Globalization
Implications for the Middle Market Company
Article by: James Webb, Stratus Partners
Stratus Ideas, February 2002
Globalization
The historic globalization of business is finding a continually
growing impact upon business here in America. If a company is not doing
business directly with a foreign company, then their customers most likely
enjoy overseas revenue. On the other end of the business model, more and
more companies look overseas for supplies and component parts - if not
your immediate supplier, then probably your supplier's supplier.
The events of September 11th caused heightened security and distrust among
certain governments. This has resulted in higher insurance premiums,
longer delays at borders and higher transportation costs that amount to a
"security tax." Stephen Roach, the Chief Economist at Morgan Stanley has
declared that the attacks and their aftermath "may bring about the demise
of globalization."
A historic perspective is necessary. Globalization is reversible. It was
derailed in 1914 by economic policy and again during the recession of the
1930's. However, in our present situation we have seen bumps, but not
stops. While the cross-border flow of goods and services grew by an
average of 7% throughout the 1990's, it stagnated in2001 - however, we are
already starting to see increased activity in 2002. Also, the flow of
direct investment into developing nations is holding up well.
Recent events at Enron and Global Crossing are indicative of companies
that over-leveraged to the upside and failed to have adequate contingency
plans in place for the inevitable downside of every business cycle.
Stability in Europe?
The month of March will see the initiation of a convention to draft a
constitution for the European Union. Former French President d'Estaing
compares the event to Philadelphia convention that gave birth to the
Constitution of the United States. Of course, President d'Estaing is in
charge of the affair and is trying to bolster the event.
- The truth concerning greater
European stability can be found in looking at the individual companies
rather than in relying on the rhetoric from the top. The following
appear to be icebergs in the path of the European Union juggernaut:
- Austria has a far right government
set against enlarging the EU
- Belgium has failed to comply with
more European Court rulings than any other EU member
- Britain has opted out of the euro
- the common currency
- Denmark has failed to adopt the
euro, defense or justice agreements
- France blocks economic reforms
- Germany has elected an opposition
leader who has publicly complained about interference from the EU
- Greece will only support EU
expansion if a divided Cyprus is let in
Ireland rejected the Nice Treaty
- Italy has recently changed their
stance to align more with British beliefs
- Sweden opted out of the euro.
While the European Union tide is very
strong, individual nations continue to find ways to fight it.
While these events are causing bumps - not stops - they provide additional
concern over European economic progress and cross-border commerce.
Asian Comeback?
Unlikely. Japan's deflationary spiral continues unabated as consumer
prices have fallen every month for the past two years only to see retail
sales continue to plummet - down 6% in 2001alone. GDP continues to fall in
real terms and jobs cuts continue to accumulate
As eyes turn to the billions of consumers in China, all they see is
corruption. According to The Economist "so pervasive is corruption in
China that it would be hard to find any leader whose associates and family
members are beyond suspicion." China's handling of a huge corruption
scandal in the port city of Xiamen demonstrated the limitations of Chinese
leadership's resolve.
The Terrorist Threat
On a much more disturbing plane is the proliferation of weapons of
mass destruction. President George Bush recently referred to "an Axis of
evil arming to threaten the peace of the world." Once again, we prefer to
look at specifics:
- Iraq heads the list due to its
known clandestine activities in the past. They have spent $10 billion
to find ways to produce weapons grade material, have successfully
tested a "dirty" nuclear weapon, and have had time to rebuild their
chemical weapons stocks
- Iran signed the Chemical Weapons
Convention, declaring that they have no weapons or production
facilities even though it is general knowledge that they have had both
since the 1980's. They have also been aggressively recruiting
disgruntled Russian scientists for their missile development program.
- North Korea has been caught
making plutonium for their nuclear weapons program. Public promises to
stop are generally met with more discoveries that they do not even
slow down. They are also known to possess large stocks of chemical and
nerve agents.
- Cuba and Israel refuse to sign
the Nuclear Non-Proliferation Treaty; Libya, Syria and Egypt refuse to
sign the Chemical Weapons Convention; Sudan refuses to sign the
Biological Weapons Convention; Saudi Arabia purchased medium-range
missiles from China; India and Pakistan publicly crossed the nuclear
weapons threshold
These are just snippets of
destabilizing influences - brought into much sharper focus by the events
of September 11th.
Leadership in Uncertain Times
Keeping the company moving forward to maintain a competitive advantage
is tough in uncertain times. The key is to determine the nature of the
uncertainty, identify ways to measure deviation to identify when the
situation is not acceptable, and have contingency plans in place to move
when adverse events impact your competitiveness.
For example, companies relying upon "just-in-time" inventory should
conduct a complete supply chain diagnostic of where parts really come from
- all the way back to raw material. Should any of the suppliers along the
chain be suspect (i.e., in a high risk area), keep a close watch and
prepare now to ensure your customers are not disappointed.
