‘Deglobalisation’ has become the favourite term for many commentators of late. The decision made by voters for Britain to exit the EU—popularly termed “Brexit”—is seen as the harbinger of a new world where trade, financial and people ‘flows’ between countries that defined globalisation are in reverse gear. Recent data that show global GDP growth—one of the traditional metrics of globalisation—has halved from a 6%-high in the 1960s to 3% in 2015, falling share of FDI in total global investment and the stagnating trade intensity (the trade-GDP ratio), perhaps the most important metric of globalisation, were offered to prove the case of deglobalisation. These experts and commentators have offered the growing trade protectionism on one hand and the increasing cost of labour in emerging markets leading to the “re-shoring” of manufacturing on the other as key contributing factors.
That is certainly one view of the changing world. There is another, a very different, view. At the BCG Henderson Institute, we think that rather than signalling the “death” of globalisation, the decline in the traditional metrics signals the “birth” of a radical new phase of globalisation—one that rebalances geo-politics with geo-economics. As such, we think that countries and companies need to think about globalisation in a different way, turn to different metrics, and devise a new strategic framework to develop their future strategies.
This is not the first time experts have predicted the end of globalisation in the modern era that began with Industrial Revolution in Europe in the 18th century. The first wave of growth was abruptly halted by World War I in 1914. The march of globalisation resumed only in the 1950s with the introduction of mass manufacturing and the building of export supply-chains by companies in the West. The Oil Crisis in the mid-1970s again halted this phase of globalisation. The third phase of globalisation emerged in the 1980s, with the growth of internet allowing the outsourcing of low-cost manufacturing and services and led to the development of globally-integrated supply-chains. This model of globalisation became our base-line until it was again halted by the financial crisis in 2008.
Each new phase of globalisation was preceded by a crisis. Each time, it emerged stronger, but different in its characteristics. More importantly, each new phase was triggered by the emergence of a new ‘technology’ that transformed the economics of doing business. First, it was the steam engine; the next phase was driven by the technology of mass manufacturing, and the last phase—which saw China emerging as the ‘factory for the world’ and India as the inventor of the ‘offshore IT and BPO model’—by the growth of internet. A fourth, and equally powerful, technology is emerging rapidly, that of digital technologies; these are not just transforming economics and customer value propositions, it is in our view already launched the fourth and perhaps the most radical shift in the model of globalisation.
Digital technologies are shaping the world of business and global trade in three very distinct ways. First, they are altering productivity and competitiveness of companies and countries. By our estimation, the adoption of digital technology for manufacturing is expected to increase output per worker by 30% and decrease labour costs by as much as 30% in countries such as South Korea, Germany, the US, and China. This means that companies will need to reconsider their decisions on locating and designing their plants and supply-chains taken in the third phase of globalisation. Indian companies are beginning to adopt these new technologies to stay competitive. Second, while the trade in goods (which drove the earlier phases of globalisation) is stagnating, the trade in global services is growing, with the trade in digitally-enabled services being the fastest growing segment. In 2013, according to available figures, services constituted 23% of total exports from OECD countries—up from just 17% in 1980. This shift reflects the growing value of services in many industries, driven by the growth of digital technologies. Finally, the rapid growth of digital platforms has started to make country boundaries and traditional country-based business models redundant. Today, goods worth $700 billion are traded through Alibaba and Amazon, having grown at a compound annual growth rate of more than 33% since. In effect, these global market platforms and their associated supply and delivery systems are replacing the complex supply chains that were a common feature of the first three phases of globalisation, making it much easier for even small companies to compete in a global market.
This new ‘technology’ is fundamentally altering the model of globalisation, replacing the physical and financial connectivity with more and more digital linkages. Cloud becomes the digital container in tomorrow’s globalisation. The globally optimised value-chain—a familiar feature of the third phase of globalisation—will give way to value-chains that blend digital technology with older low-cost technologies, allow greater integration across products and services, and leverage the growth of independent global platforms for the exchange of goods and services. Leveraging these new technologies, Uber has become one of the fastest-globalising companies ever, despite all the regulatory issues it has faced and Pokemon Go perhaps became the fastest-globalising ‘product’ ever, blurring country boundaries or customer segmentation. Global manufacturing companies moving rapidly into digital services are creating more value than their traditional peers.
We can call this deglobalisation and bemoan the slowdown in the global GDP or stagnation in global trade and FDI, or see it as the start of a radical new phase of globalisation which brings global customers closer with a swipe on a smartphone screen, offering tremendous opportunities for growth and to build new capabilities to compete. Those companies who do the latter will win the new battles to be fought in Globalisation 4.0. Others will become memories for the new generations.
The author is senior partner and director, BCG Henderson Institute.
Views are personal