Post on 29-Mar-2018
transcript
Geopolitics and Global Companies
By Parag Khanna
The Global Connectivity Revolution
Highways, railways, bridges, tunnels, airports, seaports
Skeletal System Transportation
The Infrastructural Matrix: Exoskeleton on the Planetary Body
Vascular System Energy
Nervous System Communication
Oil & gas pipelines and refineries, electricity grids and power plants
Internet cables, satellites, data centers
Planetary Urbanization:Megacity Archipelagos Define Humanity
The IMF’s about-face: From austerity to stimulus; public unlocks private investment that fuels income growth, productivity gains and imports/trade
Take advantage of ultra-low interest rates: Invest $300T of financial stock into the “connectivity asset class”
Patient capital: Private wealth, pensions, insurance, SWFs, asset managers seek inflation-linked yield
Invest in the future: Low volatility, non-correlated to business cycle, steady cash flow and dividends
Connectivity is the Most Important Asset Class of the 21st Century
Towards the Supply Chain World: Free markets (Adam Smith)
Comparative advantage (David Ricardo)
Division of labor (Émile Durkheim)
IoT/Big Data/AI (Ray Kurzweil)
“Perfect Capitalism” (Michio Kaku)
Trading atoms and bits: “Where” are complex global value chains? Things are “Made Everywhere”
The Most Powerful Law of History: Supply and Demand
Supply of anything can meet demand for anything
Perpetual optimization of land, labor & capital for production
Inefficiency is the enemy
Fungible investment, relentless competition
Supply Meets Demand: Trade Envelopes the World
Source: DHL Index 2014
Global trade to GDP steady ~50-60%; growing 2% in 2017 (WTO)
EU-China trade > $400B; EU-ASEAN trade > $200B; EU-Japan = $150B; EU-India ~$100B
China-Africa trade reaching $400B by 2020
US-EU goods/services trade tops $1T/year
US-China trade = $660B; US deficit > $400B
Resilient global services trade at $5T; services > goods as share of output growth
Lat-Am exports to China: $90B; China exports to Lat-Am: $160B (both 50% of Asian total)
Data flows ~60% of US services exports and 34% of total export value
Competing over Connectivity: Trade not shrinking but optimizing
East Meets West: Eurasia’s Iron Silk Roads
AIIB and the Compression of Eurasian Space: China Becomes a Two-Ocean Power
“Iron Silk Roads” win the “New Great Game” (over Iran)
Rising cross-EM trade as % of EM exports
“Unlimited demand”: Demographics and urbanization
The next supercycle: Structurally low commodities prices driving consumption of cars, cement, steel, etc. around Indian Ocean rim
South-South FDI crossing $300 billion/year
Surging cross-EM trade/FDI patterns: Asia outbound FDI up to $200 billion by 2020
CHIMEA/New Maritime Silk Road: China trade/FDI with Africa / GCC > US (but < EU)
New post-Western institutions: AIIB, BRICS Bank plus non-USD denominated trade and lending
A Post-Western World?
The Great Supply Chain Tug-of-WarSupply chain alliances: national supply chain nexus: Toyota/Nagoya and Samsung/Seoul; Boeing versus Airbus; GE w/o Ex-Im
China’s German quest: From low-value “Made in China” to high-value “Made by China” (e.g. IT GVCs)
Capture global markets: Export credits; national champions (batteries, medical, solar, rail, robotics, semiconductors etc.)
Vertical warfare: JDI vs. 3D Robotics
Attract investment, displace investors: Industrial policy at home (SEZs, IP theft, patent trolling, #MakeInIndia)
Net benefit: wages, skills, jobs, tech, tax
“Give us your investment, not your companies.” - Sachin Bansal, FlipKart
Complexity Outlook Index (2013) ranks countries according to their potential to improve productive capabilities, especially by gaining know-how from large or proximate trade partners to raise the complexity of their own goods.
The Race to Complexity: Horizontal + Vertical = Diagonal
No dominant national market: Global revenues; chasing demandNo dominant investor pool: Distributed financingNo dominant employee location: Mobilizing global/local talentMultiple or shifting HQs: “20 Hubs and No HQ”Transfer pricing / inversion: Perpetual arbitrage
What constitutes a cloud company?
Taxes, Technology, Talent
“I have long dreamed of buying an island owned by no nation and establishing the world headquarters of the Dow company on truly neutral ground beholden to no nation or society.”
- Carl Gerstacker, CEO, Dow Chemical, 1972
What it Takes to Go Global Scale
Procter and Gamble products available in 180 countriesDHL services available in 220 territories/countriesGoogle dominates search and mobile in 40+ languagesWalmart services 200 million customers per weekCoca-Cola runs 450 brands worldwide with 1B daily servings
AffordabilityUnilever products used by est. 2 billion people/dayGE Healthcare investing $300m to build robust andlow-cost healthcare solutions for emerging markets
Training 2m healthcare workers by 2020 $500 portable ECG machines for rural India
AdaptationYUM Brands: Opened 2,497 KFCs in China since 1987LG: Local design and manufacturing (e.g. one-touch“Indian menu” microwaves)Samsung: Fridges withstand power fluctuations in Africanmarkets
Is FDI stock/GDP ratio headed for a plateau -- or new wave as EM MNCs go global?
Can FDI flows/GDP rebound on the back of tech sector expansion?
Foreign profits (RoE) of OECD MNCs down 17% from 2011-2016 (US, UK, Dutch MNCs down to 4-8% only) Tech exception: 50% of total overseas profits of top 50 American MNCs East to West Politically motivated regulatory nationalism raising costs for MNCs, forcing preservation of labor force and national character (e.g. Softbank-ARM, SinoChem-Syngenta) West to East EM governments back domestic competitors sparking sell off (e.g. McDonald’s, YUM)
Stateless No More?
Global Regulators: US, EU, China
US pressure to repatriate est. $2.7T offshore cashEuropean anti-monopoly litigation; privacy/ data protection policies; fees for search-based new republishingChina strengthening firewalls, local data storage requirements, and IP theft
EMs Getting Wise to the Global Shell GameAggressive audits and finesRaising capital gains taxesDemands for country-by-country reporting on profits and tax payments
Reigning in the Corporate Giants
Paul Ryan
Margrethe Vestager
Xu Lin
State-owned Assets Supervision and Administration Commission (SASAC) of the State Council:
NuclearAviationShipbuilding and shippingManufacturing Industries (Machinery)ElectronicsOil/gas (CNOOC, CNPC, CPC)Power (electricity grid, dams, coal)AirlinesTelecom (CTC, China Mobile)Steel and aluminumChemicals (SinoChem)RailwaysPharma
The Future of Chinese SOEs is Singapore-Style GLCs Supply-side reforms boosting profits (~7% in
2016)
Reduce over-capacity
Consolidate and scale through $50B China Structural Reform Fund
Dividing b/w profit-making and public welfare entities
Strategic assets and utilities plus newer tech and consumer goods (e.g. medicine, tea)
Mixed ownership models
Float/sell shares
BRICS: Bending on Strategic Assets KEY ISSUES:
Balancing local and foreign investors
Energy: Waiting for oil to rise
Avoiding intra-state asset transfer
Distributing gains
Stepping in when projects fail
Improving corporate governance and ease of doing business
Brazil● 2016: Temer launches privatization in oil
and gas fields/distribution, power plants, infrastructure (highways, airports, rail)
● Petrobras divestment: Weak currency fuels strong M&A activity, foreign participation
● “Project Growth”: Reduce debt, partner with private sector, attract investment, curb corruption
● Goal to raise $9B in privatization revenue in 2017
India ● Goal to raise $10B by selling government
stakes (Jaitley): ONGC, Coal India, Bharat Heavy Metals
● Majority shares bought by Life Insurance Company of India
● Sensitive military shares: GoI reduces stake in Bharat Earth Movers Ltd to 28%
● Public banks: Consolidate then privatize● Energy: Provincial utilities and oil/gas fields
Russia● 20% Rosneft sold to
Glencore-Qatar for $11.3B in 2016
● Prospective sectors/companies: Aeroflot, Sovkomflot, VTB, Russian Railways
● Widening deficit not offset by revenue gains
China● Declining share of SOEs among
industrial firms; listing companies on exchanges; selling shares to managers
● Transfer of assets to municipalities that launch LGFVs
● PSBC 2016 IPO raised $7.5B● Singapore/Temasek-style GLCs:
mixed/partial privatization● Other sectors: Qunar/Ocean
Management (travel); Alibaba/Intime retail stores
ASEAN: Maintaining Liquidity Amidst Currency PressuresVietnam
● 2015: Vietnam Airports Corp. <5% stake offered; 85% foreign buyers● 2016: GIC buys 7.7% stake in Vietcombank● 2017: FPT Telecom and Securities listings; Binh Son oil refinery IPO● Vietnam Airlines (listing plus ANA investment) and Vietnam Textile
and Garments Corp.● State Capital and Investment Corp. (SCIC) increasing sale of
Vinamilk stakes from 10% to 45%
Indonesia● First wave (1990s/2000s): Ports, cement● Political risks: Jakarta court bans water supply privatization; forced
closure and sale of Newmont mine● Next wave: oil/gas services, transport, marine, land development● 100% foreign ownership allowed in hospitality (hotels, restaurants)
Thailand● Continuing Thaksin’s revolving door: Since 2014 coup, junta has
expanded control of 56 SOEs
Philippines● All Pagcor casinos to be privatized during 2017
Managing Volatility Beware ripple effect of recedingcredit and weak currenciesManage financial risk: Maintain cash and liquidity to avoid solvency traps Boost regional investment: Deepen ASEAN Bond Markets Initiative
Support GrowthSME and trade finance to strengthencross-border supply chains and exports(only 30% of ASEAN exports from SMEs)Invest in services sector productivity and value-added
AEC: Engage Now to Shape the Future
Promote ResilienceInstitutional harmonizationand transparencyFrom round-tripping to FDI:Make investment sticky
Pax Aseana: How to Grow From Billions to Trillions
THANK YOU!paragkhanna@gmail.com
@paragkhannawww.facebook.com/DrParagKhanna