Question to Oracle: Will Populist Media Campaigns toward Corporations Be a Major Threat?

ORACLE RESPONSE:

Yes. New media campaigns are starting to shape consumer-purchase and business-policy decisions of corporations. This new media is enabling blitzkrieg communications, including fake news, to the public by individuals, social groups, and political groups about the political, social, or economic attitudes of corporations or their senior executives. Those blitzkrieg communications about corporations and their products and services are likely going to increase and become more effective in the speed, targeting, and messaging. In the future a company’s identity, business reputation, and brand could be heavily influenced by the demographics, attitudes, and beliefs of company’s employees, particularly the senior executives. It’s very uncertain, how big populist attacks are going to become for corporations, particularly consumer-product/service companies, and it’s uncertain what can or will be done to protect a corporation’s identity and business activities from those attacks. But it’s critical for corporations to have a business policy for how it addresses political, social, and economic issues, whether and how it communicates about those issues, and how it will manage blitzkrieg campaigns against them.

RECENT SIGNALS OF CHANGE

New media is changing how people conduct their lives, including how they participate in their communities and the political process and how they make choices about the products they buy and services they use. Everyone now has endless opportunities to say something or act in some way. Each act provides the individual a feeling of satisfaction or pleasure, while the cost or risk to the individual feels small, unless you’re in China where the goal is to register every individual act and keep a tally. The influence of the new media is getting bigger and bigger.

  • Advertisers rushing to online, digital ads. Online, digital ad spending is beginning to approach TV ad spending. Newspapers are really suffering.
    • Digital ad spending is rapidly catching up and could soon be greater than TV ad spending. Global ad spending in 2017 is expected to be ~ $180 billion (33 percent of the total) in digital, online media and ~$220 billion (40 percent of the total) for TV. This compares to global ad spending in 2010 of ~$66 billion (16 percent of total) for digital, online media and ~$181 billion (or 44 percent of total) for TV ad spending.
    • An article in The Wall Street Journal on February 1, 2017 titled “Facebook’s Steep Wager on Online Video Has to Pay Off” noted Facebook’s revenue in 2016 is expected to increase 46 percent from the year before, but that this growth is going to “come down meaningfully” in 2017. The article indicated Facebook is betting on video, including Facebook Live, to play a much bigger role in the future. CEO Zuckerberg has apparently said he envisions the company becoming a “video-first” company.
  • Rise of live video
    • In January 2016 GoPro teamed with Twitter-owned Periscope to allow users to broadcast live from their GoPro devices connected to iPhones. Users have the ability to switch instantly between the GoPro and the iPhone’s video camera—i.e., each user can do two-camera live action shots.
    • Live video is the current big battleground for Facebook, Snapchat, Twitter/Periscope, YouTube, and many smaller startups. China has 200 live-streaming platforms. In September 2016, ii-Media Research predicted there would be over 300 million viewers of live streaming in China, or about half of China’s internet users, by the end of 2016. Source: “Cash Flows in China Live Streams,” The Wall Street Journal, 9/28/16, p. B6. Until recently TV and cable broadcasters exclusively broadcast live video. Live new media video is totally disrupting the traditional media industry.
    • In December 2016 China issued new regulations requiring foreigners to submit a formal application with the Ministry of Culture before they can post live-streaming videos from their smartphones and websites.
    • Another WSJ article on February 6, 2017 about the content of Snapchat’s registration filing for its initial public offering was titled “How Millennials Are Turning Snapchat Into the New TV.” Snapchat noted in the registration that its users view 10 billion videos a day.
    • In November 2016 The Wall Street Journal reported Amazon has been talking to major sports organizations like the National Basketball Association, Major League Baseball, and the National Football League about providing streaming live sports.
    • Online businesses are buying traditional media assets. High-quality content online will likely differentiate new media companies. In December 2015, Alibaba Group, China’s e-commerce giant, bought the South China Morning Post and all other media assets from the SCMP Group. Alibaba’s digital strength will enable the 112-year-old newspaper to become a global media entity covering China for readers around the world. While the Hearst Corporation’s Cosmopolitan magazine just announced it is teaming up with Snapchat to launch the Cosmo “channel” on Snapchat’s “Discover” newsstand.

Two big brothers: New Media Superstars and Government. An individual’s private life and work life are increasingly inseparable and increasingly visible to everyone, while at the same time governments and corporations are gathering more and more digital data everyone, including a lot of information about how individuals behave in a wide variety of circumstances.

  • Big data enabled computational politics. In December 2015, a database containing the records of 191 million US voters found its way onto the internet. Politicians and government agencies could target individuals with personalized messages. But this is not just happening in the United States. In Britain, the Conservative Party used targeted ads on Facebook to help win the general election in 2015.
  • Hangzhou’s local government is piloting a “social credit” system the Communist Party wants to roll out nationwide by 2020. The aim of the national social credit system is to “allow the trustworthy to roam everywhere under heaven while making it hard for the discredited to take a single step.” The plan for the system is to compile digital records of citizens’ social and financial behaviors to calculate a personal rating that will determine what services they are entitled to, and what blacklists they go on. A person can incur black marks for infractions such as fare cheating, jaywalking, and violating family-planning rules. The Economist notes “The scale of the data-collection effort suggests that the long-term aim is to keep track of the transactions made, websites visited and messages sent by all of China’s 700m internet users.” The Economist, “Creating a digital totalitarian state: Big data gives Chinese rulers new ways to monitor and control citizens,” December 17, 2016, p 21.
  • For most corporations, new digital media has become an important new channel of corporate communications, marketing, and selling the company’s products and services to millions of customers and potential customers. For many corporations—particularly new, high-tech ones—it’s the primary channel. A new book published in 2016, “Super-Consumers,” by Eddie Yoon of Cambridge University describes the importance and influence of the group representing ten percent of consumers that accounts for 30-70 percent of sales and almost 100 percent of “customer insights.” This high-passion group is defined by both its sales size and its attitude to the product. Facebook and Google are focused on developing strong relationships with their super-fans.
  • In a special report in The Economist, September 17, 2106, entitled “The rise of the superstars” Adrian Wooldridge described how high-tech companies become superstars by discovering niche markets and then scaling up as fast as possible. This “blitzscaling” is required to develop the necessary millions of customers to earn any money and prevent potential competitors from reaching those customers first. The article points out a downside of the emergence of superstars with global scale, namely the negative feelings they generate in the general population toward big business. One reason is a customer’s perception of being at the mercy of one company. Another is the emergence of superstars and the consolidation of industries result in unique, large relationships between the superstars and government. And because of those connections to government, the government policy preferences of superstars and the political connections of their business leaders are news information.

Social and political dynamics. Digital media communications is today’s means for creating political or social action.

  • ISIS might not exist without the internet and social media.
  • We are now experiencing chaotic pluralism where mobilizations spring from the bottom up, often reacting to events. Thousands of events are occurring each day, most of which don’t result in surge responses.
  • Collective action based on online postings leaves a big digital footprint. Governments can use this information to monitor protests and intervene when they feel it’s necessary. They can also identify and do something about the online activist leaders.
  • Most governments, particularly those with authoritarian regimes and some resources—like Russia and China—are investing heavily in web-based propaganda. These include social-media bots and other spamming tools to drown out real online discussions and “trolls” to act on their behalf in Western comment sections, Twitter feeds, etc. China authorities have an extensive censor system for blocking any comments or online postings.
  • A study at the University of Konstanz found that the internet tends to grow fast in countries in which the governments are concerned about the flow of information, but there is no evidence so far “that democracy advances in autocracies that expand the internet.”
  • It was reported in early February that Facebook and Google have active programs in Europe to combat “fake news”—the rapid spread of online misinformation—in upcoming important elections in France and Germany.

New Media Actions toward Corporations. An important new development is that opponents of a corporation’s business policy, its industry, its products or services, or even the politics or social positions of key executives are starting use this same new media infrastructure against the corporation. And given the potential speed, intensity, and potential impacts of the new media actions, this is critical business policy for every corporation to address and plan for.

  • The Trump election result stimulated a number of business boycott and support actions. A group called Grab Your Wallet identified after the election a number of stores that shopper should boycott during the Christmas holiday. Trump supporters are using Twitter to encourage consumers #buytrump or #buyivanka or asking people to boycott Starbucks stores because Starbucks Corp. pledged to hire 10,000 refugees. The success or failure of the various actions will be closely analyzed for lessons learned. The first analysis of Grab Your Wallet’s campaign indicated it had little impact on the targeted merchants’ sales.
  • In January 2107, Uber fell behind its much-smaller competitor Lyft in the Apple App Store after Uber app users deleted their accounts largely in protest over Uber CEO Travis Kalanick’s ties to President Trump. Kalanick then resigned from Trump’s business advisory council in the first week of February.
  • The CEO of Under Armour was criticized recently for remarks made in a television interview where he said he respected President Trump’s willingness to make bold decisions and said, “To have such a pro-business president is something that is a real asset for the country.” Some groups called for boycotts of Under Armour products and a financial analyst covering Under Armour’s stock downgraded his rating for the stock to “negative” from “neutral” saying “We believe the decision to express a view in today’s highly charged political climate was a mistake.” A week later the CEO announced he would publicly fight President Trump’s proposed travel ban, trying to mitigate the damage of his earlier comments.
  • President Donald Trump praised Boeing Co. on February 17, 2017 in a visit to a Boeing manufacturing plant in South Carolina. He also said, “This is our mantra. Buy American and hire American.” Boeing CEO has met a number of times with following Mr. Trump’s initial blast on Twitter in December 2016 against the cost of the new jets it will build to serve as Air Force One and threatening to even cancel the plan.

 

PLAUSIBLE DEVELOPMENTS WE MIGHT SEE IN THE FUTURE

New-media actions could be a major threat for corporations. At a minimum, corporations need to consider the range of possible campaigns they could face and develop plans for how they monitor new media activities and how they would respond to a major surge action affecting them.

More powerful new media actions likely in the future:

  • Larger online user bases will enable testing of thousands of models about the behavior of online social networks, including the movement of misinformation or fake news online.
  • The massive amounts of data about events and responses could enable people or organizations to become very effective in predicting or purposely triggering desired surge responses. In other words, new media campaigns may become much more effective.
  • More and more will be targeted at corporations.

Less privacy for corporate employees:

  • More information will be available online about each individual’s personal and work lives. A lot of that online information will be restricted, but an increasing amount will publicly accessible.
  • Government agencies, corporations, activist groups and the general public will likely increasingly seek personal information about employees of large corporations.

Nationalism and multinationals:

  • Most corporations are already readily identified with their original home country and not seen as independent of geopolitics. Those country-to-company alignments could become catalysts even more for new-media actions.
  • A multinational’s identity may become even more aligned with their home country’s policies and behavior, despite protests to the contrary.
  • Social campaigns on new media may influence foreign governments to discriminate more than they do today against multinationals based on nationality. Will China treat German companies different from US companies?
  • Issues for new media could be the locations of the company’s headquarters, political views of company executives, nationalities of work force, geographic footprint of the multinational, environmental footprint, etc.

New online rules and tools:

  • European efforts to help individuals to be forgotten may stimulate efforts around the world for individuals to be able to manage what information about them is available online.
  • Online media companies that search for, gather, store, or transmit personal data could implement new policies to protect an individual’s personal information online, minimize the ability of third parties to publicize personal information about an individual, and provide individuals the means for controlling what personal information is shown, including perhaps the ability to hide information already online.
  • Public opinion will likely vary significantly within each country, and from country to country, on how open and transparent the internet should be and what personal information, particularly about senior corporate executives, should be private and what protections should be provided.
  • Governments will likely impose new restrictions on how personal information can be accessed, transmitted, and used. Those restrictions could likely vary significantly around the world from tighter restrictions to fewer restrictions.
  • New tools and technologies for protecting an individual’s online personal information online or identifying an individual online may develop.
  • Applications may develop for the Dark web so an individual’s online personal activities remain hidden.

For companies that sell consumer products or services:

  • They could experience significant new media actions based political, social, or work activities of their senior executives.
  • An executive’s social and political identity could increasingly be a factor in corporate brand strength and reputation and vulnerability to populist action.
  • With the heightened publicity, discrimination lawsuits by individuals often employees against corporations may increase over issues of employee nationality, religion, language, hiring of foreign legal residents, etc.

Corporate affairs, identity, and brand management:

  • Corporations large and small and not just consumer companies will most likely need new business policies, marketing strategies, and corporate affairs capabilities for navigating a business environment where customers and users overnight can be turned off or on in response to new media surges, stimulated by external events or outside agents, friend and foe.
  • New corporate affairs capabilities—reaction time (time to get in front of an issue), crisis management, managing the information flow, use of new media tools, participation of more employees in social media responses, monitoring of employees’ social media and online activity, use of live video will likely be required
  • Managing the risks and opportunities from new-media actions will require corporations to spend more resources on corporate affairs, identity, and brand management.
  • Corporations may need to develop a new business policy with regard to corporate positions on social and political issues and how corporations should participate in political or social processes related to those issues. Should corporations attempt to remain neutral on social and political issues because of the risks, participate more strongly on social and political issues, or what.
  • New corporate policies about employee behavior outside the workplace or online may be needed, even if only to reaffirm no restriction.
  • New corporate policies may be required for executives’ social media postings.
  • Executives could be required to sign morals clauses with their employers—like pro athletes, entertainers, and newscasters do now—to help protect their employer in the event the executive engages in reprehensible behavior or conduct that may negatively impact his or her public image and, by association, the public image of the corporation.
  • We might also see reverse morals clauses where executives protect their personal reputations against actions or behavior of an employer that negatively impacts the executive’s public image.

 

Question to Oracle: Will Current Investments in New Transportation Technologies Pay Off for Multinationals?

RESPONSE

Yes, if they enable future growth in market share in Asia. Over the next ten years, the explosion in urban populations in Asia will likely create the biggest opportunities for the industry. New integrated transportation systems based on automation advances will transform the movement of residents and goods throughout the world. The best opportunities with automated vehicles in the next ten years will likely be with heavy-duty trucks. Electric vehicles with models being produced by every manufacturer will slowly enter the marketplace, but they likely remain loss leaders for the next ten years. CEOs of multinationals involved in transportation will earn their pay for making so many major global decisions in the face of the many political, economic, cultural, technological, and competitive uncertainties. Multinationals with strong positions in China will be in the best positions to take advantage of future opportunities

RECENT SIGNALS OF CHANGE

Recent signals of change in how people and goods are moving around include the following:

Demand for Mobility

  • The world’s growing population continues to move to urban areas. In 1950, 0.7 billion people, or 30 percent of global population, lived in urban areas. By 2015, 4.0 billion, or 55 percent, lived in urban areas. If current trends continue urban journeys that already account for two-thirds of all miles traveled by people will increase by 200 percent in 35 years (by 2050). “Transport as a service: It starts with a single app,” The Economist, October 1, 2016, p. 58. In the developed world, the growth of urban journeys is hardly growing; in developing economies, it’s exploding.
  • Ford Motor Company estimates the global car market is worth $2.3 trillion per year, while the market for transport services (car sharing, mass transit) is $5.4 trillion per year. “Transport as a service: It starts with a single app,” The Economist, October 1, 2016, p. 59.
  • In the United States, the percentage of people aged 20-24 with a driver’s license fell from 92 percent to 77 percent between 1983 and 2014. “Transport as a service: It starts with a single app,” The Economist, October 1, 2016, p. 59.

Automation and the Mobility of People and Goods.

  • Tech companies and traditional auto and auto-parts manufactures are scrambling to develop the new hardware and software systems of future automated and self-driving vehicles. The competition is widespread among tech firms like Alphabet, Uber, Mobileye, Intel, Infineon, and Apple and among carmakers and suppliers like BMW, Ford, Volvo, Delphi, ZF Friedrichshafen AG, and Tesla. Tech firms are partnering with carmakers; tech firms are going it alone; carmakers are going it alone. It’s intense.
  • Waymo LLC, the self-driving car group of Alphabet Inc., is developing a sensor-system package for automakers that includes an 360 degree-view radar, eight vision modules, and three different types of Waymo-built lidars. Waymo’s testing of sensor and software systems reached 2.5 million miles over the past 8 years. Waymo plans to have driven 3 million miles by May 2017. That’s a lot of data being gathered.
  • Technology is also changing how people and goods move around urban areas. A number of new concepts are being tested for using technology (apps) that mixes and matches a variety of public and private means of transport. Helsinki is currently testing an app from MaaS Global (Mobility as a Service) to do just that. Around 70 percent of residents of London use apps with live travel information for movement planning.
  • Transport-as-a-service is rapidly expanding around the world. New technology companies like Uber, Lyft, and Didi Chuxing already provide e-taxi services in most of the world’s cities. Didi Chuxing has 300m users in 400 cities. Besides taxi-competition, those same companies are using their technology to expand into car sharing, carpooling, and ride sharing with cars and mini-buses.
  • Uber announced in January 2017 that it will start releasing anonymized ridership data from dozens of cities in which it operates. Urban planners can use the data to analyze traffic patterns and make better decisions about urban infrastructure.

Mobility-Asset Supply

  • Car manufacturing is a global, yet local enterprise. Car manufacturers are continually looking to lower the costs of production by building plants where wages are significantly lower, work forces are more productive, or where countries have negotiated free-trade deals with other countries. Wages in Mexico are significantly lower than in the United States, on average 85 percent lower, and Mexico’s car manufacturing has been growing steadily. “Trump’s Auto Bluster,” The Wall Street Journal, January 7, 2017, p. A12. Mexican light-vehicle production increased from a little over 2 million per year in 2008 to about 3.5 million per year in 2016. A little over 75 percent are shipped to the United States. “Build Them and Ship Them,” The Wall Street Journal, January 1, 2017, p. A5. Still, about 82 percent of US automakers’ vehicle production remains in North America.
  • Many politicians are advocating a more nationalistic economic system, challenging the current economist mind-set that globalization is natural and good for everyone. But many perceive the costs of globalization can be significant at the country level. After China’s entry into the World Trade Organization in 2000, it’s estimated Chinese imports eliminated 2 million jobs in the United States with no equivalent increase in US jobs linked to exports to China. Greg Ip, “We Are Not the World,” The Wall Street Journal, January 7, 2017, p. C2. At the same time, China has generally violated the WTO spirit by discriminating against foreign investors and products.
  • The backlash against globalism in developed countries may not be economic but cultural. A large percentage of each nation believes a commitment to national identity will bring more long-term benefits than a commitment to an uncertain global system. They are upset about immigration and terrorism, and are worried about their economic future. They have no faith in global institutions. In 2016 two researchers at the London School of Economics noted a growing migrant population rather than rising unemployment made British voters more likely to vote to leave the EU. As President Obama noted after the 2016 presidential election that, “for the majority of the American people, borders mean something.” Greg Ip, “We Are Not the World,” The Wall Street Journal, January 7, 2017, p. C2.
  • According to the Pew Research Center, at the end of 2016 around 25 percent of Republicans said free-trade agreements were good compared to approximately 55 percent who thought so at the beginning of 2009. Approximately 55 percent of Democrats thought free-trade agreements were good in 2016 compared to slightly less than 50 percent in 2009. 49 percent of the US general public say that US involvement in the global economy is a bad thing compared to 44 percent who say it’s a good thing. Josh Zumbrun, “Economists Grapple With Public Disdain,” The Wall Street Journal, January 9, 2017, p. A2.

Electric Vehicles

  • Chinese companies dominate the sales of electric cars worldwide. China electric car production grew by 50 percent in 2016 to 300,000. Outside of China, electric-car production was 260,000. The Chinese cars are small and generally have a poor-quality reputation. So far no market leaders in China have emerged. Primarily Chinese companies are producing electric cars in China because the government only subsidizes local companies and foreign manufacturers have been reluctant to share their technology with local venture partners. The government is trying to force foreign carmakers to participate in making electric cars in China through a new carbon credit-based trading system that will motivate carmakers to increase production of electric vehicles over the next five years. Anjani Trivedi, “China Shaky on Electric Vehicles,” The Wall Street Journal, January 6, 2017, p. B12. Volkswagen, already well established in China with partners SAIC Motor and FAW Group, is exploring a venture to make electric cars with a state-run company, China Anhui Jianghuai Automobile. General Motors plans to launch alternative-energy cars with its partners, SAIC and Wuling, by 2020. While Nissan Motor and its partner introduced an electric car in China in 2014. Rose Yu, “Volkswagen Is in Talks to Make Electric Cars in China,” The Wall Street Journal, September 8, 2016, p. B7.
  • All the major German manufacturers, including Daimler, Volkswagen, and Porsche, are introducing electric cars by 2020. The current auto market leaders all appear to be targeting Tesla.

Self-Driving Trucks

  • The commercialization of automated heavy-duty trucks is proceeding fast—at least at the pace of automated cars. The return on investment opportunities are clearer in trucks than in cars, and driving on highways is much easier to automate than driving around cities. Self-driving trucks are already used in mines. All the big truck makers, including Volvo, Daimler, and Iveco, are working on driverless trucks.
  • German vehicle manufacturers are beginning to dominate the North American heavy-duty truck market. Daimler already owns Freightliner and engine supplier Detroit Diesel, giving Daimler 40 percent of North American truck sales market. In September 2016, Volkswagen AG acquired a 17 percent share in Navistar, a US-based truck maker. Navistar currently has about 11 percent of the North American market. The total North American market is around $30 billion per year.
  • Daimler announced in September a new venture to develop drones for its new electric delivery vans. Daimler purchased a minority stake in the US startup Matternet to help enable the venture. Amazon.com, China’s JD.com, and Germany’s Deutsche Post DHL are attempting to use drones in package delivery, while the US Postal Service is considering using drones from delivery vehicles as well.
  • Data from the American Transportation Research Institute shows insurance costs for truckers in the United States increased by almost 30 percent in 2015, compared to an increase in driver wages of 8 percent, and a decrease in fuel costs of around 30 percent. The number of accidents is declining, but the payouts for accidents have increased substantially. “Insurance Costs Soar for Truckers,” The Wall Street Journal, October 15, 2016, p. A1.

PLAUSIBLE DEVELOPMENTS WE MIGHT SEE IN THE FUTURE

The transportation is rapidly changing around the world. There are many large uncertainties about how people and goods will be moving around in ten years.

Urban developments in ten years:

  • In developed economies, only modest changes will occur between urban and rural populations numbers. In a sense the current divide between urban and rural populations will become permanent.
  • In developing economies, including China, the development of urban settlements will continue to be dramatic.

Mass transit in ten years:

  • A number of new mass transit system projects will start in developing countries.
  • In developed countries however very few new large systems will be built. Most mass transit investments will in upgrades and retrofits and buses.

Global demand for cars in ten years:

  • There will be an explosion in demand for small cars in Asia to serve rapidly growing urban populations.
  • However, the demand for new cars in developed economies could begin to slowly decline. Electric cars won’t make up the difference at all.

Transportation services in ten years:

  • Transportation services are going to expand in both developed and developing economies, stimulated by big data, new transportation-as-a-service business models, and urban mobility needs. Great opportunities will be realized.
  • Families will use third-party transportation services in lieu of owning a second car.

Automated vehicles in ten years:

  • While driverless vehicles won’t be a reality in ten years, heavy-duty trucks with driverless capabilities could be implemented. These trucks with attendants could be self-driving on highways. The attendants would take over in an emergency and when not on highways.

Electric vehicles in ten years:

  • It’s unlikely electric vehicles will become mainstream and have any real impact on the use of petroleum around the world.
  • Most electric vehicles will be made and sold by Chinese companies.
  • And most of them will be small, particularly in developing economies.
  • The Chinese companies could eventually dominate the foreign markets for new energy vehicles with their much lower-cost small models.
  • Electric cars will likely remain a niche product in North America, primarily purchased by those with high disposable income.

Vehicle manufacturers and transportation services providers in ten years:

  • But the industry is changing rapidly. Demand is changing significantly; new competitors are entering; new technology is required; and new transportation markets are emerging.
  • While manufacturers will continue to diversity globally, parts and vehicle manufacturing centers will remain close to large demand areas. In other words, vehicles sold in the United States will generally be built in the United States, Canada, or Mexico.
  • Traditional manufacturers will compete in transportation as a service markets, but will likely find it unprofitable.
  • The industry will remain relatively fragmented with many international manufacturers and models.
    • A shakeout of existing large manufacturers will occur.
    • German manufacturers have the potential to become even bigger.
    • Who could buy Fiat Chrysler?
    • Some Chinese manufacturers will become very large because of Chinese market demand and demand in other developing countries.
    • Some Chinese companies could begin to challenge international companies in developed economies.

 

Are the Chinese government and Chinese Multinationals in Cahoots?

ORACLE’S RESPONSE

Absolutely. It’s China’s system. Every Chinese stakeholder—government agency, Chinese company, and Chinese citizen—contributes in the global struggle that is not a game. The government plays a central role in shaping every stakeholder’s long-term goals, in setting economic and industrial priorities, in nurturing and protecting domestic companies, in creating opportunities for Chinese companies to become industry world leaders, and in shaping a world order that favors the Chinese. The keys of the strategy are for the Chinese government to enlist each stakeholder in the effort, create an unlevel domestic playing field so competitive that the Chinese companies that emerge are potential global leaders when they go abroad, and provide strong direct and indirect support to Chinese organizations competing in strategic industries.

Since a critical feature of global industrial markets is how rapidly situations can change, researchers, companies, and investors around the world are in an unrelenting struggle to learn and adapt rapidly. If they don’t, they won’t succeed. The Chinese government/industry system enables the country to stay focused on long-term goals, while actively supporting various parts of the system to prevail in the strategic markets that are constantly changing interactively complex, non-linear, and chaotic. The Chinese multinationals contribute by taking risks in the foreign markets and using the Chinese government’s offered support. This decentralized approach for competing in many complex markets is not unlike the US Army’s doctrine for planning and executing operations against insurgencies in the Middle East and Africa.

With this coordinated system, in the next ten years Chinese multinationals could replace American multinationals as the face of global capitalism.

RECENT SIGNALS OF CHANGE

Recent signals of this integrated Chinese government and multinational system and their overseas potential include the following:

Private (non-state) Chinese multinationals grow up in a crony-capitalistic system that shapes their organization, business practices, and foreign growth objectives. They ultimately owe an allegiance to China. Increasingly, their key shareholders are state-owned organizations.

  • In a recently published book, China’s Crony Capitalism: The Dynamics of Regime Decay, the author Minxin Pei, a professor of government at Claremont McKenna College in California, describes how the state decentralized the rights of control over state property to local officials, but left the rights of ownership murky. According to the author, the Chinese state holds the residual property rights of maybe half of the new worth of the China economy. This has led to a system of corruption at every level of the government/economy, an absence of a system of checks and balances, and the motivation of political officials to keep the system in place. In a crony capitalist system it’s awfully difficult for any private Chinese corporation to grow without local politician support; successful corporate leaders learn how to thrive in this environment. All Chinese corporations must grow up playing with a different set of rules than what western corporations grow up playing with.
  • A Washington Post article on December 30, 2016, entitled “China’s $9 billion effort to beat the U.S. in genetic testing,” described China’s effort to become a world leader in the use of genomics and an example of a Chinese’s company’s advanced DNA technology being used to help an American child in Boston. The article noted China is “battling for dominance in innovation and science that is more likely to determine the economy of the future” and believes “[genetic testing] technology could prove as transformational as the Internet.”
  • In the past year ending in September 2016, two state-owned investment funds have become top-10 shareholders in 39 percent of listed companies in China, according to UBS Group AG, which analyzed the shareholdings. (Interestingly, in Japan the situation is similar: According to The Wall Street Journal about 30 percent of all the companies in Japan’s three main equity indexes now have Japan’s central bank as one of their top ten shareholders. Six years ago, the Bank of Japan’s equity presence was “trivial.”)
  • A recent study by Fitch Ratings, Moody’s, and Standard & Poor’s showed state-owned Chinese enterprises received more generous lending terms from banks than private firms, largely because of the perception that the state will stand behind the state-owned enterprises.
  • An analysis by Wind Info in November 2016 indicated almost 14 percent of listed, nonfinancial companies’ profits are attributable to Chinese government support. And that’s up from 5 percent six years ago.
  • Private Chinese firms often have government shareholders, and approximately 11 percent of their profits come from the state.
  • Priority sectors, even if they’re doing well, get government support. Subsidies to China’s car manufacturers have grown 50 percent since 2010. Approximately 19 percent of Geely’s gross profits over the past five years are government subsidies and grants.

China’s domestic markets are complex, very messy affairs and Chinese business models are evolving in response to the dynamic conditions. The complex relationships with government organizations are changing and manufacturers are relying less on foreign inputs in domestic-manufactured products. China’s economy is shifting from a labor-intensive manufacturing to higher-tech industries and services.

  • President Xi wants to put politics (federal dictates) back in command, but progress against corruption and local deviation from federal policy has been slow. Market forces, local governments, and corruption often wield more power over corporate actions.
  • Chinese manufacturers are buying more raw materials and components from domestic suppliers rather than from abroad. The portion of foreign inputs in China’s exports has fallen from over 40 percent in 1995 to less than 20 percent in 2015. The annual value of China’s high-tech and new-tech imports has been slowly falling since 2013.
  • In 2015 services generated 50 percent of China’s GDP, up from approximately 40 percent in 2000; while industry generated a little over 40 percent of GDP in 2015, down from about 45 percent in 2000. Official unemployment rates have been notably steady at around 4 percent for many years, but those figures don’t reflect reality because they exclude migrants from rural areas.
  • China’s domestic demand for high-tech products has grown so rapidly that in some markets new products are being developed and introduced first in the world in China. For example, China is leading the adoption of virtual reality. Chinese companies will be able to leverage initial customer sales and experiences to become the market leaders in the G-20 countries they first enter.

The Communist Party is continuing to assert strict control over the political/economic/social system.

  • Hangzhou’s local government is piloting a “social credit” system the Communist Party wants to roll out nationwide by 2020. The aim of the national social credit system is to “allow the trustworthy to roam everywhere under heaven while making it hard for the discredited to take a single step.” The plan for the system is to compile digital records of citizens’ social and financial behaviors to calculate a personal rating that will determine what services they are entitled to, and what blacklists they go on. A person can incur black marks for infractions such as fare cheating, jaywalking, and violating family-planning rules.
  • China continues to limit the ability of Chinese affiliates of the Big Four accounting firms (Deloitte, PwC, EY, and KPMG) to share documents about Chinese companies publicly traded on US stock exchanges with the US Securities and Exchange Commission.
  • China is implementing new rules for nonprofits in the country. The types of activities that the nonprofits can participate in are prescribed—not everything is allowed—and foreign nonprofits that are allowed to operate will be tightly monitored and controlled.cropped-dsc_0083.jpg

Despite being the world’s second largest economy, China still dictates the participation of foreign-owned corporations in China to best serve Chinese consumer needs, transfer knowhow and capabilities to Chinese companies, and stimulate local companies to become world-class leaders.

  • After rejecting battery-operated cars—in favor of hybrids and fuel-cell vehicles—China is forcing Toyota into electric/battery cars. China is the world’s largest car market and new regulations will penalize car manufacturers that produce an insufficient number of electric, plug-in hybrid, and fuel-cell models. By 2018, such cars must account for 8 percent of the maker’s production, and the percentage will rise from there. (Sounds like totalitarian California.) It doesn’t look like Toyota will meet the deadline.
  • Didi Chuxing’s acquisition of Uber’s China business will essentially preserve China’s ride-hailing market for Chinese companies. Uber probably discovered this is the outcome the Chinese government wanted to happen.

In 2016, China made pledges to create a level playing field for foreign and domestic investors. But will it? China has a long list of industries in which foreign investment in the country is either restricted or off-limits and where Chinese companies are provided direct support. Time will tell if this one-sided policy will change.

  • After two decades Beijing is now considering whether to let Goldman Sachs and J.P. Morgan Chase operate investment banks in China on their own. Other foreign banks would soon follow. But the opportunity may no longer be that attractive. The closed market allowed China banks to develop large balance sheets, develop close relationships with corporate Chinese clients, and become formidable competitors. Chinese banks had a 10 percent share of investment banking revenue in Asia, excluding Japan and Australia, in 2006; in 2016 that share has increased to 61 percent of a much larger market. Although US banks have invested heavily in the region, their share has declined from 43 percent in 2006 to just 14 percent in 2016.
  • Interestingly, China has become a more attractive place to seek legal action for companies that accumulate patents for litigation and licensing purposes. Canadian patent-licensing firm, WiLAN Inc. filed a lawsuit against Sony Corp. recently in Nanjing, alleging that the Japanese company’s smartphones violated WiLAN’s wireless-communication-technology patent. The Chinese government has been strengthening its patent laws and China’s courts have developed rapidly over the years, driven largely by Beijing’s objective to promote homegrown technologies and protect the increasing number of patents Chinese companies own. In China, lawsuits are less time consuming and costly than in the United States—the normal venue for such suits. Germany is another favorite international venue for these suits.
  • International companies will be open to the new opportunities being developed by the Chinese. General Electric Co. recently announced it wishes to develop new sales in industrial equipment in developing countries by piggybacking China’s push to open more markets to Chinese companies, particularly President Xi Jinping’s initiative, “One Belt, One Road,” focused on roads, ports, and other infrastructure in some 65 countries.

It’s tough for Chinese companies to expand abroad. For the most part, China’s large high-tech companies currently have only small overseas presences. Part of the reason for not being more successful is Chinese companies have tried to enter developing-economy markets first before expanding into developed-economy markets.

  • For high-tech markets, emerging market demand simply isn’t there yet. As an example, app developer Cheetah Mobile has over 600 million monthly active users, 79 percent of them overseas-mostly in India and Indonesia. But its overseas sales still account for a small portion of its overall sales.
  • Huawei has been an exception. Led by its founder, Ren Zhengfei, China’s Huawei Technologies has expanded rapidly in the global market for telecom gear and smart phones, and despite market barriers in key markets like the United States, Huawei’s revenue doubled to $60 billion in the last five years. Mr. Ren laid out an intense management philosophy when he founded the company in 1987 and Huawei employees’ dedication to the company today stands out among Chinese companies.

Leading China-market competitors are using different strategies. The Chinese government is a factor in many strategies.

  • General Motors started selling Chinese-built Buick’s in the United States in late spring 2016. The Buick Envision is built by Shanghai GM, a joint venture with SAIC Motor Corp, but was designed by GM in Michigan. The Envision is one of Buick’s top sellers in China. Made-in-China cars aren’t expected to become a big part of overall US car sales because manufacturers historically have found it more profitable to build cars where they are sold. But with China’s car factory capacity now at 40 million cars per year, it may be much more practical (and profitable) to simply build all cars in China.
  • Market access/cybersecurity problems produce foreign corporate allies. Microsoft and Chinese company Huawei Technologies just announced their joint support of the EastWest Institute, a nonprofit focused on encouraging open discussions of cyber security issues and new information technology products. Microsoft is facing the antitrust heat from Chinese regulators while Huawei can’t compete for US telecommunications-equipment opportunities because of US government concerns over cyberspying.
  • In September 2016, Nvidia Corp. of Santa Clara, CA, and Chinese internet firm, Baidu Inc. announced a partnership to develop a self-driving car. Baidu is already testing self-driving cars in China and recently received approval from California regulators to test its self-driving cars there.
  • In October 2016, Jack Ma of Alibaba and Steven Spielberg of Amblin Partners formed a partnership, Holding Ltd., to help Amblin distribute its movies in China and enable Alibaba to become a bigger part of Hollywood’s production and distribution ecosystem.
  • The number of acquisitions by Chinese companies is taking off. The acquiring company may pay a premium, but it can develop a strong market share quickly. But acquisitions are subject to many government agencies’ approvals.
    • The Dalian Wanda Group acquired Legendary Entertainment in January 2016 and has pending deals to take over Dick Clark Productions and Carmike Cinemas Inc. to become the largest movie exhibitor in the United States. It already is the largest exhibitor in the world. While the media industry is closed to foreign companies in China, the movie industry in the United States is not closed to Chinese companies. Senate Minority Leader-elect Charles E. Schumer (D-N.Y.) said China’s investments in U.S. industries, including film, deserve a more critical look from Washington regulators. China’s protectionist policies, he said, have put American companies at a significant disadvantage in the world’s most populous country, even as Chinese companies like Dalian Wanda Group reap the benefits of the U.S.’ open market. “I am concerned that these acquisitions reflect the strategic goals of China’s government and may not be receiving sufficient review.”
    • The Chinese conglomerate, HNA Group, that has China’s biggest privately held airline, hotels, supermarkets, etc. has agreed to spend $20 billion this year to buy 25 percent of Hilton Worldwide, the aircraft-leasing arm of CIT Group, the US computer-logistics company Ingram Micro, and the Radisson and Country Inns & Suites chains—some of these deals are pending.
    • A key feature of many Chinese investments in foreign markets is the quid-pro-quo to have an offsetting benefit in China. The HNA Group bought the Hilton stake from the US private equity firm Blackstone Group LP. Is it coincidental that Blackstone Chief Executive Stephen Schwarzman made a $100 million donation in 2013 from his personal fortune to fund a scholarship program modeled after the Rhodes Scholarship to bring 200 mainly US students to China every year?

China’s government is quick to protect Chinese corporate interests when foreign governments or regulators take positions against those interests. China recently responded to suggestions in the United States (including Trump) and European Union that they—the US and EU—will take actions to punish those that benefit from Chinese subsidies and discourage Chinese companies from dumping.

  • The number of trade remedy cases against China by G-20 members has been steadily rising since 2010. In 2016, trade with China became a hot political issue in the presidential campaign.
  • The China government continues to support state-owned companies in becoming national champions in global industrial markets, even if those companies remain inefficient and showing signs of getting worse. In September 2016, China’s two largest steelmakers, Baosteel Group and Wuhan Iron & Steel Group, or Wisco, announced their plans to merge. If the government adds a couple more mills to the merger, the new company will become the world’s largest producer, topping Luxembourg-based ArcelorMittal SA. The government expects the new firm to trim excess production capacity and compete in international markets.
  • The Chinese government links international policies and economic opportunities in its foreign relations. Australia’s Liberal government announced in October 2016 that it wouldn’t be conducting freedom-of-navigation patrols in the international waters of the South China Sea, effectively ceding control of the Sea to China. Sixty percent of Australian trade moves through the Sea. Chinese companies are investing in Australia, while China is the biggest buyer of Australian commodities.
  • Chinese takeover deals (44 each) in Germany in 2016 so far are worth more than $11.3 billion. That’s more than the previous 14 years combined. Germany’s openness to Chinese investment is changing; German government officials are trying to limit the acquisitions, reviewing proposed acquisitions more closely, and saying no to some. After Germany withdrew its approval on security grounds for a $736 million purchase of German chipmaker Aixtron SE by China’s Fujian Grand Chip Investment Fund LP. Chinese government officials immediately complained about Germany’s protectionist tendencies. German officials then complained about investment reciprocity in China, in effect saying, “We’ve always been open to foreign investment, but you haven’t been.”
  • The UK government approved a contract for Huawei to supply equipment for Britain’s telecoms infrastructure. But recently, the new Prime Minister, Theresa May, delayed approval of a nuclear power plant to be part-funded by Chinese investment. Xinhua, China’s official news agency, immediately commented that ditching the nuclear plant would create repercussions for Britain and British companies elsewhere.
  • A Global Times—a Chinese state-run publication— editorial predicted China will punish American companies if Trump follows through with his pledge to get tough with “cheating China. It said, “China will take a tit-for-tat approach . . . A batch of Boeing orders will be replaced by Airbus. US auto and iPhone sales in China will suffer a setback, and US soybean and maize imports will be halted.”
  • The EU is debating whether to grant China “market economy status,” which would potentially make it harder for the EU to protect its industries from what it deems unfair trade practices by Beijing. China’s government will likely threaten retaliation if the EU doesn’t grant market-economy status to China.

PLAUSIBLE DEVELOPMENTS WE MIGHT SEE IN THE FUTURE

The system of cooperation and collaboration between Chinese government agencies and Chinese multinationals will evolve as the number of expansion strategies get used and tested in the dynamic overseas markets, China’s economy matures, and the global order and China’s role in it changes. Global markets will operate less openly. G-20 countries will build up their trade-restriction policies. We can expect to see many of the following outcomes.

Globalization

  • Global trade could continue to grow in the next ten years, stimulated by the wide-ranging activities of Chinese multinationals.
  • By 2030 maybe 40 percent of the Fortune 500 will be based in emerging markets, compared to 26 percent in 2015.
  • There could be a massive shift in control of global markets from West to East.
  • On the other hand, globalization trends could stall if Western countries impose major trade barriers and severely restrict the activities of unfriendly-nation multinationals on security grounds.

Over the next ten years the Chinese government will continue focusing on strength and perpetuation of the Communist Party regime. Still plausible, but maybe less likely is for the government to focus largely on protecting the country’s territorial integrity and enhancing the wellbeing of the Chinese population.

The Chinese government will be trying to increase its surveillance and control of its citizens. Perhaps the Chinese government will gain access to DNA data of its citizens for its social-credit system. The Washington Post article about China’s investment to beat the US in genetic testing noted the “vast warehouses of genetic information” that will be created.

China’s priority going forward will likely be to continue protecting domestic industries and Chinese multinationals and not to overhauling the Chinese system to make it more market oriented.

The Chinese government will also continue to maintain a level of authority over every Chinese corporation—state-owned or not—and every move by a Chinese corporation in a foreign market will provide the Chinese government an additional presence overseas.

China government’s active role overseas will continue. The system will provide results.

  • China’s government will actively encourage Chinese multinationals to compete in the largest markets in the world, particularly strategic ones, and become global market leaders.
  • The government will encourage Chinese companies to try and dominate commodity supply chains to protect China’s future access to commodity resources, like the United States has protected the world’s access to Middle Eastern oil.
  • At the same time, the China government will actively combat protectionist measures imposed against Chinese corporations.
  • China will continue to use domestic-market subsidies, access to low-cost financing from state-owned banks, etc., and new strategic initiatives like President Xi’s “One Belt, One Road” to help Chinese companies become global leaders.

Chinese Multinationals Going International

  • Over the next ten years the number of investments by Chinese firms will increase steadily in all the G-20 major economies and stimulate increased global trade from which everyone will benefit.
  • Leveraging their protected market positions in China against foreign competition, Chinese multinationals will blitzkrieg the United States and European countries to develop market share rapidly.
  • Chinese commodity producers will lead the way. As the demand for commodities begin to grow again and as prices increase in the next two years, Chinese commodity producers and product manufacturers will expand rapidly into G-20 countries. They will buy existing producers and distribution companies, taking advantage of their weakened financial states because of the commodities slump.
  • Chinese companies will operate in any country as long as their staff is reasonably safe and they get paid—North Korea, Russia, South Sudan, Venezuela, the United States, Iran, and Congo—no problem. American and European firms will continue to be limited by national laws, international sanction, and business standards for activities such as environmental management.

The partnerships between the Chinese government and Chinese multinationals will rapidly gain more experience in penetrating foreign markets and will likely become more effective in entering and competing in developed-country markets. The Chinese companies with their government sponsors will eventually dominate in many of those markets.

Chinese multinationals could replace American multinationals as the face of global capitalism. Chinese multinationals in the next ten years could become the global leaders—displacing the US and European ones—in many industries. Given recent signals of change, plausible outcomes range from a dynamic global trade realm with Chinese multinationals acting as leaders to an ugly global business environment where governments act to support national champions and restrict the opportunities available to foreign competitors.

  • G-20 multinationals will partner or merge with Chinese multinationals as opportunities arise. Some interesting East-West combinations could result.
  • Chinese companies will challenge and surprise many in a number of global markets. For example, US, German, Japanese, and South Korean firms dominate the global car and truck manufacturing industry. That could quickly change with one or two acquisitions or the emergence of a new type of car manufacturing organization (like Tesla) in China.

The United States and European Governments

  • The number of proposed deals involving Chinese multinationals that must be approved will increase dramatically in both the United States and in Europe. Individually each deal appears rational and is hard to dispute under the country’s commerce laws, but collectively they suggest structural shifts might occur if they all are allowed to go through.
  • The explosion in number of proposed deals could overwhelm the G-20 government bureaucracies and market regulators. Governments may struggle to review and evaluate the deals in a consistent manner.
  • G-20 countries will dedicate more authority and resources to government offices to manage the growth of Chinese multinationals in their countries. Given the Chinese companies’ inevitable ties to Chinese government officials, security concerns and unfair government subsidies will be most often cited.
  • European Union markets will be particularly vulnerable to Chinese competitors because European competitors are already not dominant in many industries. EU authorities might encourage large foreign investment from Chinese companies or fight it, or do both. Given nationalism trends in the EU, Chinese companies may not be welcome; but given the unemployment problems, outside investment will be very welcome.

The aggressiveness of the Chinese companies and the Chinese government’s uncooperative approach in helping Chinese companies compete globally will likely spark large anti-trade sentiments in North America and the EU, create major political and security issues for G-20 governments, and force a variety of penalty and protectionist policies to be implemented.

The business climate in G-20 countries in general will become more nationalistic.

  • Business practices in the next ten years and the business leaders we follow will often be Chinese, and the business culture and competitive practices in G-20 countries will evolve. Just like there’s a Silicon Valley model based on the emergence of the online companies, there will be an East-West model that reflects the cultural, economic, and business norms of China.
  • Crony capitalism will remain strong.

Have Oil and Gas Companies Seen Their Best Days?

ORACLE’S RESPONSE:

No. The actions of large oil and gas companies will continue to shape the global economy for the foreseeable future. Despite efforts around the world to diversify away from hydrocarbons, state-owned oil and gas companies and large independent producers will grow and prosper, and be critical players in efforts to move toward a net-zero emissions regime. If you’re a pension fund, buy stocks of the major oil and gas producers, including those from China, Russia, and Saudi Arabia (after Aramco’s IPO).

RECENT SIGNALS OF CHANGE

Oil and natural gas will continue to be key energy sources for the foreseeable future. In May 2016, Shell’s scenario group published a plausible scenario of the world meeting international climate goals and achieving a net-zero emissions state. Shell described a number of key developments over the next 50 years that could lead to net-zero emissions, including significant investments in solar, wind, and nuclear sources, carbon capture and storage technologies, many country de-carbonization strategies, and a global carbon pricing system—whether through carbon trading, carbon taxes, or mandated carbon-emission standards. However, for the future global population of 10 billion people to have a decent quality of life, the global energy needs would have to double by the end of the century. Oil and natural gas would have to remain important energy sources for the next forty years, until solar, wind, and nuclear sources can assume the burden of meeting the global economy’s needs. When the net-zero emissions state reached, let’s say by the end of the century, the share of oil and gas in the overall energy mix will have fallen from 57 percent to around 15 percent, while the non-fossil-fuel share will be just under 80 percent.

According to the International Energy Agency (IEA), to have a chance at keeping global warming to less than 2ºC above pre-industrial levels, oil demand would have to peak in 2020 at 93 million barrels per day (b/d), just above current levels, and oil use in passenger transport would have to decrease dramatically. Shell’s chief financial officer said he expected oil demand could peak in 5 to 15 years. State-owned China National Petroleum Corp. recently forecast that China’s oil consumption would begin to decline by 2030. But the uncertainty is high on when demand might peak. It could be much later. In its most likely scenario, where more stringent government policies to limit global warming aren’t effectively implemented, the IEA says oil demand will continue to increase beyond 2030.

There is plenty of oil and gas. In 1995, proven oil reserves (i.e., oil discovered and economic to produce) in the world were 120 trillion cubic meters. In 2015, proven oil reserves were 187 trn cubic meters. Global oil supply has steadily risen—almost 20 percent—since the year 2000 to over 95 million b/d in 2016, with non-OPEC producers leading the charge, competing strongly with OPEC producers for market share.

The last three years have been tough on OPEC countries that rely on oil and gas revenues for their government budgets. The International Monetary Fund in October 2016 estimated the oil price needed to balance Middle Eastern government budgets ranged from a low of $47.76/b for Kuwait to a high of $216.46 for Libya. The prices are a key indicator of the governments’ dependency on oil revenues and the budget difficulties they face when prices fall. Surprisingly, Iran at $55.29/b is perhaps less motivated than Saudi Arabia at $79.71/b for a large price increase. In 2015, Saudi Arabia posted a budget deficit of $98 billion. In October 2016, the Kingdom issued $17.5 billion of bonds, its largest amount ever. Governments facing years of economic difficulties are struggling with how much effort should they apply to save existing ventures (and the jobs), mitigate the impacts of the closed or canceled ventures, and change the incentives to attract new multinational and local investments.

Government incentives and hurdles toward increased oil and gas development activities vary significantly around the world.

  • Government stakeholders in the United States are questioning the companies’ financial and accounting practices, business models, and oil-spill and climate-change prevention efforts. The US Securities and Exchange Commission is looking into whether ExxonMobil values its unproduced-reserves appropriately after the oil price declines and potential regulatory action on climate change.
  • The US Energy Department recently curtailed licensing and development plans for Alaska’s Arctic region. The US Energy Information Administration in its 2016-published energy outlook shows oil production from Alaska decreasing to less than half its current level after 2030.
  • The governor of the Bank of England suggested in September 2015 the companies should disclose how they would manage climate-change risks.
  • Saudi Aramco, the largest oil producer in the world, is producing oil at record levels.
  • Russia is developing oil reserves as fast as it can under western-government sanctions. Iran is aggressively trying to expand.
  • In November 2016, at the end of China’s President Xi Jinping’s visit to Latin America, China’s state media released its strategic blueprint for China-Latin America relations. Latin America is already China’s second-largest investment destination after Asia. Much of the investment is in energy projects. An example, state-run State Grid Corp. of China, the world’s largest electricity provider by revenue with $312 billion, is pursuing a takeover of CPFL Energia SA, the Brazilian electric company, for $13 billion.

The environmental risks of commodity operations are not going away, and new ones continue to come to light.

  • Recent figures indicate that around a third of the annual methane emissions in the United States can be traced to the natural gas industry. While methane doesn’t remain in the atmosphere as long as carbon dioxide (12 years compared to 500 years), it is about 25 times more potent as a cause of global warming. The Environmental Defense Fund, an American NGO that often works with industry, estimates 2-2.5% of the gas flowing through the supply chain leaks out.
  • Petrobras is implementing a divestment plan to sell $15 billion in assets to help pay off the company’s very high debt load of $126 billion. In the spring and summer of 2016, Petrobras sold stakes in Argentina and Chile subsidiaries, a large offshore oil field to Norway’s Statoil, and petrochemical units to Mexico’s Alpek.

Fueled by commodity prices, particularly oil exports, sovereign-wealth funds—financial vehicles owned by governments—doubled in size from 2007 to 2015 to $7.2 trillion. Since 2007, the number of sovereign funds increased by 44 percent to 79, many in Africa and Asia. Nearly 60 percent of sovereign wealth fund assets are related to energy exports.

Oil prices peaked in August 2013 over $110 a barrel. They bottomed out below $30 a barrel in January 2016. Since May 2016, prices have been relatively level, bouncing around between $40 and $50 a barrel. Not surprisingly, the number of rigs drilling for oil in the United States is up by 50 percent since May.

The world’s seas are becoming more efficient in moving hydrocarbons.

  • The major Panama Canal expansion, opened in June 2016, more than doubles the canal’s capacity and includes a third lane to accommodate ships large enough to carry 14,000 TEU. The Canal hopes to recover the 10 percent to 15 percent of annual revenue lost to the Suez Canal from 2013-2015. A key market of the future for the canal could be LNG carrier traffic.
  • Russia’s US$27 billion Yamal LNG project within the Arctic Circle will begin operation in 2017. This remarkable project will use West-designed and Far East-built ice-class LNG tankers to enable year-round export shipments from northwest Siberia to European and Asian markets. The LNG tankers are intended for navigation both westbound and eastbound along the Northern Sea Route (NSR), the Arctic seaway along Russia’s coast linking the Atlantic and Pacific. The Russian company, Novatek, has a 50.1% interest in Yamal LNG; China National Petroleum Corporation and France’s Total Group both have a 20% holding; and the Chinese state-owned Silk Road Fund has a 9.1% interest.
  • Ship transport of Russian Barents Sea oil along the Norwegian Arctic coast in the first part of 2016 reached new highs because of cumulative oil-development and port infrastructure investments over the last decade in the Russian sector above the Arctic Circle.

Producers are following the market toward gas. From 2000 to 2015, the percentage of total energy production of natural gas in Shell, Eni, Total, ExxonMobil, ConocoPhillips, and Chevron went up significantly. Only in BP did it go down slightly. In Shell, Eni, and Total the share of natural gas is almost 50 percent.

  • US exports of natural gas have just exceeded US gas imports for the first time in 60 years with most of the export increases going to Mexico and Canada.
  • China Petroleum & Chemical, or Sinopec, is attempting to double domestic natural gas production in the next five years in order to reduce coal usage in the country and reduce China’s need for imported liquefied natural gas—that many investors around the world were counting on. Sinopec is counting on rapidly expanding natural gas production from shale reserves.
  • US coal exports to China have recently shrunk to almost nothing. They were almost 6 million short tons in 2011, 10 million tons in 2013, and about 300 thousand to date in 2016. Out of seven West Coast export terminals proposed in the past five years, none has opened.

During the last three years of low oil and gas prices, independent oil and gas companies have been reluctant to start new ventures, even to secure low-cost reserves.

  • In 2016 ExxonMobil lost its triple-A bond rating that it has had since 1930. In 2015 it failed to find enough new oil and gas to replace what it produced for the first time in 20 years. And in October 2016 it announced some 4.6 billion barrels of its reserves, nearly 20 percent of its oil and gas reserves, mainly in Canada, may be too expensive to produce.
  • Exxon Mobil is not continuing its involvement in a venture to build a new LNG export terminal in Alaska. The project is not forecast to be very competitive in the world. Just a year ago, the Alaska state government paid $65 million for TransCanada Corp.’s 25% share in the overall project that was expected to cost between $45 billion and $65 billion. BP and ConocoPhillips, other shareholders in the venture, are also expressing concerns about the project.
  • In November 2016 Blackstone Group cancelled an $800 million venture it set up two years before to invest in distressed oil and gas assets in Southeast Asia. Potential sellers such as international oil companies hung onto assets rather than selling on the cheap.

But Russian and Chinese companies have been getting bigger and better while the prices have been low.

  • Russia’s oil and gas companies, Rosneft, Gazprom, Gazprom Neft, Lukoil, and Surgutneftegas—all operating under guidance by Putin’s government—continue to grow and become more capable. Their development and production activities are Russian focused, but the companies have extensive international relationships with technology partners, financiers, service companies, and customers.
  • Russia’s oil and gas ties with both China and India have increased significantly in the last three years. In October 2016, Russia’s state-controlled Rosneft announced the purchase Indian refiner and gas-station owner, Essar Oil, Ltd. for $7.5 billion.
  • Russia also has deals to supply oil and gas to China and for Chinese companies to buy stakes in Russian energy projects abandoned by western firms due to the sanctions. China’s support to Russian energy and infrastructure projects is critical but fragile. For the Yamal LNG project Chinese lenders recently signed a $12 billion loan agreement after two years of talks. But many other agreements signed in the last two years haven’t yet led to firm contracts, and the perception is China has been able to take advantage of Russia’s weak negotiating position. Also, China’s goal of building land and sea routes that will enable Europe to connect more easily with China could reduce Russia’s role as a trading partner of Europe.

As the technological and operational leader in the Arctic region, the partially state-owned Norwegian oil company, Statoil, is continuing to pursue opportunities throughout the region, including in Russia despite the strained political ties between Russia and Norway and the EU. Statoil’s strategic cooperation with Rosneft involves joint exploration in the Russian Barents Sea and Sea of Okhotsk (in the far east of Russia), as well as pursuing interests in a license in the Norwegian Barents Sea. Statoil began drilling in June 2016 in the Sea of Okhotsk. “We are pleased to have entered a key stage in our long term cooperation with our partner, Statoil . . .,” said Igor Sechin, chief executive of Rosneft and an ally of Russian president Vladimir Putin in July 2016. On the other hand, Norway and Statoil would like to continue selling natural gas extracted from Norwegian waters to Europe. But replacing the aging gas fields in Norway has been difficult, and Statoil and other energy companies haven’t yet made the next big discovery in Norwegian waters that would justify building the large necessary gas export infrastructure.

Some integrated oil and gas companies are also investing in alternatives to oil and gas. Solar and wind energy sources are growing rapidly around the world and their prices now are competitive with fossil-based sources. In a figure by IHS Markit in The Economist November 26, 2016 issue, the cost of power generation in the United States from solar is competitive with oil (although oil isn’t used anymore in power generation). The cost of natural gas is on par with coal. Worldwide, renewable energy passed coal as the world’s biggest source of power-generating capacity. Statoil, Norway’s state-owned energy company, is investing in carbon capture and storage technologies and offshore wind farms.

ORACLE MUSINGS: PLAUSIBLE DEVELOPMENTS WE MIGHT SEE IN THE FUTURE

Large oil and gas companies around the world will do well for the next 20 years largely because demand for oil and gas will continue to increase because the world economy will depend on them. The major uncertainty for all the companies is the policy restrictions on carbon sources that will be implemented. Unless extensive bans on using fossil fuels are implemented, the companies will remain major players in the global economy.

After the next 20 years, the range of uncertainty on the energy sources used in the world remains extremely wide. The use of nuclear, the government restrictions on hydrocarbons, the technology innovations in renewables and CCS, etc. all remain highly uncertain.

While the demand for oil will increase for the next 20 years, the demand for natural gas is going to explode.

  • The two big hurdles for companies developing the new oil and gas reserves will be the large capital required to explore, develop, and produce oil and gas in hard to reach places, and the liability risk to companies from oil spills and contributing to global warming.
  • For oil and gas companies, NGOs, and other energy stakeholders, a key to their success will be their abilities to manage in a complex environment, subject to disruptive changes. Will organizations develop the necessary capabilities, processes, and strategies for an environment of continuous change?

Prices will grow slowly over the next five years.

  • The large, integrated oil and gas producers will specialize in developing low-cost oil and gas reserves anywhere they can be found.
  • They will flock back to Russia when sanctions are lifted.
  • If sanctions aren’t lifted, Russia will get the expertise and financial support it needs from China, India, Brazil, and special deals made with Statoil and others.
  • Africa and North and South America will be major areas of activity.
  • Technology innovation (e.g., in fracking) will continue to lower the costs of extracting oil and gas from source rock.

Greenhouse-gas (CO2 and methane) emissions will likely increase each year and accumulate in the atmosphere and ocean.

  • The battles over the development and use of fossil fuels could become even more intense.
  • NGO’s will continue to object to natural gas development and production activities and the companies that conduct them. Becoming a good world citizen will be hard for gas companies to achieve.
  • Large private oil and gas companies could experience more protests wherever they operate.
  • Russian and Chinese companies will be singled out more and more by NGOs.
  • Many western governments will find themselves simultaneously penalizing Russian and OPEC producers or taxing imports from them while welcoming them as important gas and oil suppliers to their countries.

Most of the large independent oil producers will become majority gas producers. They will follow the various government incentives to increase natural gas production to displace coal and enable a net-zero emissions system. However, the companies will continue to be seen as dirty and dangerous to the environment because of their extensive oil operations and the safety issues associated with the natural gas.

Large western companies will compete well for large projects because of their project experience, use of new technology, and ability to raise large amounts of capital.

  • Chinese companies will become fierce competitors of the large western companies around the world.
  • Russian companies may expand operations outside of Russia.
  • Technology innovation will be extensive in the pursuit of low-cost oil. Many technologies will be valuable in other realms—security, environmental monitoring, automation for underwater and harsh environments, etc.

OPEC Producers are not going to slow down. OPEC producers will not reduce oil production to any degree in order to boost market prices. They might pledge to limit production, but they will continue seeking ways to expand production to meet future demand around the world. Aramco will still produce at high levels.

Sovereign-wealth funds will be more important financiers of oil and gas developments in the future—often the only sources of capital for very large projects.

Oil and gas companies will perform very well financially, and will remain amongst the largest corporations in the world in terms of revenues. But the costs to them of catastrophic environmental events will rise. It’s uncertain how a foreign company, even if it were Chinese, would fare if they were responsible for a major event in the Arctic region that couldn’t be cleaned up.

Chinese Multinationals: New World Leaders

FORESIGHT

For the last 30 years, the world’s economy has been stimulated by China’s domestic economic growth. In the next 10 years, that stimulus will be Chinese multinationals’ extensive activities to build foreign empires. Chinese corporations protected from international competition in China’s domestic markets are now rapidly penetrating foreign markets. Since the Chinese government maintains a level of authority over every Chinese corporation—state-owned or not, every move by a Chinese corporation in a foreign market provides the Chinese government an additional presence overseas. One plausible outcome over the next ten years is that the number of investments by Chinese firms will increase steadily in all the G-20 major economies and stimulate increased global trade from which everyone will benefit. On the other hand, the aggressiveness of the Chinese companies could spark large anti-trade sentiments, create major political and security issues for G-20 governments, and force a variety of protectionist policies to be implemented. In any event, business practices in the next ten years and the business leaders we follow could be defined by Chinese multinationals and their successes.

RECENT SIGNALS OF CHANGE

The key to anticipating possible developments in the future is to focus on recent signals of change—big, disruptive, out of the ordinary changes—in the world.

A new phenomenon in the world is the rapid growth of emerging-market multinationals, particularly from China. Cross-border production, investment, and innovation by multinational corporations have been key drivers in the world’s economic growth since 1990. According to the World Investment Report 2015 by UNCTAD, multinational affiliate sales as a share of world GDP more than doubled from 1990, increasing from 25 percent in 1990 to 50 percent in 2014. At the same time, emerging-market economies are now counterparts on more than half of global trade flows, and the share of Fortune 500 companies based in emerging markets has increased from 5 percent in 1980-2000 to 26 percent in 2015. In some industries, Chinese multinationals are growing while the traditional leaders from the United States and Europe languish. For example, in the telecom-equipment industry, Huawei had 2015 revenue of $58.8 billion, while Cisco ($48.7 billion in 2016) and Ericsson ($27.9 b) created a strategic tie-up, while Nokia ($13.8 b) and Alcatel-Lucent ($15.7 b) merged.

China’s economic boom has stimulated the world’s economy for the last 30 years, but that stimulus is changing quickly.

  • US exports to China quickly rose from $19.2 billion in 2001 to $69.7 billion 2008. With services added, the United States exported $169.2 billion worth of goods and services to China in 2014.
  • Direct foreign investment into China reached nearly $300 billion in direct investment in 2013, but has since leveled off. But Chinese manufacturers are buying more raw materials and components from domestic suppliers, and this maturation is spreading to higher-tech products as well. The portion of foreign inputs in China’s exports has fallen steadily from a high of over 40 percent in 1996 to 20 percent in 2015.
  • At the same time, investment outflows from China have been rapidly expanding; they were approximately $75 billion in 2013, nearly $200 billion in 2015, and probably will be much larger in 2016.
  • Interestingly, China’s dependence on the US market is shrinking as it builds its presence in more foreign markets. Chinese exports to the United States as percentage of China’s economy fell from above 7 percent in 2006 to 3.72 percent in 2015.
  • Still China’s gross exports to the United States are up. Since the rate of US imports as a percent of GDP hasn’t changed much over the years, the exports from other countries (like Japan) to the United States are down.

China is promising to reduce the restrictions on foreign investment and the activities of foreign companies in China. China has a long list of industries in which foreign investment in the country is either restricted or off-limits and where Chinese companies are provided direct support. Time will tell.

  • After two decades Beijing is now considering whether to let Goldman Sachs and J.P. Morgan Chase operate investment banks in China on their own. Other foreign banks would soon follow. But the opportunity may no longer be that attractive. The closed market allowed China banks to develop large balance sheets, develop close relationships with corporate Chinese clients, and become formidable competitors. Chinese banks had a 10 percent share of investment banking revenue in Asia, excluding Japan and Australia, in 2006; in 2016 that share has increased to 61 percent of a much larger market. Although US banks have invested heavily in the region, their share has declined from 43 percent in 2006 to just 14 percent in 2016.
  • The China government continues to support state-owned companies in becoming national champions in global industrial markets, even if those companies remain inefficient and showing signs of getting worse. In September 2016, China’s two largest steelmakers, Baosteel Group and Wuhan Iron & Steel Group, or Wisco, announced their plans to merge. If the government adds a couple more mills to the merger, the new company will become the world’s largest producer, topping Luxembourg-based ArcelorMittal SA. The government expects the new firm to trim excess production capacity and compete in international markets.

Private (non-state) Chinese multinationals grow up in a crony-capitalistic system that shapes their organization, business practices, and foreign growth objectives. They ultimately owe an allegiance to China.

  • In a recently published book, China’s Crony Capitalism: The Dynamics of Regime Decay, by Minxin Pei, a professor of government at Claremont McKenna College in California, describes how the state decentralized the rights of control over state property to local officials, but left the rights of ownership murky. According to the author, the Chinese state holds the residual property rights of maybe half of the new worth of the China economy. This has led to a system of corruption at every level of the government/economy, an absence of a system of checks and balances, and the motivation of political officials to keep the system in place. In a crony capitalist system it’s awfully difficult for any private Chinese corporation to grow without local politician support; successful corporate leaders learn how to thrive in this environment. All Chinese corporations must grow up playing with a different set of rules than what western corporations grow up playing with.
  • Starting in September 2016, The Wall Street Journal has been reporting on China Zhongwang Holdings Ltd.’s stockpile of one million metric tons of aluminum, worth about $2 billion and representing about 6 percent of the world’s total inventory, that is stored in a remote desert location of Mexico. Zhongwang Holdings could be trying to evade US tariffs imposed by the US Department of Commerce on Chinese aluminum products by routing the products through other countries like Mexico to disguise its origins or do a little product modifying to change the country-origin status.
  • The Wall Street Journal reported in October 2016 that the Dalian Wanda Group and its chairman Wang Jianlin, which acquired Legendary Entertainment in January 2016 and has pending deals to take over Dick Clark Productions and Carmike Cinemas Inc. to become the largest movie exhibitor in the United States, “have close ties to China’s government and Communist Party.”

That’s not to say that China’s domestic market isn’t fiercely competitive. It is very competitive, and the strong competitors that emerge from it could become formidable competitors globally.

  • Didi Chuxing beat Uber Technologies in China to add to Didi’s dominance in China’s ride-hailing market. This is the first country market in which Uber was beat.
  • China’s domestic demand for high-tech products has grown so rapidly that in some markets new products are being developed and introduced first in the world in China. For example, China is leading the adoption of virtual reality. Chinese companies will be able to leverage initial customer sales and experiences to become the market leaders in the G-20 countries they first enter.

Chinese government industrial policy and oversight are becoming more sophisticated. In 2016, China has been making pledges to create a level playing field for foreign and domestic investors. It’s too early to see if the changes will have any tangible effect. Interestingly, China has become a more attractive place to seek legal action for companies that accumulate patents for litigation and licensing purposes. Canadian patent-licensing firm, WiLAN Inc. filed a lawsuit against Sony Corp. recently in Nanjing, alleging that the Japanese company’s smartphones violated WiLAN’s wireless-communication-technology patent. The Chinese government has been strengthening its patent laws and China’s courts have developed rapidly over the years, driven largely by Beijing’s objective to promote homegrown technologies and protect the increasing number of patents Chinese companies own. In China, lawsuits are less time consuming and costly than in the United States—the normal venue for such suits. Germany is another favorite international venue for these suits.

The number of acquisitions by Chinese companies is taking off. The simplest means of developing a competitive position in foreign markets are through acquisition and joint venture/merger with an industry leader. The acquiring company may pay premium, but it can develop a strong market share quickly.

  • While the media industry is closed to foreign companies in China, the movie industry in the United States is not closed to Chinese companies. The Dalian Wanda Group acquired Legendary Entertainment in January 2016 and has pending deals to take over Dick Clark Productions and Carmike Cinemas Inc. to become the largest movie exhibitor in the United States. It already is the largest exhibitor in the world. In October 2016, Jack Ma of Alibaba and Steven Spielberg of Amblin Partners formed a partnership, Holding Ltd., to help Amblin distribute its movies in China and enable Alibaba to become a bigger part of Hollywood’s production and distribution ecosystem.
  • The Chinese conglomerate, HNA Group, that has China’s biggest privately held airline, hotels, supermarkets, etc. has agreed to spend $20 billion this year to buy 25 percent of Hilton Worldwide, the aircraft-leasing arm of CIT Group, the US computer-logistics company Ingram Micro, and the Radisson and Country Inns & Suites chains—some of these deals are pending.
  • A key feature of many Chinese investments in foreign markets is the quid-pro-quo to have an offsetting benefit in China. The HNA Group bought the Hilton stake from the US private equity firm Blackstone Group LP. Is it coincidental that Blackstone Chief Executive Stephen Schwarzman made a $100 million donation in 2013 from his personal fortune to fund a scholarship program modeled after the Rhodes Scholarship to bring 200 mainly US students to China every year?
  • International companies will be open to the new opportunities being developed by the Chinese. General Electric Co. recently announced it wishes to develop new sales in industrial equipment in developing countries by piggybacking China’s push to open more markets to Chinese companies, particularly President Xi Jinping’s initiative, “One Belt, One Road,” focused on roads, ports, and other infrastructure in some 65 countries.

In 2015 Western sentiment of industry leaders and working-class communities is rapidly growing that China’s markets are closed, Western markets are open, and Chinese companies are dumping excess capacity in the West with rock-bottom prices. These actions are then leading to suppressed wages, lost jobs, and company failures in the Western countries. The number of trade remedy cases against China by G-20 members has been steadily rising since 2010. In 2016, trade with China became a hot political issue in the presidential campaign.

Chinese government officials will support Chinese firms in foreign markets, and will act quickly to help Chinese companies facing foreign-government barriers.

  • The UK government approved a contract for Huawei to supply equipment for Britain’s telecoms infrastructure. But recently, the new prime minister, Theresa May, delayed approval of a nuclear power plant to be part-funded by Chinese investment. Xinhua, China’s official news agency, immediately commented that ditching the nuclear plant would create repercussions for Britain and British companies elsewhere.
  • Chinese takeover deals (44 each) in Germany in 2016 so far are worth more than $11.3 billion. That’s more than the previous 14 years combined. Germany’s openness to Chinese investment is changing; German government officials are trying to limit the acquisitions, reviewing proposed acquisitions more closely, and saying no to some. After Germany withdrew its approval on security grounds for a $736 million purchase of German chipmaker Aixtron SE by China’s Fujian Grand Chip Investment Fund LP. Chinese government officials immediately complained about Germany’s protectionist tendencies. German officials then complained about investment reciprocity in China, in effect saying, “We’ve always been open to foreign investment, but you haven’t been.”

Chinese and Indian immigrants are now outpacing those from Mexico in most regions of the United States. In 2014—the most recent year for which data is available—about 136,000 people came to the United States from India, about 128,000 from China, and about 123,000 from Mexico. In 2005 Mexico sent more than 10 times as many people to the United States as China, and more than six times as many as India. Workers are coming to the United States from China because Chinese corporations are expanding in the United States and because employment opportunities in China are changing. Chinese purchases of industrial robots are increasing rapidly as manufacturing labor has become more scarce and expensive. In 2010 Chinese purchases of industrial robots numbered about 15,000 units; in 2015 they were about 65,000 units; and in 2018 they are projected to be about 150,000 units.

PLAUSIBLE DEVELOPMENTS WE MIGHT SEE IN THE FUTURE

Chinese multinationals are poised to rapidly expand in all the G-20 countries. In the next ten years Chinese corporations could become the global leaders—displacing the US and European one—in many industries. Chinese multinationals could replace American multinationals as the face of global capitalism. Given recent signals of change, plausible outcomes could range from a dynamic global trade realm with Chinese multinationals acting as leaders to an ugly global business environment where governments act to support national champions and restrict the opportunities available to foreign competitors.

Globalization

  • By 2030 maybe 40 percent of the Fortune 500 will be based in emerging markets, compared to 26 percent in 2015.
  • There could be a massive shift in control of global markets from West to East.
  • Global trade could continue to grow in the next ten years, stimulated by the wide-ranging activities of Chinese multinationals.
  • On the other hand, globalization trends could stall if Western countries impose major trade barriers and severely restrict the activities of unfriendly-nation multinationals on security grounds. This is very possible.

Chinese Multinationals Going International

  • Chinese commodity producers will lead the way. As the demand for commodities begin to grow again and as prices increase in the next two years, Chinese commodity producers and product manufacturers will expand rapidly into G-20 countries. They will buy existing producers and distribution companies, taking advantage of their weakened financial states because of the commodities slump.
  • Leveraging their protected market positions in China against foreign competition, Chinese multinationals will blitzkrieg the United States and European countries to develop market share rapidly.
  • Chinese companies will operate in any country as long as their staff is reasonably safe and they get paid—North Korea, Russia, South Sudan, Venezuela, the United States, Iran, and Congo—no problem. American and European firms will continue to be limited by national laws, international sanction, and business standards for activities such as environmental management.

East West Competition

  • G-20 multinationals will partner or merge with Chinese multinationals as opportunities arise. Some interesting East-West combinations could result.
  • Chinese companies will challenge and surprise many in a number of global markets. For example, US, German, Japanese, and South Korean firms dominate the global car and truck manufacturing industry. That could quickly change with one or two acquisitions or the emergence of a new type of car manufacturing organization (like Tesla) in China.

Business Climate in G-20 Countries

  • The expat Chinese business community will expand dramatically in G-20 countries.
  • The business culture and competitive practices in G-20 countries will evolve. Just like there’s an evolving Silicon Valley model based on the emergence of the online companies, there will be an East-West model that involves cultural and economic connections to China.

The United States and European Governments

  • The number of proposed deals involving Chinese multinationals that must be approved will increase dramatically in both the United States and in Europe. Individually each deal appears rational and is hard to dispute under the country’s commerce laws, but collectively they suggest structural shifts might occur if they all are allowed to go through.
  • The explosion in number of proposed deals could overwhelm the G-20 government bureaucracies and market regulators. Governments may struggle to review and evaluate the deals in a consistent manner.
  • G-20 countries will dedicate more authority and resources to government offices to manage the growth of Chinese multinationals in their countries. Given the Chinese companies’ inevitable ties to Chinese government officials, security concerns and unfair government subsidies will be most often cited.
  • European Union markets will be particularly vulnerable to Chinese competitors because European competitors are already not dominant in many industries. EU authorities might encourage large foreign investment from Chinese companies or fight it, or do both. Given nationalism trends in the EU, Chinese companies may not be welcome; but given the unemployment problems, outside investment will be very welcome.

China’s Active Government

  • China’s government will actively encourage Chinese multinationals to compete in the largest markets in the world and become global market leaders.
  • At the same time, the China government will actively combat protectionist measures imposed against Chinese corporations.
  • China will continue to use domestic-market subsidies, access to low-cost financing from state-owned banks, etc., and new strategic initiatives like President Xi’s “One Belt, One Road” to help Chinese companies become global leaders.
  • The government will encourage Chinese companies to try and dominate commodity supply chains to protect China’s future access to commodity resources, like the United States has protected the world’s access to Middle Eastern oil.

Question for the CEO: How Could You Pursue Short-Term Gains in a Cyclical Industry?

Doug Oberhelman, Chairman and CEO of Caterpillar, last week announced he would step down as CEO because of questions about the company’s future after four years of revenue decline. A Wall Street Journal article on October 17, 2016 noted that at a mining trade show in September Oberhelman said, “Everybody was surprised by the size of the downturn [in the commodities markets] and the length of it. I firmly believe we couldn’t have forecast that at the time.” No, Caterpillar shouldn’t have been surprised. How could any company dependent on a cyclical commodity industry be surprised by plausible cyclical developments?

When Caterpillar made a slew of major investments from 2010 to 2013 at the height of the commodities boom, I have to surmise they went after potential short-term gains and ignored the risks of a commodities slump. It’s also foolhardy for a company to make strategic investments in a very dynamic, constantly changing marketplace that don’t enable the company to adjust when very plausible changes begin to occur?

There are two strategy imperatives for companies competing in dynamic, complex markets: First, in evaluating the major strategic opportunities to pursue, explicitly evaluate the range of possible long-term developments the company could face. Second, in crafting a strategy, incorporate the ability to adjust the strategy as events and developments unfold—after you have a lot more information about important external decision factors. In other words: 1) you can’t predict the future, so don’t commit to a strategy that only succeeds under one set of assumptions, and 2) commit to a strategy that enables the company to act quickly in response to big changes when they begin to occur.

Another Wall Street Journal article last week on October 18, 2016 was about Ford Motor Co.’s new dual-track strategy to be an auto manufacturer and a transportation-services provider. On the surface, this dual-track strategy appears to satisfy the second imperative above. It would give Ford the ability to move or accelerate in different directions, depending on how events in the future unfold. What will be the markets for electric and self-driving vehicles and what business models will serve the new transportation landscape best? In effect Ford is saying, we don’t know what strategy will be the winning strategy, so we’re going to invest in a number of initiatives and develop the capability to move quickly to realize whatever big opportunities emerge. Continuing the One Ford strategy implemented by the CEO Mark Field’s predecessor would be too risky given the range of marketplace developments that could occur.

Implementing Ford’s dual-track adaptive strategy won’t be easy. It depends on building a decision making process that will enable the company to adjust its strategy—quickly if necessary—in response to unfolding events. The strategy needs to be dynamic, and this will require a shared—not just top down—decision making process, a new information gathering and assessment system, and a fast organization-pivoting capability.

The biggest obstacle in many companies to developing an effective strategy for an uncertain environment is senior executives’ unwillingness to use planning-under-uncertainty techniques like scenario planning for major decisions. That unwillingness mostly stems from a lack of knowledge and experience with the techniques, and the fact few multinationals are known to rely on them in making major decisions. That’s a shame because decision-focused, scenario-planning methods are mature, practical, and effective in creating strategy that everyone can get behind. They require some effort to learn, but that’s a small price if the result is the ability to make good strategic decisions in the face of uncertainty.

If the senior executives of an organization don’t use scenario planning or something like it, then the board of directors should insist on independently applying a stress test—like the too-big-to-fail financial institutions must undergo each year—to see how well the strategy and proposed investments of the organization would do in the face of major change.

A Bright Future for Global Shipping (and China)

A Bright Future for Global Shipping (and China)

FORESIGHT

Even though the global sea shipping industry is currently experiencing a severe downturn, and the short-term outlook is highly uncertain since we don’t know what’s going to happen with China’s economy in the next two years, the industry has been rapidly modernizing since the beginning of the 21st Century and this will enable shipping by sea to remain cheap and accommodate future increases in global trade. Since ports and canals will process even larger volumes of goods and commodities in the future, national economies will be more at risk to port and canal disruptions, stoppages, or terrorist attacks. Chinese companies already dominate the ship building industry; in the future they could become leaders of everything else: containers and bulk shipping and port operations.

RECENT SIGNALS OF CHANGE

  • The shipping industry is in a major, major slump because of the slowdown in the global economy.
    • In 2015, Chinese imports from the European Union dropped almost 14 percent. Chinese exports to the EU were down 3 percent. In the first quarter of 2016, Chinese imports from the EU were down 7 percent from a year earlier; Chinese exports for the same period were down 7 percent.
  • Orders for new ships have fallen dramatically.
    • According to UK marine data provider, Vessels Value, from 2011 to 2015 an average of 1,450 ships annually were ordered. In the first seven months of 2016, owners ordered 292 vessels.
  • The container business is suffering from having too much capacity in the economic slowdown, and experiencing less demand for containers because of new shipping and distribution technologies and practices.
    • Two thirds of global shipping trade is carried in containers, a technology invented in the 1950s. But digital technology is enabling manufacturers and shipping companies to become much more efficient in the movement of goods throughout the supply chain, and in 2015 global GDP grew faster than global container trade for the first time, except in the 2008 financial crisis. The industry leader in shipping, Maersk Line, just recently in 2015 installed sensors on its containers to track the location and contents of all its containers.
    • Large retailers in developed economies are pushing to reduce the number of goods in the supply chain as more consumers shop online. Retailers are reducing the merchandise in stores and, instead, are storing more goods in warehouses where they can fulfill online orders or quickly restock stores.
    • The latest generation of container ships, the Triple E introduced in 2013, can carry 18,000 TEU (twenty Foot Equivalent Unit), more than four times the maximum capacity of the 4,000 TEU Panamax-standard ships (the old size limit of the Panama Canal) introduced around 1985. When oil prices were high before 2015, shipping companies built bigger and bigger ships. Maersk built 20 Triple-E class vessels before oil prices dropped. The size of the Triple-E vessels exceeds the new Panama Canal lock dimensions. The new Panamax standard vessel, introduced in 2014, is 12,500 TEU and designed to fit exactly the Panama Canal’s new locks.
    • Efforts have just started to develop unmanned cargo ships. British engine maker Rolls-Royce Holdings is leading the Advanced Autonomous Waterborne Applications initiative. But the earliest estimates are to have remotely controlled unmanned vessels by 2030, and autonomous ones by 2035.
  • Since 2000, ports and canal authorities have invested billions of dollars to upgrade equipment, expand capacity, and deepen harbors to handle the growing flow of manufactured goods and bulk commodities around the world and bigger ships.
    • The major Panama Canal expansion opened in June 2016. The nine-year, $5.4 billion expansion more than doubles the canal’s capacity and includes a third lane to accommodate ships large enough to carry 14,000 TEU. The expansion is expected to shift about 10 percent of the Asia to US container traffic from West Coast ports to East Coast ports by 2020. The Canal also hopes to recover the 10 percent to 15 percent of annual revenue lost to the Suez Canal from 2013-2015. A key market of the future for the canal could be LNG carrier traffic.
    • The American Association of Port Authorities estimates $150 billion will be invested by 2020 to enlarge US ports to handle the bigger ships.
  • Unfortunately, a lot of these increased capabilities are coming on board just as the demand for cargo trade has dropped.
    • In July 2016, imports fell at the two busiest port complexes in the United States, in Southern California and New York. The month of July is when shipping volumes typically start their holiday-season ramp up.
    • Also in July, the city council of Oakland, California approved blocking coal exports through a new terminal. In the past five years, seven coal export terminals have been proposed on the West Coast of North America. None has opened.
  • China companies are investing in foreign ports, and maybe a new canal, to enable more trade with China and control a key piece of the global trade value chain.
    • Piraeus, Greece is one of Europe’s biggest ports. In 2009, China’s Cosco leased part of Piraeus’ container terminal. Since a key part of Greece’s financial bailout is for the Greek government to sell state assets to pay down debt and bring in foreign investment, Greece completed the sale in the summer of 2016 of a majority stake in the entire port to Cosco.
    • In 2014, the China Merchant’s Group and Australian fund-manager Hastings Funds Management purchased Australia’s Port of Newcastle, the world’s largest coal-export terminal for Australian $1.75 billion.
    • In 2014 the Nicaraguan government and Hong Kong-based HKND Group announced plans to build a second canal linking the Atlantic and the Pacific Ocean 278km (173 miles) from Punta Gorda on the Caribbean through Lake Nicaragua to the mouth of the river Brito on the Pacific. The estimated cost is $40bn (£23bn). Construction has not started yet, but supposedly soon.
    • Multinationals are positioning themselves for future global growth, much of which will be spurred by China. A Wall Street Journal article on 10/15/16 noted that General Electric and other multinationals are following China’s state-owned companies in the developing world who are building roads, ports, and other infrastructure as part of President’s Xi Jinping’s initiative, known as “One Belt, One Road.”
  • Because Africa lacks good roads and railroads or a manufacturing base, perhaps 90 percent of Africa’s trade goes by sea. Ports are also the point where trade can be regulated and taxed. Forty percent of Kenya’s government revenue comes from custom duties and taxes. But the inefficiencies of Africa’s ports remain a major obstacle to Africa’s long-term economic prospects. The ports are generally too small; they are poorly run and operated; the levels of corruption involving port officials are high; and the roads and rail infrastructure leading away from the ports require serious upgrading.
  • The development of the Russian Arctic route, the Northern Sea Route (NSR), for transit shipping has stalled because of the economy and cheap fuel prices. 2012 was the biggest year with shipments of 1.35 million tons. In mid-September 2016, the year’s total has reached 0.20 million tons. In 2015 less than 0.040 million tons was sent via this route.
    • LNG carriers from Russia could begin to use this route soon. In January 2016, Korea’s Daewoo Shipbuilding and Marine Engineering (DSME) launched a liquefied natural gas (LNG) carrier classed for breaking through over 2 meters of ice. The carrier will serve the Yamal LNG project in the Russian Arctic and is planning to use the NSR as needed. Another 14 ice-breaking LNG vessels are on order with Daewoo for the project.
  • In this major shipping slump, companies are merging, selling assets, implementing cost-cutting measures, scrapping ships, going bankrupt—anything and everything to survive.
    • A.P. Moller-Maersk operates two major businesses: the world’s largest shipping company, Maersk Line, and an oil and gas company, Maersk Oil. The family that owns the Maersk Group is looking to split up the conglomerate. In June, the Maersk Group’s CEO was fired and replaced by the head of the container business.
    • The world’s seventh largest shipping line, Hanjin, declared bankruptcy on August 31, 2016. It is starting to sell its best assets.
    • French CMA CGM, the world’s third largest shipping line, just acquired Singapore’s Neptune Orient Line (NOL) for $2.4 billion in cash, and is now looking to sell the port assets of NOL for around $1 billion.
    • In 2015 China’s two biggest state-owned shipping companies, China Ocean Shipping (Group) Co. (or Cosco Group), and China Shipping Company combined their fleets and port operations to create China Cosco Holdings, the world’s fourth largest container operator.
    • China Cosco Shipping Co., the world’s largest bulk carrier, said in June 2016 it would recycle (scrap) 53 vessels by the end of 2017, or 8 percent of its existing fleet. Will that be enough?
    • Large shipping companies are forming alliances to share space on their vessels. In January 2015, Maersk and Mediterranean Shipping Company (MSC) started the alliance 2M. The world’s seventh largest shipping line, Hanjin, which just declared bankruptcy on August 31, 2016—had been part of six-member group, The Alliance, formed in May 2016 to help compete against 2M.
  • Chinese yards build approximately half of the world’s new ships. They are currently suffering badly. In 2016, the yards have received 127 orders worth about $3 billion, compared with 621 orders worth $27 billion in 2015 and 992 orders worth $34 billion in 2014. About 75 percent of China’s 1,800 yards it had in 2009 have closed. The consolidation is being orchestrated by Beijing to be not so dependent on manufacturing and heavy industries and to remove high-cost, inefficient shipbuilding yards from the market. Beijing is also no longer subsidizing the sector.
    • In October 2016, a Wall Street Journal article indicated Cosco and China Shipping Group were also planning to combine 11 shipbuilding yards in China to create China’s third biggest shipbuilding group.
    • High-cost Japanese shipbuilders are struggling a lot. “The order book for Japanese yards is down around 80 percent year on year,” said New York-based Karatzas Marine Advisers in October 2016. Labor costs at Japanese shipyards are on average about two to three times as high as the South Korean and Chinese.
  • China banks greatly expanded their loan portfolios in the shipping industry before the current shipping business crisis. Many of those loans are likely non-performing at a time when other industries (and loan portfolios) are hurting.
  • Things could be turning around in commodities. As of the summer of 2016, it appears energy and materials commodity prices are slowly recovering. The commodity fuel (energy) index of indexmundi.com is up approximately 45% since the beginning of 2016, although it’s still 23% down from the highs of a year earlier. Noticeably, private equity firms are beginning again to invest in oil opportunities. The metals price index of indexmundi.com is up 10% for the year, but still down 15% from a year ago.

PLAUSIBLE OUTCOMES IN TEN YEARS

Short Term: Next Two Years

The world faces two, very different possible short-term outcomes in global trade and shipping: Either the world economy will experience a major recession and cross-border trade and ocean shipping will fall significantly for several years, or the world will embark on long economic expansion supported by increases in cross-border trade and a competitive ocean shipping system. Much depends on what happens with China’s economy. If China’s economy doesn’t’ come off the rails, then shipping will likely start recovering in 2017. Commodity prices are already up and those markets could soon improve one shipping market.

Assuming the recession scenario doesn’t occur, then we could see in the short term:

  • The shipping industry will likely slowly begin recovering in 2017, pulled along by a rebound in commodities flows around the world and higher prices after shipping capacity is removed.
  • China developments:
    • Beijing will continue to encourage consolidation of the various shipping sectors—shipbuilding yards, container shipping lines, bulk commodity shipping lines, etc. More state-owned companies will merge. But will enough higher-cost capacity be eliminated to enable Chinese companies to be the low-cost leaders in the markets?
    • Chinese banks will suffer from non-performing loans in shipbuilding. This will contribute to the growing problems in China’s financial industry. How vulnerable is the overall Chinese economy to a financial crisis?
    • Chinese companies could be aggressive in taking advantage of current bargain prices and acquiring foreign assets.
  • International shipping companies:
    • Multinational shipping companies will scrap many higher-cost, smaller-tonnage vessels, removing container and bulk-carrier capacity from the system.
    • Consolidation of shipping companies based in Europe will continue because of ongoing financial losses and the need to prepare for rejuvenated, low-cost Chinese competitors for when the market turns.
  • Japanese and Korean shipbuilders will lose even more market share when new orders start flowing in again, unless heavy subsidies are pushed their way by their respective governments. That’s unlikely.

Long Term: Years 3 to 10

The long-term outlook for global trade and shipping industries is very positive unless geopolitical forces drastically curb cross-border exchanges. But short of a severe worsening of the political situation, we could see the following in a revived world:

  • Global shipping:
    • Shipping rates, canal tolls, and port costs will remain low for many years. Ocean shipping will remain a very competitive option.
    • The Chinese will remain the largest player in the movement of goods around the world.
    • The prices and efficiencies of the global shipping will depend on the competitiveness of the shipping industry and the financial stability of the Chinese companies.
    • Use of the Arctic NSR will slowly increase but will not be a major factor in global shipping except for LNG carriers.
    • Piracy activities could fall off.
    • But maybe non-state terrorist organizations could target vulnerable large vessels.
  • Shipping companies:
    • In the long-term the costs of transporting large quantities of manufactured goods and bulk commodities will continue to decline with the use of larger ships, more digital data and analytics to improve efficiencies, and more competitive route and canal options.
    • Interesting automation advances will continue to be adopted because of the major opportunities for eliminating human safety issues and saving a lot of money.
    • Chinese owners, many of them state-owned, may begin to dominate.
  • Ports, shipyards, and onshore transportation infrastructure:
    • Chinese shipbuilders will recover and dominate future shipbuilding.
    • For many developing economies, the investment and operation of new ports will define their economic opportunities.
    • There’s a good chance investments in African ports will significantly increase. Less but still important will be the investments in Latin America ports.
    • However, corruption levels and bad management will still define most African ports.
    • Chinese firms will be active in the financing of foreign port and transport infrastructure to enable trade growth with Chinese firms.
    • Maybe the Chinese will buy the Panama Canal, if the plan for a second canal through Nicaragua falls through.

Long-term implications for national economies:

  • Since ports and canals will process even larger volumes of goods and commodities in the future, national economies will be more at risk to terrorist attacks, disruptions, or stoppages in ports and canals.
  • For the last 70 years, the US Navy and Coast Guard have maintained order on the high seas. That will likely be less so in the future. The Russia Navy will control the Arctic NSR. China will likely deploy its Navy more globally, particularly in the Southern Hemisphere.
  • India could try to expand its own Navy to match China’s, but this won’t happen in the next ten years.
  • A boom in truck and rail infrastructure building will occur as regional governments complete the land-transport infrastructure to match the new and refurbished port capacities.
  • The United States may eventually examine the costs and benefits to the US economy from the Jones Act, which requires goods transported between US ports to be shipped on vessels built in US yards.