1. Editorial: Changing global balance

Editorial: Changing global balance

Tough times ahead for Western global corporations

By: | Published: September 11, 2015 12:23 AM

A golden run for global business—1980 to 2013—when the world’s largest corporations (largely Western firms) saw post-tax net profits rise sharply from $2 trillion (1980) to $7.2 trillion (2013), may be coming to an end. A new report by McKinsey Global Institute, Playing to win: The new global competition for corporate profits—that analysed 30,000 large firms from across the world—predicts that while corporate profitability during the period rose from 7.6% of world GDP to 9.8%, it will fall to 7.9% in 2025. So, almost all gains, relative to the world GDP, over the past three decades could be wiped out in just one decade. McKinsey listed multiple factors for the possible fall in corporate profitability. There is a perceptible shift in profits from heavy industry to idea-intensive sectors that revolve around R&D, software and algorithms.

The competition for Western firms from emerging-market companies—either state-owned or famiy-owned—is hotting up. Three Chinese companies—Sinopec, China National Petroleum and State Grid Corporation of China—rank among the 10 largest companies by revenues globally. While emerging market companies accounted for less than 10% of M&A deal value in 2008 in consumer products, by 2014, this had trebled to 30%. Even as we look at improving the ease of doing business in India, McKinsey finds that emerging market companies must navigate challenges in securing permits, enforcing contracts and raising capital. After overcoming such hurdles, these companies have an advantage in other fast-growing emerging markets that Western MNCs do not have. Homegrown giants in China, India and other emerging-markets battle it out with Google, Apple and Microsoft to attract the best engineers, designers and strategists.

The newest challenge to the large corporations is the emergence of global technology firms. By building digital platforms and networks, they can drive marginal costs to zero, they can rapidly move into new sectors. The largest of these rival nations: Bharti Airtel’s  310-million-strong subscriber base, is just a shade less than the US population(320 million); Google’s $131 billion assets compares with Turkey’s reserves of $130 billion and Amazon’s customer base of 244 million rivals the 257 million population of France, Germany, UK and Spain combined. While global revenues could reach $185 trillion by 2025, falling costs could have bottomed out. These pressures could slow profit growth and produce an after tax profit pool of $ 8.6 trillion. But, this could well be the decade for emerging-market companies to make a mark globally.

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