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The subsequent period of globalization shall be formed by prospects, know-how and worth chains

Technological

The subsequent period of globalization shall be formed by prospects, know-how and worth chains

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New research from McKinsey examines in detail 23 different industry value chains in 43 countries to gain a better understanding of what companies are already doing locally and how they are contributing to the fundamental changes that will shape the next era. She notes that the geography of global demand has changed radically over the past decade. China, India and other emerging economies originally joined global value chains by manufacturing labor-intensive industrial goods and exporting them to advanced economies. But now, their billions of new consumers are a powerful force. It is an outdated assumption to think of them as “low-cost factories for the world”. They are lucrative hypermarkets themselves and their businesses are a new source of competition. In addition, the share of developing countries in global consumption has increased by around 50% over the past ten years. China now imports as many end products as Germany – and more than Japan, Great Britain or France. Businesses absorb and react to these deeper changes even as they try to deal with political uncertainty. Since both industry structures and the global economy are changing, this is a moment to reassess where along the value chain to compete and where to operate around the globe in the future.

If you ask the average CEO what makes them sleepy these days, you can bet the answer will be tariffs and trade wars. A third of respondents in a recent McKinsey survey of global executives said uncertainty about trade policy is their greatest concern – and three quarters of all companies say their global investment strategies are changing as a result.

But companies cannot afford to respond only to the news cycle. The bigger picture must be taken into account in every decision – and when we step back it becomes clear that longer-term structural changes are reshaping the nature of globalization. Our new study examines in detail 23 different value chains in the industry in 43 countries to get a better overview of what companies are already doing locally and how they are leading to the fundamental changes that will shape the next era.

First, the geography of global demand has changed radically over the past decade. China, India and other emerging economies originally joined global value chains by manufacturing labor-intensive industrial goods and exporting them to advanced economies. But now, their billions of new consumers are a powerful force. It is an outdated assumption to think of them as “low-cost factories for the world”. They are lucrative hypermarkets themselves and their businesses are a new source of competition.

The share of developing countries in world consumption has risen by around 50% over the past ten years. China now imports as many end products as Germany – and more than Japan, Great Britain or France. It now also imports higher value goods. China is reaching the tipping point of having more millionaires than any other country in the world and now represents about a third of the world market for luxury goods. Taken together, emerging economies are likely to consume nearly two-thirds of the world’s manufactured goods by 2025, with products like automobiles, construction products, and machinery leading the way. For knowledge-intensive services, including IT services, financial services and business services, 45% of all exports from advanced economies go to developing countries.

As local demand increases, emerging economies are also reaching a new level of industrial maturity. They are expanding domestic supply chains and importing less of the inputs they need to keep their factories running. China in particular is modernizing several industries and expanding its design, engineering and high-tech manufacturing capabilities. Multinational companies in advanced manufacturing industries could come under pressure in the coming years as China penetrates new and higher-value market niches. In addition, developing countries are creating their own multinational giants – companies that are now becoming global themselves through exports and foreign acquisitions. Western multinational corporations face new competitive challenges in their own backyards.

Industry value chains are also being reshaped by a wave of next-generation technologies. Some, including digital platforms and logistics applications, will further reduce the costs, delays and frictions of retail. Ultra-fast 5G networks will form a backbone for the IoT, smarter networks, autonomous vehicles and virtual reality to better realize their potential. Perhaps most profoundly, automation technologies in manufacturing are changing the way goods are made.

Today multinational corporations are studying a map of global demand that no longer looks like a decade ago – and they have new technologies at their disposal that reduce the importance of labor costs. The calculation with which decisions are made about the location of operations and investments in new capacities is changing, especially in the face of new automation technologies. As shipping goods halfway around the world hampers responsiveness and slows time to market, some manufacturers are building or consolidating more regional supply chains to serve their key markets more efficiently.

These changes in corporate decision-making are starting to show up in trade statistics. Trade intensity (ie the proportion of world production that is sold across borders) decreases as more of what is produced is consumed locally. The world also seems to have passed the days when companies around the world hunt for low wages. Today only 18% of the trade comes from the industrialized countries with imports from the low-wage countries. Factors such as customer proximity, the quality of the infrastructure and the availability of highly qualified workers are weighted more heavily than striving for the lowest possible labor costs worldwide.

At the same time, the flow of services is growing 60% faster than the trade in goods. Technology is gradually making it possible to remotely deliver services such as industrial maintenance and telemedicine. Across multiple value chains (including manufacturing), more value is gained from services, be it software, design, intellectual property, sales, marketing, or after-sales services. In one industry after another, companies in all industries are adding new service lines or experimenting with subscription and goods-as-a-service business models.

Businesses absorb and react to these deeper changes even as they try to deal with political uncertainty. Since both industry structures and the global economy are changing, this is a moment to rethink where to compete along the value chain and to act around the globe in the future.

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