You cover the entire world, covering clients wherever they may be, and that puts you in a unique position to understand what companies are facing in real time. I’m curious as to your sense of the biggest risks and opportunities heading into 2017.
2016 was a year where there were a lot of big events in large, established markets that surprised people and have had a global ripple effect. If I had to identify a single risk that every global leader needs to deal with, it would be the rise of populism in the developed world. We’ve seen that with Brexit, we obviously saw it with Trump, and we could potentially see it with upcoming elections in France, where we could see a core member of the EU elect a populist leader who is not thrilled at the prospect of staying in the EU or Eurozone.
"If I had to identify a single risk that every global leader needs to deal with, it would be the rise of populism in the developed world."
That said, from a 30,000-foot level, the global economy is still quite healthy. Some of the larger oil exporting markets struggled when the price of oil fell, but we’re seeing Brazil and Russia start to bounce back. The US is going to accelerate growth significantly from 1.6 percent last year to 2.1 percent this year. Overall, we expect the global economy to go from 2.5 percent to 2.8 percent growth in the coming year. There is a lot of opportunity if you know where to look for it and how to manage risk.
If the worst risks were to materialize, what would that world look like?
We’ve seen that there will be bilateral approaches to trade from the largest countries, including the US, there’s going to be disruptive appreciation in the dollar, which we expect will change the game in some ways that companies are not prepared for. We also track risk for potential scenarios. These are things like a hard landing in China, the possibility of a trade war, or open military conflict. These are the kinds of things that really change the game for business if you don’t have a hedging strategy in place.
Obviously, no year is free of scandals or problems. How does one separate real risk from perceived risk that might be speculated upon by the media or others?
The dawn of the Trump Administration is a perfect example of this dynamic, because like most disruptive changes, it has positives and negatives. Separating media hype from real change can be very difficult. Clearly the Trump Administration will be somewhat unpredictable, but the package of change will include tax and regulatory simplification that will likely have economically stimulative impacts. At the same time, this could also result in trade wars and the US not supporting allies in places like Southeast Asia and Eastern Europe.
We found the number one risk among executives was a scenario we called “Trump Trade Chaos”, wherein the world settles into Trump’s pattern of bilateral, case-by-case dealmaking. Business loses a great deal of confidence in the cost structure of their import/export flows, and the cost structure of their supply chain in this environment. They’re not going to know how to predict their own margins in this scenario, because anything could change at any time. It’s one thing to renegotiate NAFTA to include components of the TPP agreement, such as energy and IP protections, which could be beneficial. On the other hand, if immigration issues start to become mixed into the politics of trade, Trump could decide to completely walk away from NAFTA and throw things into disarray. Both of these scenarios are possible, and that makes it very difficult to make informed decisions.
Where do you see additional opportunities? You mentioned tax reform and reinventing relationships with trading partners.
The application of pressure can be an effective negotiation tactic, and anyone who thinks that Donald Trump isn’t a skilled negotiator hasn’t been paying attention for the past thirty years. The Trump Administration may find ways to create a more level playing field in China. One of the interesting aspects of our downside scenarios for China is that it could result in fairer competition based on the need to keep foreign direct investment flows coming in.
Looking at growth rates around the world, Brazil and Russia are entering modest growth cycles, so companies should look in their direction, even if they are not growth leaders.
It’s important to look below the country level in some of these places. Just because there is a real risk of a hard landing in China, this doesn’t mean companies shouldn’t look for pockets of growth and dynamism within the country. If you look at Chengdu or Chongqing in the center of the country, they are going to be growing at nine or ten percent for the next few years. They have a lot of tech companies and manufacturing and a very sophisticated workforce, while not being as competitive as the city clusters around Shanghai.
The same is true in India. When taken as a whole, India can seem like an intimidating place to do business, but the chances of finding customers in Mumbai and Ahmedabad are very high, without having to deal with country’s logistical challenges and poor infrastructure. In short, the world doesn’t have to be as intimidating as a lot of executives might think.
“I don’t think Southeast Asia gets as much attention as it should.”
What are some other potential bright spots that people should be considering?
Southeast Asia doesn’t get as much attention as it should. Western companies tend to get intimidated by the complexity of doing business there. Obviously, there are ten different countries in ASEAN, with differing languages and regulatory regimes, but I think this is deceptive. Looking at the ten largest cities in ASEAN, you easily get a majority of the GDP of the whole region, while only worrying about 20 to 25 percent of the area. A focus on areas like Jakarta, Bangkok, or Manila presents great opportunities in this regard.
What do you think of the Trump Administration in general? It sounds like some of your clients are concerned, while others see opportunities.
It is tricky for foreigners to interpret what is happening in American politics, because they are used to the US being an exception to the way most countries operate. The expectation is that the US will provide a global security umbrella and have military forces around the world, but not use them to extract economic rent from the rest of the world. In many ways, the United States has elected a leader who behaves in a way other populist world leaders do (Turkey, populist Central Europe, etc). Companies are totally comfortable doing business in these places, once they realize that the rules might not apply quite as consistently as they have in the past.
Do you see that as a benefit to foreign companies, or an asset to American companies?
I don’t necessarily think of it at the corporate level. The United States will have more progressive advocacy overseas, but it won’t be uniformly expressed. In terms of doing business in the US, executives with international experience will benefit, because American politics is becoming more nationalistic in a way that is familiar to executives that have been doing business internationally for the last ten years. I recommend that American companies bring high performing international employees home, because they know how to handle this environment.
What do you see going on in key US relationships, specifically China, Canada, and Mexico?
It was very revealing to see that relations between President Trump and Prime Minister Justin Trudeau were seemingly cordial, while there have been periods of confrontation and a cancelled summit on the southern border. Tension on the Mexican border will likely continue, and this will strain Mexico, considering the domestic challenges it faces. With China, almost anything is possible at this point. There was a confrontational impulse right out of the gate with a phone call to the Taiwanese president, but we’ve seen a softening with Trump’s acknowledgment of the One China policy.
What about Japan?
Japan is in an interesting place in terms of managing its relationship with the US. On a recent visit, there was talk among business leaders and economic analysts about Prime Minister Abe’s visit. People were reassured that Trump articulated unequivocal support for a security relationship with Japan when North Korea launched a missile. Promises of American protection won’t dissuade Japan from continuing its military buildup and a more assertive defense posture against both North Korea and China, but it is reassuring in the moment. China seems to be more in the crosshairs of an Asian trade war than Japan, but Donald Trump does seem to have a 1980’s view of the United States’ international trade relationships. Commentators in Japan are interested in why the Trump-Abe summit did not focus more on trade, as the Japanese Ministry of International Trade and Industry compiled a massive package articulating the massive benefits of Japanese investment into the US.
Abe has gotten a great deal of attention from Trump, which I think could be a good thing. How much room for improvement do you see for companies in that relationship at the political level, and to what extent is the business environment divorced from the political environment?
It would be a surprise if Japan became the flashpoint of 2017 in terms of real business. There were certainly some industries, like American agriculture and Japanese auto manufacturers that were looking forward to TPP. Obviously, net trade would have improved and benefits would have flowed down to customers, but it’s not like the status quo is negative. These are very established economies that do a lot of business with each other. Japan is closer to the Canada end of the spectrum in terms of the way people think about trade than China or Mexico. Because Japan doesn’t have a job displacement dynamic, it won’t be a point of focus for the Trump Administration. Trump’s base cares about jobs and the displacement of American manufacturing, and so he’s trying to hold off cheap labor. By contrast, manufacturing is successful in Japan and Germany because they are so productive and use automation effectively. Not because they are cheap, however, so they are not of concern to Midwestern voters. China and Mexico will likely stay in the crosshairs, and I’m a little concerned about ASEAN, as many of those countries play the same role in trade relations and the global manufacturing value chain as China. I could envision them getting swept up in the same dynamics if there were a high-profile news event such as a factory closing and outsourcing to those countries. That could become a big deal.
What’s on the agenda for Frontier Strategy Group, and yourself personally in 2017?
We’re tracking a number of different developments around the world. Frontier is engaging our clients in several markets that are on the upswing. We’re doing an event in Buenos Aires in a few months, to bring attention to Argentina and look more carefully at business strategies there. We’re also going to do some business trips on the sub-national front, getting into the Chinese interior and northeast Brazil. We are in the process of adding extensive data for 350 Chinese cities, 30 economic indicators forecasted out 10 years, which will help our clients be more granular about targeting demand at a local level, which is key for managing margins.