As Cold War II clicks through the gears, several authors have published books regarding how the world will change and what businesspeople can do to ensure that they land on their feet. Longstanding FT columnist Rana Faroohar’s book on this subject “Homecoming: The Path to Prosperity in a Post-Global World” has been published to rave reviews in the USA. Our first read suggests that this book will become a bit of bible for investors and CEOs who are grappling with these momentous changes. For investors in India, after having been drubbed by China for nearly a generation (as China successfully lobbied its way into the WTO and then lobbied for Western capital and technology), it is our chance to get our act together. To understand more, you should read Faroohar’s book.
Faroohar’s begins her FT column on the book with an anecdote with a mindblowing anecdote: “I’ll never forget an interview I did years ago with the late Richard Trumka, the then-president of the AFL-CIO, America’s largest labour union. Trumka, a tough-talking former Pennsylvania coal miner turned lawyer, told me about a conversation he had had in the 1990s with a Clinton administration official about the fallout of Nafta, which had been ratified in 1993, and the potential impact of China coming into the global trading system.
Trumka was concerned about a sudden flood of cheap labour into the global marketplace, and the effect it would have on American workers’ incomes and lives. “I told [the official] that the deals would kill us, and he agreed.” But the official said that after a while, “wages would start to go up again, and things would even out around the world”. When Trumka asked him how long this process of “levelling out” might take, he answered: “about three to five generations”.”
As Nafta and China pulverised American blue collar workers and paved the way for politicians like Trump and the far right in Europe, the clock turned. Now, in a world where Russia and China are locked in confrontation with the West, supply chains are being rejigged to adjust to the new realities. Both in her FT column and in the book Faroohar talks about six sets of changes. To understand these changes, we suggest that you either read the column or buy the book. Here are the three changes that we felt are going to have the most impact on India:
Firstly, local manufacturing and local supply chains will become more important everywhere. “Today, we are entering a new era of localisation. That doesn’t mean that all things global will fade. Quite the contrary — business, policymakers and society as a whole need a bit more focus on the local to ensure continued buy-in for globalisation. Ideas and information will still flow across borders (although there will be limits on that depending on geographic differences in privacy and data regimes), as the world economy becomes ever more digital. Capital too, will be mobile, although it’s unlikely to be quite as unfettered as it has been in the past. There will be more limits on what financial institutions in liberal democracies can do to fund autocratic governments or degrade the economic wellbeing of citizens in their own home countries, as there should be….
After decades of a “winner take all” trend, in which the majority of prosperity has been located in a handful of cities and companies, look for business and policymakers to be more focused on ensuring that wealth and place are re-moored.
This will come with costs — such as inflation. The old “efficiency” models, which assumed that people, goods and capital would move seamlessly to wherever they were needed, were cheap. Creating more opportunity at home, while still remaining connected to the global economy, will require building more resilient models — that involves better education, infrastructure, higher local wages, and less focus on the short-term bottom line. Efficiency was cheap. Resiliency will cost more. Who pays for it is up for grabs.”
Secondly, as corporates are forced to go local (both for their supplies and for their end markets), the power of governments (relative to corporates) will increase: “…the shift towards global market interests has led to exactly the kind of nationalism that the creators of institutions such as the IMF, the World Bank, and the World Trade Organization wanted to avoid….As law professor Ernst-Ulrich Petersmann, one of Hayek’s students, put it: “The common starting point of the neoliberal economic theory is the insight that in any well-functioning market economy, the ‘invisible hand’ of market competition must by necessity be complemented by the ‘visible hand’ of the law.” Law is about values, and countries and regions have different ones. From surveillance capitalism to concepts of corporate power, values and the laws that enforce them will increasingly shape markets.”
Thirdly, companies that vertically integrate and control their supply chain (rather than outsourcing lots of stuff) will be more successful: “Vertical integration among corporations, for example, is once again gathering steam, as leaders look to buffer supply-chain disruptions, cut transport costs, and reduce geopolitical risk. Companies from Johnson & Johnson to Volkswagen as well as retailers such as Chanel or Zegna are moving more production in-house, and trying to source and control more raw materials.
Elon Musk is ahead of the curve, producing most of his Tesla in-house after discovering that it was harder to innovate and much more expensive to work with cutting-edge technologies in real time when the supply chains were far away (as author Ashlee Vance sketches in his biography of him). Ultimately, Tesla became committed to sourcing and innovating as much as it could around its battery and power train technologies locally. “
If Faroohar’s prognosis is correct then a host large Western companies will have to make some very difficult choices over the next few months. Kenneth Rapoza’s piece captures how America Inc is caught in the horns of a dilemma: “In Homecoming, Foroohar talks to some domestic manufacturers like Jason Ballard, founder of Texas-based 3D-printing company ICON, and CPA board member Anderson Warlick, CEO of textile company Parkdale Mills in South Carolina.
“Our supply chains have been dismantled for 30 years and manufacturers in the U.S. haven’t been as respected as they should be,” Warlick told her. “You can’t turn back the clock on thirty years overnight. But that doesn’t mean you shouldn’t start now.”
Foroohar is a realist. She doesn’t think globalization ends but thinks we never go back to the no-holds-barred globalism of the pre-Trump era. But…“It won’t be completely localized, either,” she said.
She gives an example of how some parts of Brooklyn are returning to manufacturing, helping blue-collar workers stay local rather than needing to take trains into Manhattan for service jobs. This is good news.
Alas, it is clear that the bulk of big corporations, and the firms that lobby for their interests, want a return to the pre-2017 trade war era. They want to go where dollars go farthest, and that’s not here. They want to invest in growth markets, which are all in Asia. They will ignore geopolitical tensions between China and the U.S.
Major investment firms and corporate brands like Goldman Sachs to Pepsi were fast to announce the closing of their businesses in Russia once the war in Ukraine began. Who thinks Apple and Intel leave China in the event of a shooting war in the South China Sea?”
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Note: the above material is neither investment research, nor financial advice. Marcellus does not seek payment for or business from this publication in any shape or form. Marcellus Investment Managers is regulated by the Securities and Exchange Board of India as a provider of Portfolio Management Services. Marcellus Investment Managers is also regulated in the United States as an Investment Advisor.
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