Global Leadership survey said that trade policy uncertainty is their main concern – and three-quarters of all companies say their global investment strategies are changing as a result.

But companies can't afford to just react to the news cycle. Every decision needs to be informed by the bigger picture – and when we step down, it is clear that long-term structural shifts transform the nature of globalization. Our new research looks in detail at 23 different industry value chains in 43 countries to get a better overview of which companies are already doing on the ground and how they complement basic changes that will shape the next era.

First, the global demand for geography has changed radically over the last decade. China, India and other emerging economies that were originally connected to global value chains by making labor-intensive manufactured goods and exporting them to advanced economies. But now, their billions of new consumers are a strong force. It is an outdated assumption to think of them as "low-cost factories to the world." They are lucrative consumer markets in their own right and their businesses are a new source of competition.

The developing country's share of global consumption has increased by about 50% over the last decade. China now imports as many final goods as Germany – and more than Japan, the United Kingdom or France. It now also imports higher value goods. China reaches the point of having more millionaires than any other country in the world and now represents one third of the global luxury goods market. Overall, emerging economies are likely to consume nearly two-thirds of the world's manufactured goods by 2025 with products such as cars, construction products and machinery leading the way. In knowledge-intensive services, including IT services, financial services and business services, 45% of all exports from advanced economies already go to developing countries.

While local demand is rising, the new economies also reach a new level of industrial maturity. They expand domestic supply chains and import fewer of the intermediate inputs they need to keep their factories humming. China is mainly by modernizing several industries and developing its capacity in design, engineering and high-tech manufacturing. Multinational companies in advanced manufacturing industries can come under pressure in the coming years as China moves into new and higher value market niches. In addition, developing economies create their own multinational giants – companies now go global through both export and foreign acquisitions. Western multinational companies are facing new competitive challenges in their own backyard.

The industry's value chains are also being transformed by a wave of next-generation technologies. Some, including digital platforms and logistics applications, will continue to reduce trading costs, delays and frictions. Ultrafast 5G network will provide a backbone to IoT, smarter networks, autonomous vehicles and virtual reality to realize more of their potential. Perhaps it is very deep that automation technologies in the manufacturing industry change the way in which goods are made.

Today, multinational companies are studying a global demand map that doesn't look like it did a decade ago – and they have new technologies at their disposal that reduce the importance of labor costs. The calculation that goes into decisions about where to find operations and where to invest in new capacity changes, especially in the light of new automation technologies. Because shipping goods halfway around the world inhibit responsiveness and slow down the market, several manufacturers establish and consolidate multiple regional supply chains to serve their larger markets more efficiently.

These shifts in corporate decision-making have begun to emerge in trade statistics. The trading intensity (ie the share of global production sold across borders) decreases as more of what is done is consumed locally. The world also seems to be moving past business days, leaving low wages across the globe. Today, only 18% trade in advanced economies importing from low-paid countries. Factors such as proximity to customers, the quality of the infrastructure and the availability of a more qualified workforce require more weight than the driving force to find the lowest possible global labor costs.

At the same time, service flows are growing 60% faster than trade in goods. Technology has begun to make it viable to provide services such as industrial maintenance and telemedicine remotely. Across multiple value chains (including manufacturing), more value comes from services, whether software, design, intellectual property, distribution, marketing or after-sales service. In the industry after industry, companies in all industries add new service lines or experiment with subscriptions and business models "goods-as-a-service".

Businesses absorb and respond to these deeper shifts even when trying to cope with political uncertainty. With both industrial structures and the global economy in flux, this is for a moment to reassess where to compete along the value chain and where to work around the world in the future.


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