Natural Gas: Make or Break National Policy Issue

Natural gas policy decisions in the next 30 years could make or break nations. They will be critical in the long-term health of the economy, a country’s geopolitical partners, and its energy security. Many developed countries are focused on moving as fast as they can toward renewable-energy sources and ignoring the risks of making this humongous bet on relatively unproven technology. Developing countries aren’t likely to move rapidly toward renewable sources, and will likely take advantage of the plentiful, low-cost natural gas that will be available for the foreseeable future. Progress toward having substantially more renewable-energy sources might be better achieved and faster if natural gas were the essential partner in every country’s energy strategy. Natural gas could be the great enabler: It could enable renewables to be developed more effectively; it could enable energy security for countries making the transition away from coal; it could enable a robust and resilient national economy in the next fifty years; and it could enable faster progress toward reducing climate-change emissions.

RECENT SIGNALS OF CHANGE

The new availability of low-cost natural gas has dramatically altered the economics of energy production and the strategies for combating global carbon emissions around the world.

Gas is turning into a better opportunity than oil for many producers. The technology of shale oil production continues to advance steadily in spite of or perhaps because of low hydrocarbon prices. Over the last five years, production well productivity has risen more than 400%, 40% in the last year. 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. 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.
New environmental risks from natural gas operations are coming 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 trough the supply chain leaks out.
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. 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.

Shipping of natural gas is rapidly becoming global, not local.

A single global market for natural gas is emerging. Natural gas is starting to be bought and sold around the world just like oil and petrochemicals. Behind this revolution is improved technology for moving gas as a liquid, flexible contracts, and new global capacity for sending and receiving LNG shipments. The share of gas moving by sea reached 40 percent of total trades in 2015 and according to the IEA will account for a bigger share of trading than pipelines by 2040. Thirty-nine countries now import LNG compared to 17 ten years ago.
Qatar is the world’s largest supplier of LNG with a market share of nearly one-third. In 2016, Qatar shipped 77.2 million metric tons (mmt) for 30.0 percent share and Australia shipped 44.3 mmt for a 17.2 percent share. Australia is expected to overtake Qatar based on current development plans in 2019 with at least 80 mmt. Ironically, Adelaide, Australia, suffered recent power blackouts during a nationwide heat wave because lack of investment in the country’s natural-gas infrastructure. The next big exporters were Malaysia, Nigeria, Indonesia, Algeria, Russia, Trinidad, and Oman.
The world’s seas are becoming more efficient in moving natural gas. 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. A key market of the future for the canal could be LNG carrier traffic. Also, 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.

China and India are reshaping their energy supply and demand mix and their foreign trade in energy commodities. China is proceeding faster than India.

In 2000 China and India didn’t have any LNG imports. In 2016 they are the third and fourth largest importers after Japan and South Korea. The United States and China are currently negotiating a trade deal that could involve US LNG shipments to China.
China Petroleum & Chemical, or Sinopec, is attempting to double domestic natural gas production in the next five years by rapidly expanding natural gas production from shale reserves in order to reduce coal usage in the country and reduce China’s need for imported liquefied natural gas. Many investors around the world were counting on sending natural gas to China.
Asia accounts for two thirds of the world’s coal demand, but that demand may be falling and sooner than everyone’s base-case scenarios show. In China in 2016, coal consumption fell 4.7 percent. This was the third year in a row of declining use. Coal currently supplies about 70 percent of China’s electricity, but the Chinese government is focused on cutting coal’s use, and succeeding. Coal-fired plant capacity in China is still being added—in November 2016, China’s National Energy Administration announced it is raising coal-fired power capacity as much as 20 percent by 2020, from 900 gigawatts in 2015 to as much as 1,100 gigawatts by 2020—but capacity utilization of coal plants has fallen steadily in China from around 60 percent in 2010 to around 50 percent in 2016. It appears coal will only provide 55 percent of China’s electricity mix in 2020.
Coal makes up 61 percent of India’s power-generating capacity, but India has announced it doesn’t need any new coal-fired power stations in the next decade beyond what it is currently building. Capacity utilization of coal plants has fallen steadily in India from over 75 percent in 2010 to less than 60 percent in 2016. Even with the rapid economic growth of the last decade, about 40 percent of India’s coal-fired power plants are now idle because of weaknesses in the distribution system and because government planners overestimated the growth in demand.

US electricity generation from natural gas now exceeds that from coal.

In 2016, natural gas’s share of US electricity generation at 33 percent exceeded coal’s share at 32 percent for the first time. Coal’s share has steadily fallen from a high of over 55 percent in the mid-1980s, while natural gas’ share has steadily risen from about 10 percent then. Nuclear remains steady at 19 percent, while renewables, not counting hydro, have risen from zero in the mid-1980s to 8 percent in 2016.
The Tennessee Valley Authority historically has been a major user of coal plants, but that has changed radically since 2007 because of environmental agreements to reduce coal emissions, the lower prices of natural gas, and increased production from nuclear. In 2007, over 55 percent of TVA’s energy mix was coal; in 2017 a little over 20 percent of the mix will be coal. Since 2011, TVA has shut down 24 coal-fired units out of 59 in its network.

LNG supplies are changing some countries’ dependence on pipeline gas that comes from other countries, that runs through unfriendly countries, or both. Poland’s new LNG import terminal reduces its reliance on gas from Russia.

In developed countries, wind and solar renewables are beginning to change radically the energy supply mix.

In 2015 5.5 percent of the world’s electricity came from wind and solar. Hydropower, wind, and solar together produced 9.4 percent of the electricity. The International Energy Agency said in July 2017 that for the first time the amount of renewable capacity commissioned in 2016 almost matched that for other sources of power generation, such as coal and natural gas. In some countries, solar photovoltaics are cheaper than coal and gas.
An interesting example of where wind and solar renewables are becoming a significant energy source is Texas, the center of the US oil and gas industry. In 2001, renewables (wind, solar, and hydro) accounted for 2% of Texas energy; in 2016 they will accounted for 16%. One night this past winter, nearly 50% of the power flowing into the Texas grid came from wind turbines in the state. Federal subsidies for Texas renewables have been a big factor, but equally big have been the falling costs of solar and wind technology.

The electricity system around the world is fundamentally changing because of the orchestrated growth in the use of renewables largely with subsidies. The costs of these subsidies were modest when the renewables contribution to overall energy supply was marginal, but that’s changing. Since 2008, public subsidies for renewables have been $800 billion. In 2014, the IEA estimated that decarbonizing the global electricity grid will require $20 trillion in investment in the next 20 years, and that still leaves much to be done. A new economic system for electricity is required, but the ecosystem of energy and the economy is too complex for anyone to know what that should be and how to make the changeover efficiently. Source: The Economist, “A world turned upside down,” February 25, 2017, pp. 18-20. Other risks of investing in renewables include the new technology uncertainty and costs, and the many, many land-use, energy, and environmental regulations in place that are just as big hurdles for renewables as they are for the other energy supply investments.

Nuclear energy plants are progressing in many parts of the world, but not in the United States and Germany. Electricity from US nuclear plants at about 1.5 mega-watt hours per year is expected to decline very slowly over the next 25 years as reactors close and aren’t replaced. Toshiba’s subsidiary, Westinghouse, recently declared bankruptcy over escalating costs involving billions of dollars to finish two nuclear power plants in South Carolina and Georgia. Both plants might not be completed.

The International Energy Agency (IEA) report on CO2 Emissions from Fuel Combustion highlighted that the growth in global CO2 emissions was slowing down. In 2014, the IEA indicated the global CO2 emissions were 32.4 gigatons of carbon dioxide (GtCO2), an increase of 0.8 percent over 2013 levels. The growth in 2013 over 2012 levels was 1.7 percent, while the average annual growth rate since 2000 has been 2.4 percent. Work by the Intergovernmental Panel on Climate Change (IPCC) shows that holding warming to 2°C typically requires global annual emissions to peak sharply around 2020, fall steeply by 50% before 2040, and be close to net zero towards the end of the century. The EIA’s International Energy Outlook 2016 reference case has global energy-related CO2 emissions growing about 1 percent/year from 2012 to 2040, but will CO2 emissions peak much sooner than anyone expected?

Governments around the world are already adopting major plans to transition to renewable energy in spite of major uncertainties about the costs and plausibility of those plans. In a June 2017 paper in the Proceedings of the National Academy of Sciences, 21 energy researchers rejected in no uncertain terms Stanford Professor Mark Jacobson’s 2015 study that made a case for 100 percent renewable energy by 2050. They wrote Jacobson’s plan “can, at best, be described as a poorly executed exploration of an interesting hypothesis. The study’s numerous shortcomings and errors render it unreliable as a guide about the likely cost, technical reliability, or feasibility of a 100 percent wind, solar, and hydroelectric power system.” In other words, it was crap. The problem is that governments around the world— Germany, California, and Portland, Oregon—are already implementing extensive plans to transition to renewable energy. Germany’s goal is 80 percent renewable by 2050; California is trying to set a goal of 60 percent by 2030; Portland wants to be using 100 percent clean power by 2035.

Even if oil demand peaks in the foreseeable future and the world achieves a net-zero emissions state, oil and natural gas will continue to be key energy sources. Shell’s scenario group in May 2016 highlighted that 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. If the net-zero emissions state is 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 would be just under 80 percent.

ORACLE MUSINGS ABOUT ENERGY, ECONOMIC, AND SECURITY OUTCOMES

Depending on what natural gas policy decisions are made, world economic, political, security, and environmental outcomes in the next twenty years could be very different.

For the next 20 years the demand for natural gas is likely to explode.

Natural gas production could grow even more than base case scenarios because of technology innovation, rapid development of LNG shipping infrastructure, new government restrictions around the world on use of coal in power generation, and high costs of clean coal technology.
Technology innovation will likely continue to lower the costs of shale gas development. China and Argentina could see rapid expansion in their natural gas productions.
Global shipments of LNG will expand rapidly as more infrastructure for receiving LNG is built in countries around the world. Since most of the shipments will be headed toward Asia, issues around the security of shipping lanes in Asian waters will develop.
Russia leverage will both increase and decrease because of natural gas. Many traditional buyers of Russia’s gas will strive to reduce their dependence on Russian piped gas by investing in LNG. At the same time, Russia will be able to serve the new LNG markets.

Future of coal: Global coal demand could begin to fall soon.

The momentum to substitute natural gas for coal in electricity generation will likely accelerate.
Coal use will likely continue to decline in the United States. It’s uncertain how Trump administration policies could affect that decline, but in general the trend won’t likely reverse.
The biggest changes in coal usage could be in China and India. If natural gas prices remain low, coal demand will most likely keep falling. In fact, China and India could struggle to keep up with the forces driving those declines.
Clean coal technologies will likely struggle to become commercial. Consequently, in a couple of years, new coal plants may never be built again in a large industrial economy.

The biggest economic winners of using more natural gas could be the rapidly growing Asian economies, particularly China.

Natural gas supplies could help meet the extensive energy growth needs throughout Asia, and enable Asian countries to move faster away from coal.
China companies will likely continue to be industrial leaders in all commodities, including oil, gas, and coal. The Chinese companies will continue to be the biggest, invest the most money, and generally be aggressive to capture the most market share.
China could bet big on natural gas for its economy. It could expedite LNG receiving facilities and new natural gas burning power plants.
China’s changing policies toward improving the country’s air quality and energy supply in the next ten years could have the greatest impact on global CO2 emissions and the world’s goal of reaching a net zero CO2 emissions state as soon as possible.
China will likely ride the wave of coal use reduction and assume a much large leadership role on environmental issues in international forums, like the IPCC.
In many respects, India’s accomplishments will be greater, but they will follow China’s.

National energy plans in developed economies may not fit with reality.

Germany and California and others focused on making a complete transition to renewable sources as fast as possible could struggle with their goals. Physical and financial barriers could be too large to reach 50 percent of power from renewable sources. Disruptions in power services could increase. The goals will likely stay in place, but the old energy systems could remain critical.
Nuclear power could gain more advocates and expand, but not likely unless major problems with renewables appear.

Renewable power could expand more rapidly than projected in rapidly developing economies.

For many countries, in ten years more than 50 percent of new power capacity will be from renewables sources. Major investments in infrastructure for using more renewable technologies will be made.
Chinese corporations will likely continue to invest heavily toward becoming global leaders in renewable-energy technologies, like solar electricity generation and electric cars.
If net CO2 emissions per year start falling, societies could struggle to maintain their commitments toward renewables.

The battles over the development and use of fossil fuels could become even more intense.

Greenhouse gas emissions will likely continue to accumulate in the atmosphere and ocean for the foreseeable future. CO2 emissions from gas will continue to grow because of the growth in natural gas production.
NGO’s will likely continue to object to natural gas and oil development and production activities and the companies that conduct them.
Gas companies are unlikely ever to be viewed as good world citizens.
Large private oil and gas companies could experience more protests wherever they operate.
Russian and Chinese companies will likely be singled out more and more by NGOs.

New economic system for electricity will emerge over the next 15 years: But no one can predict the dynamics of that system because there are too many uncertainties in technology, geopolitics, human behavior, climate change, energy supply sources, energy demand, and economics. The wide range of possible outcomes include:

A very unreliable electricity delivery system, with major disruptions, could develop in major industrial economies, particularly those with the biggest commitments toward renewables.
On the other hand, an integrated system of diverse power sources with higher electricity prices could develop that is much more efficient and robust than current systems.

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.

Plausible Outcomes

Insights on Plausible Outcomes for the Major Uncertainties of the Future

Tag: global trade