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Economic Conditions Snapshot, June 2018

Respondents’ views on economic conditions and growth prospects have tempered. Meanwhile, trade-related changes have become ever more pressing risks to domestic, global, and company growth.

McKinsey Global Survey results

Jean-François Martin

2 Economic Conditions Snapshot, June 2018

Midway through 2018, respondents around the world express more cautious views than they did in March about the state of the economy and its prospects for the rest of the year. In McKinsey’s most recent survey of executives’ sentiment on economic conditions,1 the shares of respondents who say overall conditions are improving and predict that the rate of economic growth will increase are smaller than in the past few surveys. There are some geographic divides, but in contrast to the previous survey’s results, these differences do not fall along developed- or emerging-economy lines.2 Instead, respondents in Latin America report particularly downbeat views, while their peers in North America and India are the most positive about current conditions at home and in the world economy.

Changes in trade policy remain the most cited risk to domestic and global growth, and respondents are increasingly likely to identify the issue as a risk to their companies. Compared with the past three surveys, respondents are less likely to report increases in trade levels between their countries and the rest of the world or that their companies have seen a positive business benefit from changing trade levels. Overall, respon- dents remain optimistic about their companies’ prospects, including the size of their workforces, but they also report significant effects on the workforce—past and expected—from technology-related trends.

Tempered views on the economy Respondents’ opinions on economic conditions and prospects for growth, both global and domestic, are more cautious than they’ve been in several surveys. Forty percent of respondents—down from 54 percent and 60 per- cent, respectively, in the past two surveys—say the global economy is in better shape now than six months ago.

What’s more, expectations of the world economy’s prospects have declined (Exhibit 1). The share of respondents that predict global conditions will worsen now exceeds the share predicting improvements, for

Exhibit 1

Survey 2018 Economic snapshot June 2018 Exhibit 1 of 6

Expectations for the future of the world economy—its overall conditions and its growth rate—have declined.

Expected changes in global economy, in 6 months, % of respondents1

1 Figures may not sum to 100%, because of rounding. In Dec 2017, n = 1,549; in Mar 2018, n = 1,230; and in June 2018, n = 1,648.

Overall economic conditions

Dec 2017

Better Same Worse Increase No change Contract Don’t know

153551 141472

201465Mar 2018 253243

Economy’s growth rate

321652June 2018 353432

3 Economic Conditions Snapshot, June 2018

the first time since December 2016. Likewise, their views on global growth rates also have become more tempered. Respondents are more than twice as likely as they were six months ago (32 percent, up from 14 percent) to predict that the rate of global growth will slow in the next six months—though a majority still expect an increase. One exception is in Europe, where just 43 percent of respondents, compared with 55 percent of all others, believe the global growth rate will increase.

As to their home economies, respondents remain on the optimistic side—although for the first time in a year, less than a majority say economic conditions have improved in recent months. Those in North America and in India are the most upbeat across regions, and those in Latin America are the least so (Exhibit 2). Only 27 percent in Latin America cite improvements, compared with 52 percent who report declines—a dramatic change from three months ago, when respondents in the region were among the most optimistic.3

Exhibit 2

Survey 2018 Economic snapshot June 2018 Exhibit 2 of 6

Respondents in North America and India are the most upbeat about their current economies, and those in Latin America the least so.

1 Figures may not sum to 100%, because of rounding. In North America, n = 398; in India, n = 123; in Europe, n = 605; in Asia–Pacific, n = 186; in developing markets, n = 200; and in Latin America, n = 116.

2 Includes respondents in China, Middle East, and North Africa.

Current economic conditions in respondents’ countries, compared with 6 months ago, by office location, % of respondents1

Moderately worse

Same

Moderately better

Substantially better

Substantially worse

North America

India

Europe

Asia–Pacific

Developing markets2

Latin America

1 2 2

23 1

4 Economic Conditions Snapshot, June 2018

Looking ahead, the outlook on respondents’ home economies is even more cautious. Compared with previous surveys, they are more likely now to expect their countries’ growth rates will contract. At the same time, just 38 percent predict that domestic conditions will improve over the next few months, down from 47 percent in March and 49 percent in December 2017. Respondents in Latin America and Europe are the least likely across regions to expect improvements, and much less likely than they were in the previous survey (Exhibit 3).

Exhibit 3

Survey 2018 Economic snapshot June 2018 Exhibit 3 of 6

Respondents in Latin America and Europe report the most cautious outlook—and much more so than in March—for their home countries.

1 Figures may not sum to 100%, because of rounding. In March 2018, Latin America n = 87; in Europe, n = 475; in Asia–Pacific, n = 124; in North America, n = 311; in developing markets, n = 148; and in India, n = 85. In June 2018, Latin America n = 116; in Europe, n = 605; in Asia–Pacific, n = 186; in North America, n = 398; in developing markets, n = 220; and in India, n = 123.

2 Includes respondents in China, Middle East, and North Africa.

Expected changes in domestic economic conditions, in 6 months, by office location, % of respondents1

Worse

Same

Better

Europe North America

Asia–Pacific

Developing markets2

India

Latin America

Mar 2018

48Worse

Same

Better

Europe North America

Asia–Pacific

Developing markets2

India

64 25

Latin America

June 2018

5 Economic Conditions Snapshot, June 2018

Trade-related concerns persist For the second survey in a row, changing trade policy is cited most often as a threat to global economic growth. Changes in trade policy are cited by 64 percent (Exhibit 4), up from 56 percent previously and twice the share that said so one year ago. Trade-policy changes are the most commonly cited risk in all regions and by respondents in both developed and emerging economies. A related risk, changing levels of global trade, is identified by 27 percent of respondents. It’s now the third most common threat; in March, it was cited sixth.

As a risk to domestic growth, trade-policy changes also continue their climb and have overtaken political issues—that is, domestic political conflicts and transitions of political leadership—as the most commonly cited risk. As in the previous survey, changing trade policy is an outsize concern in North America. In this survey, so are domestic political conflicts, which are cited more often than average in India, Latin America, and North America.

Furthermore, after a year of increasingly positive views about trade levels between respondents’ countries and the rest of the world, sentiment has taken a downward turn. A plurality of respondents continue to report that trade levels have increased in the past year. But the share saying so now is smaller than in the past

Exhibit 4

Survey 2018 Economic snapshot June 2018 Exhibit 4 of 6

A growing share of respondents cite changes in trade policy most often as a risk to global growth.

Potential risks to global economic growth, next 12 months, % of respondents1

Dec 2017 Mar 2018 June 2018Sept 2017

1 Out of 13 potential risks that were presented as answer choices. In Sept 2017, n = 1,407; in Dec 2017, n = 1,549; in Mar 2018, n = 1,230; and in June 2018, n = 1,648.

2 In Sept and Dec 2017, answer choice was “slowdown in global trade.”

Transitions of political leadership

Changes in trade policy

2527

22 17 18

Rising interest rates

14 11

Changing level of global trade2

1617

Geopolitical instability

6 Economic Conditions Snapshot, June 2018

three surveys, and their predictions of future trade levels are increasingly pessimistic (Exhibit 5). Forty-one percent of respondents expect trade levels will decline in the next year, the largest share to say so since we first asked this question in December 2016. Now, respondents are more likely to expect declining rather than increasing trade.

Even respondents in emerging economies are less enthusiastic about trade than they’ve been in past surveys. Three months ago, 60 percent of these respondents said trade between their own countries and others had increased, compared with 49 percent of their developed-economy peers. But in the newest survey, that gap has narrowed: 45 percent in emerging economies and 40 percent in developed economies report increasing trade levels. Looking ahead, those in North America—who are also the most likely to cite trade- policy changes as a threat to domestic growth—remain the most downbeat about their countries’ trade prospects, and increasingly so.4

Exhibit 5

Survey 2018 Economic snapshot June 2018 Exhibit 5 of 6

Views on trade levels have taken a downward turn, and respondents are even less optimistic when they look ahead.

1 Respondents who answered “no change” or “don’t know” are not shown. In Sept 2017, n = 1,407; in Dec 2017, n = 1,549; in Mar 2018, n = 1,230; and in June 2018, n = 1,648.

Change in level of trade between respondents’ countries and rest of world, % of respondents1

Increase

Decline

Sept 2017

Dec 2017

Mar 2018

June 2018

Past 12 months

Sept 2017

Dec 2017

Mar 2018

June 2018

Expected, in next 12 months

7 Economic Conditions Snapshot, June 2018

Exhibit 6

Survey 2018 Economic snapshot June 2018 Exhibit 6 of 6

In Latin America and North America, respondents are less convinced—and less so than average—of trade’s positive business effects.

1 Respondents who answered “no e�ect,” “somewhat negative,” “very negative,” or “don’t know” are not shown. This question was asked only of private-sector respondents who reported some change in trade levels (either increase or decline) between their home countries and the rest of the world in the past 12 months. In Sept 2017, total n = 859, Latin America n = 100, and North America n = 135; in Dec 2017, total n = 924, Latin America n = 89, and North America n = 187; in Mar 2018, total n = 778, Latin America n = 71, and North America n = 135; in June 2018, total n = 944, Latin America n = 82, and North America n = 164.

Effects of changing trade levels on companies’ business, past 12 months, % of respondents1

Very positive

Somewhat positive 35

Sept 2017

Dec 2017

Mar 2018

June 2018

Total

Very positive

Somewhat positive 30

Sept 2017

Dec 2017

Mar 2018

June 2018

North America

Very positive

Somewhat positive 28

Sept 2017

Dec 2017

Mar 2018

June 2018

Latin America

8 Economic Conditions Snapshot, June 2018

Shifting tides at the company level Trade-related changes have implications for companies, too, and the latest results suggest that these effects are evolving. Changes in the trade environment continue to rise as a risk to company-level growth: they are now cited third (formerly, fifth) most often by respondents. And while most respondents’ companies tend to be immune from shifting trade levels at the country level, a growing share say the effects on their business have been negative: 22 percent say so now, up from 17 percent and 14 percent in the past two surveys. Respondents in developed Asia are the most upbeat about the business effects: 52 percent report a positive effect from changing trade levels. Conversely, their peers in Latin America and North America are the least likely—and much less likely than the global average—to report business benefits. In fact, respondents in the Americas are warier now of trade’s effects than they’ve been in recent months (Exhibit 6).

Still, respondents in these—and all—regions expect no meaningful hits to their business in the near term. Overall expectations for profits and demand remain high: 58 percent of respondents in Latin America and 68 percent in North America (compared with 62 percent of the global average) predict that their com- panies’ profits will increase in the next six months.

While expectations for workforce size are holding steady and remain more positive than negative,5 other results suggest that major workforce changes—thanks to technology—are already under way. Seven in ten respondents say that in the past five years, advances in digitization and/or automation have affected some portion of their companies’ workforce (that is, created a need for retraining or replacement), and respondents from larger companies report an even greater effect to date.6 Looking ahead to the next five years, nearly all respondents (94 percent) expect technology-related skill gaps will emerge.

Few companies are ready to handle these skill gaps, though. Thirty-nine percent of respondents say their companies are unprepared to deal with skill issues, and only one-third say addressing these gaps is a top or top five priority for their organizations. The biggest barrier to doing so, respondents say, is their current human-resources infrastructure, which isn’t able to support a new strategy for addressing these gaps. Finally, the results suggest that these workforce changes are a universal issue. Across regions, respondents in emerging and developed economies report similar experiences and views on the effects of automation and digitization on their workforces, the extent to which their companies are—or are not—prioritizing potential skill gaps related to technology trends, and their preparedness to address these gaps.

1 The online survey was in the field from June 4 to June 8, 2018, and garnered responses from 1,648 participants representing the full range of regions, industries, company sizes, functional specialties, and tenures. To adjust for differences in response rates, the data are weighted by the contribution of each respondent’s nation to global GDP.

2 “Economic Conditions Snapshot, March 2018,” March 2018, McKinsey.com. 3 In the March 2018 survey, 64 percent of respondents in Latin America said economic conditions in their home countries had

improved in the past six months, and 21 percent said conditions had declined. 4 In this survey, 63 percent of respondents in North America predict that trade levels between their countries and the rest of the

world will decline in the next 12 months. In March 2018, 58 percent of respondents in the region said the same; in December 2017, 37 percent; and in September 2017, 34 percent.

9 Economic Conditions Snapshot, June 2018

The contributors to the development and analysis of this survey include Sven Smit, a senior partner in McKinsey’s Amsterdam office.

He wishes to thank Alan FitzGerald and Vivien Singer for their contributions to this article.

5 In this survey and in March 2018, 44 percent of all respondents predicted that the size of their companies’, departments’, or agencies’ workforces would stay the same in the next six months; 38 percent expected an increase in workforce size; and 17 percent expected a decrease.

6 At companies with annual revenue of at least $1 billion, 77 percent of respondents say at least 1 percent of their workforce has needed retraining or replacement in the past five years, due to advances in automation and digitization. At companies with revenue of less than $1 billion, 69 percent say the same.

Five priorities for competing in an era of digital globalization As digital flows command a growing share of trade and economic growth, executives must answer new questions.

by Jacques Bughin, Susan Lund, and James Manyika

Globalization, once measured largely by trade in goods and cross-border finance, is now converging with digitization. Enormous streams of data and information are transmitted every minute—circulating ideas and innovations around the world via email, social media, e-commerce, video, and more. As these sprawling digital networks connect everything, everyplace, and everyone, companies must rethink what it means to be global. Our latest research quantifies the economic impact of this shift and suggests five critical areas of focus for executives and top teams.

THE NEW TRADE IN BITS To measure the economic impact of digital globalization, we built an econometric model based on the inflows and outflows of goods, services, finance, people, and data for 97 countries around the world.1 We found that over a decade, such flows have increased current global GDP by roughly 10 percent over what it would have been in a world without them. This added value reached $7.8 trillion in 2014 alone. Data flows directly accounted for

1 The data cover 1995 to 2013, the most recent year for which a large set of countries reported inflows and outflows of migrants.

May 2016

$2.2 trillion, or nearly one-third, of this effect—more than foreign direct investment. In their indirect role enabling other types of cross-border exchanges, they added $2.8 trillion to the world economy.2 These combined effects of data flows on GDP exceeded the impact of global trade in goods. That’s a striking development: cross-border data flows were negligible just 15 years ago. Over the past decade, the used bandwidth that undergirds this swelling economic activity has grown 45-fold, and it is projected to increase by a factor of nine over the next five years (exhibit).

Beyond creating value in their own right, digital flows are transforming more traditional ones. Some 50 percent of the world’s traded services are already digitized and that share is growing. About 12 percent of the global trade in goods is conducted via international e-commerce.3 Digitization is facilitating flows of people too, as Airbnb, TripAdvisor, and other websites provide information that enables travel.

Meanwhile, the growth of trade in goods has flattened. That’s a stark reversal from previous decades, which saw it rise from 13.8 percent ($2 trillion) of world GDP in 1985 to 26.6 percent ($16 trillion) of world GDP on the eve of the Great Recession. Weak demand and plummeting commodity prices account for a large part of this recent deceleration, though trade in both finished and intermediate manufactured goods has also stalled since the crisis. In parallel, many companies are reconsidering the risks and complexity of managing long supply chains—and placing greater importance on speed to market and other costs of doing business and less on labor costs. As a result, more production is occurring in countries where goods are consumed. Looking forward, 3-D technology could further erode international trade as some goods are printed at their point of consumption. These shifts make it unlikely that global trade in goods will resume its previous brisk growth.

OPEN PLATFORMS, VIRTUAL GOODS, AND ‘DIGITAL WRAPPERS’ Behind the scenes, the largest corporations have been building platforms to manage suppliers, connect to customers, and enable internal communication and data sharing. While many platforms are internal, the biggest and best

2 We make the conservative assumption that 12 percent of the impact of other flows on GDP can be accounted for by data flows. This adds a further $0.6 trillion to their direct 2014 impact.

3 China, pushed by favorable free-trade zones set up by the authorities, is a leader in cross-border B2B commerce. Alibaba.com is the best-known company in the space, but many other players are also important, including Zhejiang China Commodities, which just launched yiwubuy.com, and Zhejiang China Light Textile City Group, which bought the platform globaltextiles.com.

Exhibit

Global flows of data and communications are increasing dramatically.

QWeb 2016 Global �ows Exhibit 1 of 1

Used cross-border interregional bandwidth, in gigabits per second

2014

2005

>1,000≤1,000

Source: TeleGeography; McKinsey Global Institute analysis

2,000 5,000 10,000 15,000 20,000 24,405

known are more open: spanning e-commerce marketplaces, social networks, and digital-media platforms, they connect hundreds of millions of global users.

These open platforms give businesses enormous built-in customer bases and ways to interact with customers directly. They also create markets with global scale and transparency: with a few clicks, customers can get details on products, services, prices, and alternative suppliers from anywhere in the world. That makes markets function more efficiently, disrupting some intermediaries in the process. What’s more, digital platforms are helping companies that deliver digital goods and services to enter new international markets without establishing a physical presence there. They also give millions of small and midsize businesses global exposure and an export infrastructure. On eBay’s platform, anywhere from 88 to 100 percent of these relatively modest companies export—compared with less than 25 percent of traditional ones in the 18 countries the company analyzed.

Also growing rapidly is trade in virtual goods, such as e-books, apps, online games, and music downloads, as well as streaming services, software, and cloud-computing services. As the cost of 3-D printing declines, this trade could expand to new categories—for instance, companies could send digital files to output goods locally. A lot of companies already use 3-D printing for replacement parts and supplies in far-flung locations.

Many companies are adding digital wrappers to raise the value of their offerings. Logistics firms, for example, use sensors, data, and software to track physical shipments. One study found that radio-frequency- identification (RFID) technology can help to reduce inventory costs by up to 70 percent while improving efficiency. Case studies in Germany, including the logistics centers of BMW and Hewlett-Packard, found that the technology reduced losses in transit by 11 to 14 percent.4

GROUNDING THE DIGITAL DIALOGUE Business models built for 20th-century globalization may not hold up as digitization gains ground. As leaders take stock of the opportunities and threats, five questions can help ground the discussion:

1. Do we have a clear view of the competitive landscape? Competition is intensifying as digital platforms allow companies of any size, anywhere, to roll out products quickly and deliver them to new markets.

4 Nabil Absi, Stéphane Dauzère-Pérès, and Aysegul Sarac, “A literature review on the impact of RFID technologies on supply chain management,” International Journal of Production Economics, Volume 128, Number 1, November 2010.

Amazon now hosts two million third-party sellers, while some ten million small businesses have become merchants on Alibaba platforms. The growing trend toward “micromultinationals” is seen most clearly in the United States, where the share of exports by large multinational corporations dropped from 84 percent in 1977 to 50 percent in 2013. New digital competitors from all over the world are unleashing pricing pressures and speeding up product cycles.

2. Do we have the right assets and capabilities to compete? Building digital platforms, online customer relationships, and data centers is not just for the Internet giants anymore. GE, for example, is transforming its core manufacturing capabilities to establish itself as a global leader in Internet of Things technology. Businesses in all industries need to take a fresh look at their assets, including customer relationships and market data, and consider whether there are new ways to make money from them. To do so, they will need advanced digital capabilities, a major source of competitive advantage, and workers with cutting-edge skills are in short supply. Online talent platforms can help companies navigate a more global labor market and find the people they need in far-flung places.

3. Can we simplify our product strategy? Digitization can simplify the tailoring of products, brands, and pricing for companies that sell into multiple global markets. But there’s a parallel trend toward more streamlined global product portfolios. Several automakers have moved in this direction. Apple offers only a limited number of its iPhone and iPad models, all with consistent design and branding wherever they are sold. Airbnb, Facebook, and Uber have simply scaled up their digital platforms in country after country, with limited customization. The media and consumer-technology industries are shifting to simultaneous global product launches, since social and other digital platforms enable consumers around the world to see, instantaneously, what’s on offer in other countries. This development creates opportunities for products to go viral on an unprecedented scale. Making smart customization trade-offs, in short, is becoming an increasingly important top-management priority.

4. Should we retool our organization and supply chain? Digital tools for remote collaboration and instant communication make it possible to centralize some global functions (such as back-office operations or R&D), to create virtual global teams that span borders, or even to forgo having one global headquarters location. Unilever, for example, used

technology solutions to streamline some 40 global service lines and create virtual-delivery organizations with team members around the world who meet via videoconference.5

Digital technologies are also reshaping supply chains. Digital “control towers” that offer up-to-the-minute visibility into complex supply chains, for instance, can coordinate global vendors in real time. Since speed to market matters more than ever in a digital world, many companies are reevaluating the merits of lengthy and complex supply chains; logistics costs, lead times, productivity, and proximity to other company operations now have a higher priority. According to a recent UPS survey, approximately one-third of high-tech companies are moving their manufacturing or assembly closer to end-user markets.6 The wider adoption of 3-D printing technologies could lead more companies to reconsider where to base production, potentially reshaping the world’s manufacturing value chains in the process.

5. What are the new risks? Maintaining data security has to be a top priority for companies in every industry. It’s difficult to stay ahead of increasingly sophisticated hackers, but companies can prioritize their information assets, test continually, and work with frontline employees to emphasize basic protective measures. In addition, the Internet and international competition have cut into the window of exclusivity that companies once enjoyed for new products and services; copycat versions can be launched in new markets even before the originators have time to scale up.

The economic impact of digitization is growing, and digital competition often spans borders. As digital tools create new possibilities for building and managing a global presence, business leaders must challenge long-held assumptions about the international competitiveness of their companies.

Jacques Bughin is a director of the McKinsey Global Institute (MGI) and a director in McKinsey’s Brussels office; Susan Lund is a principal at MGI and is based in the Washington, DC, office; James Manyika is a director of MGI and a director in the San Francisco office.

For the full report on which this article is based, see “Digital globalization: The new era of global flows,” on McKinsey.com.

5 Pascal Visée, “The globally effective enterprise,” McKinsey Quarterly, April 2015, McKinsey.com. 6 Change in the (supply) chain, United Parcel Service, 2015, ups.com.

The future is now: How to win the resource revolution Although resource strains have lessened, new technology will disrupt the commodities market in myriad ways.

by Scott Nyquist, Matt Rogers, and Jonathan Woetzel

A few years ago, resource strains were everywhere: prices of oil, gas, coal, copper, iron ore, and other commodities had risen sharply on the back of high and rising demand from China. For only the second time in a century, in 2008, spending on mineral resources rose above 6 percent of global GDP, more than triple the long-term average. When we looked forward in 2011, we saw a need for more efficient resource use and dramatic increases in supply, with little room for slippage on either side of the equation, as three billion more people were poised to enter the consumer economy.1

While our estimates of energy-efficiency opportunities were more or less on target, the overall picture looks quite different today. Technological break- throughs such as hydraulic fracturing for natural gas have eased resource strains, and slowing growth in China and elsewhere has dampened demand. Since mid-2014, oil and other commodity prices have fallen dramatically, and global spending on many commodities dropped by 50 percent in 2015 alone.

1 See Richard Dobbs, Jeremy Oppenheim, and Fraser Thompson, “Mobilizing for a resource revolution,” McKinsey Quarterly, January 2012, McKinsey.com.

October 2016

Even though the hurricane-like “supercycle” of double-digit annual price increases that prevailed from the early 2000s until recently has hit land and abated, companies in all sectors need to brace for a new gale of disruption. This time, the forces at work are often less visible and may seem smaller-scale than vertiginous cyclical adjustments or discovery breakthroughs. Taken together, though, they are far-reaching in their impact. Technologies, many having little on the surface to do with resources, are combining in new ways to transform the supply-and-demand equation for commodities. Autonomous vehicles, new-generation batteries, drones and sensors that can carry out predictive maintenance, Internet of Things (IoT) connectivity, increased automation, and the growing use of data analytics throughout the corporate world all have significant implications for the future of commodities. At the same time, developed economies, in particular, are becoming ever more oriented toward services that have less need for resources; and in general, the global economy is using resources less intensively.

These trends will not have an impact overnight, and some will take longer than others. But understanding the forces at work can help executives seize emerging opportunities and avoid being blindsided. Our aim in this article is to explain these new dynamics, and to suggest how business leaders can create new strategies that will help them not only adapt but profit.

A TECHNOLOGY-DRIVEN REVOLUTION To understand what is going on, consider the way transportation is being roiled by technological change. Vehicle electrification, ride sharing, driverless cars, vehicle-to-vehicle communications, and the use of lightweight materials such as carbon and aluminum are beginning to ripple through the automotive sector. Any of them individually could materially change the demand and supply for oil—and for cars. Together, their first- and second- order effects could be substantial. McKinsey’s latest automotive forecast estimates that by 2030, electric vehicles could represent about 30 percent of all new cars sold globally, and close to 50 percent of those sold in China, the European Union, and the United States.

That’s just the start, since vehicles for ride-sharing on local roads in urban areas can be engineered to weigh less than half of today’s conventional vehicles, much of whose weight results from the demands of highway driving and the potential for high-speed collisions. Lighter vehicles are more fuel efficient, use less steel, and will require less spending on new roads or upkeep of existing ones. More short-haul driving may accelerate the pace of vehicle electrification. And we haven’t even mentioned the growth of autonomous vehicles, which would further enhance the operating efficiency of vehicles,

as well as increasing road capacity utilization as cars travel more closely together. Several million fewer cars could be in the global car population by 2035 as a result of these factors, with annual car sales by then roughly 10 percent lower—reflecting a combination of reduced need as a result of sharing but also higher utilization and therefore faster turnover in vehicles and fleets.

The upshot of all this isn’t just massive change for the automotive sector, it’s a shift in the resource intensity of transportation, which today accounts for almost half of global oil consumption and more than 20 percent of greenhouse-gas emissions. Oil demand from light vehicles in 2035 could be three million barrels below a business-as-usual case. If you include the accelerated adoption of lighter materials, oil demand could drop by six million barrels. We may see “peak” oil—with respect to demand, not supply—around 2030. (For more, see “Is peak oil demand in sight?,” on McKinsey.com.)

Many other commodities face similar challenges. Natural-gas demand has been growing strongly as a source of power generation, especially in the United States and emerging economies. We see no signs of electricity demand abating—on the contrary, we expect demand for electricity to outpace the demand for other energy sources by more than two to one. But the electricity- generation mix is changing as solar- and wind-power technology improve and prices fall; wind could become competitive with fossil fuels in 2030, while solar power could become competitive with the marginal cost of natural- gas and coal production by 2025. Fossil fuels will continue to dominate the total energy mix, but renewables will account for about four-fifths of future electricity-generation growth.

Metals will be affected, too. Iron ore, a key raw material for steel production, may already be in structural decline as steel demand in China and elsewhere cools, and as recycling gathers pace. Lighter cars on roads that require less maintenance would only hasten that decline. We estimate that a smaller car

We see no signs of electricity demand abating—on the contrary, we expect demand for electricity to outpace the demand for other energy sources by more than two to one.

fleet alone would potentially reduce global steel consumption by about 5 percent by 2035, compared with a business-as-usual scenario. Copper, on the other hand, is used in many electronics and consumer goods and could see a steady growth spurt—unless substitutes such as aluminum become more competitive in a wider set of applications. Electric vehicles, for example, require four times as much copper as those that use internal-combustion engines.

Some of the biggest impact on resource consumption could come from analytics, automation, and Internet of Things advances. These technologies have the potential to improve the efficiency of resource extraction—already, under- water robots on the Norwegian shelf are fixing gas pipelines at a depth of more than 1,000 meters, and some utilities are using drones to inspect wind turbines. Using IoT sensors, oil companies can increase the safety, reliability, and yield in real time of thousands of wells around the globe. These technologies will also reduce the resource intensity of buildings and industry. Cement-grinding plants can cut energy consumption by 5 percent or more with customized controls that predict peak demand. Algorithms that optimize robotic movements in advanced manufacturing can reduce a plant’s energy consumption by as much as 30 percent. At home, smart thermostats and lighting controls are already cutting electricity usage.

In the future, the pace of economic growth in emerging economies, the rate at which they seek to industrialize, and the vintage of the technology they adopt will continue to influence resource demand heavily. A key question is, how quickly will these economies adopt the new technology-driven advances? The challenge in part is from regulation and in part a question of access to capital, for example with solar energy in Africa. But the innovations provide new approaches to address age-old issues about resource intensity and the dependency on growth. Above all, they create the potential for dramatic reductions in natural-resource consumption everywhere. And that means there are substantial business opportunities for those with the foresight to seize them.

RESETTING OUR RESOURCE INSTINCTS Many of these developments are new, and they have yet to permeate the mind-sets of most executives. That could be costly. Those who fail to recognize the changing resource dynamics will not only put themselves at a competitive disadvantage but also miss exciting new value-creation opportunities. Here are five ways the future will likely be fundamentally different from the present and past:

1. Resource prices will be less correlated to one another, and to macroeconomic growth, than they were in the past. During the supercycle, all resource prices moved up almost in unison, as surging demand in China encountered supply constraints that stemmed from years of market weakness and low investment. China’s appetite for resources went well beyond just fossil fuels; in 2015, it consumed more than half of the entire global supply of iron ore and about 40 percent of copper.

Today, however, the underlying drivers of demand for each commodity have changed and are subject to factors that can be highly specific. While iron- ore demand could decline by more than 25 percent over the next 20 years as a result of the weakening demand for steel and increased recycling, copper demand could jump by as much as 50 percent. Or take thermal coal. Although it remains a primary energy source in emerging economies, coal faces competition from solar and wind energy, as well as from natural gas, and many economies would like to “decarbonize” for environmental reasons. As these interlocking shifts play out in the years ahead, past supply, demand, and pricing patterns are unlikely to hold.

Exhibit

Q4 2016 Extra Point Exhibit 1 of 1

Resource prices will be less correlated to one another, and to macroeconomic growth, than they were in the past

You will have more in�uence over your resource cost structure

You may �nd resource-related business opportunities in unexpected places

The resource revolution will be a digital one, and vice-versa

$ $

Water may be the new oil

The resource revolution: Time to hit reset

2. You will have more influence over your resource cost structure. Resource productivity remains a major opportunity. For example, while internal-combustion engines in passenger cars have become about 20 percent more efficient over the past 35 years, there’s room for another 40 percent improvement in the next two decades. The automotive sector is in a state of creative ferment trying to realize these opportunities, as partner- ships between GM and Lyft, Toyota and Uber, and a plethora of electric- vehicle and other start-ups in the sector illustrate.

Broadly, we estimate that greater energy efficiency and the substitution of some existing resources, such as coal and oil, by alternatives, including wind and solar, could improve the energy productivity of the global economy by almost 75 percent—and the fossil-fuel productivity of the economy by almost 100 percent—over today’s levels. That could cut consumer spending on fossil fuels by as much as $600 billion in real terms compared with a business-as- usual scenario under which demand would continue rising to 2035.

Business can capture some of this value through technology, such as deploying automation, data analytics, and Internet of Things connectivity to optimize resource use. Manufacturing plants are already seeing significant reduction in energy demand through retrofit efforts, including sensor installation. Or consider mechanical chillers: today, most of them are set to run at a constant pressure, which ensures continuous or near-continuous operation. But temperature sensors and automation controls enable condenser pressures to float according to changes in outdoor temperatures, so that the chillers only run when they need to, which can boost efficiency substantially.

Technology is also enabling second-order benefits, such as improving labor productivity by using sensors to more finely tune temperatures and lighting, or predicting compression failures in heating and cooling systems using the same data analyzed to minimize energy consumption. Leading companies are now starting the hard work of building apps and data flows that connect all this information across multiple tiers of their supply chains, giving them both visibility into, and influence on, the vast amounts of resource efficiency embedded deep within their extended network of operations.

3. You may find resource-related business opportunities in unexpected places. This resource revolution is already giving birth to a host of innovative products, solutions, and services, and many more are out there waiting to be seized. Car-sharing services already exist, of course, but there is plenty of room for newcomers wanting to join the disruption

of transport. Battery storage still needs to be cracked. New carbon-based materials that are lighter, cheaper, and conduct electricity with limited heat loss could transform numerous industries, including automobiles, aviation, and electronics. Drones are starting to help utilities carry out predictive maintenance of electricity lines, solar panels, and wind turbines. Plastics made from renewable biomass sources could help meet the expected increase in demand from emerging economies. Technologies that enable mining under the sea or on asteroids could help unlock vast new reserves. And, of course, many more down-to-earth applications, such as smartphone apps that help people cut their utility bills, also have a future.

The technologies underlying these opportunities already exist or are being explored. But they are still so nascent that their aggregate impact is difficult to estimate. And that’s to say nothing of more speculative technologies—such as hyperloop transportation that could move people at very high speeds or a breakthrough in nuclear fusion—which could have even greater potential.

4. The resource revolution will be a digital one, and vice versa. Responding to technology-driven change on the scale of the resource revolution requires companies to step up their ability to digitize and harness data analytics. Digital and data opportunities have a deep cross-cutting impact, affecting how companies market, sell, organize, operate, and more. In the factory, of course, data capture is just a beginning: you need to connect the data with your workflows and have a clear understanding of your energy needs in order to identify efficiency opportunities and the levers you must pull to seize them. Indeed, without rethinking processes, energizing people, transforming the way they work, and building new management infrastructure, companies are unlikely to capture much of the value available to them through digital technologies and tools.2

Developing a product offering to help customers capture the benefits of better resource management also requires the commodity supplier to become smarter than the operator. All this demands organizational agility and leaders who recognize the need to put resources squarely on the table as they seek to reinvent themselves for the digital age: scrutinizing the entire supply chain with advanced data analytics, for example, or crafting digital strategies with energy, material, and water footprints in mind. This is already happening in the utility sector, where companies like Smart Wires and SolarCity are challenging traditional players and paradigms regarding how much new transmission and distribution needs to be built out.

2 For more on the broader operating shifts needed to realize resource gains, see Markus Hammer and Ken Somers, Unlocking Industrial Resource Productivity: 5 core beliefs to increase profits through energy, material, and water efficiency, McKinsey Publishing, 2016.

5. Water may be the new oil. If it’s true that in the years ahead we’re likely to experience less correlation among prices for different resources and that demand for oil could peak, where, if anywhere, should we watch for future commodity booms? The answer may be water. For the most part, water is still treated as a “free” resource, and unlike oil, water does not yet have a built-out global infrastructure. Not surprisingly, with limited pricing and rising demand in many emerging markets, water is under pressure. Our research indicates that most emerging-market cities experience some degree of water stress.

In a thirsty world, technologies that can extract and recycle water should become increasingly valuable, creating new hotbeds of competition. Advanced water management also will become more important, with a global imperative of zero waste and maximum recycling and regeneration. The returns on water-conservation efforts become more attractive when companies consider the full economic burden of waste, including disposal costs, water-pumping and -heating expenses, and the value of recoverable materials carried off by water. Companies including Nestlé, PepsiCo, and SABMiller (poised to merge with Anheuser-Busch InBev) are increasingly focusing on sustainable water management that embeds water-saving opportunities in lean management. In India, for example, PepsiCo now gives back more water to communities where it operates than its facilities consume. Without more efforts like these, water may become the most precious, and most coveted, resource of them all.

The resource revolution that emerged, stealthily, during the supercycle will undoubtedly bring with it some cruelty and dislocation. To some extent, this is already happening: the coal fields of West Virginia, for example, are suffering. On the positive side, the more efficient and thoughtful use of resources could be good for the global environment—and very good for inno- vative corporate leaders who accept the reality of this revolution and seize the opportunities it will unleash. The new watchword for all, literally, is to be more resourceful.

Scott Nyquist is a senior partner in McKinsey’s Houston office, Matt Rogers is a senior partner in the San Francisco office, and Jonathan Woetzel is a senior partner in the Shanghai office.

The authors wish to thank Shannon Bouton, Michael Chui, Eric Hannon, Natalya Katsap, Stefan Knupfer, Jared Silvia, Ken Somers, Sree Ramaswamy, Richard Sellschop, Surya Ramkumar, Rembrandt Sutorius, and Steve Swartz for their contributions to this article and the research underlying it.

Is globalization in retreat? Three global CEOs share their insights

April 2018

Faced with a backlash against globalization, executives share how they are responding to the new dynamics of international trade to maintain competitiveness.

Globalization is not what it used to be. What will be the result of rising tension and backlashes in many countries? How should businesses adjust to the new world of digital globalization? McKinsey partner Susan Lund asked Joseph Jimenez, Andrew Liveris, and Bill Winters, who have served as CEOs of multinational companies, their thoughts on whether globalization is stalling, where it is going next, and how their businesses are adapting to these changes.

Interview transcript

Hi, I’m Susan Lund, a partner at the McKinsey Global Institute.

Large companies have been among the largest beneficiaries of the latest three decades of globalization, but times are changing. Since the great recession, we see that trade flows have flattened and that cross-border financial flows have fallen quite sharply. There’s been a backlash against immigration and globalization in many advanced economies. How are companies responding to these changes? How are they changing their strategy? What can business leaders do to ensure that we have a future that entails free and open markets?

We talked to three CEOs of global companies about these changes, how their businesses are responding, and what they foresee as the future of globalization. We talked to Andrew Liveris of the US chemicals company Dow, Bill Winters of the global bank Standard Chartered, and Joe Jimenez of Novartis, the Swiss pharmaceutical company.

Susan Lund: How is globalization changing?

Andrew Liveris: I see globalization as continuing. It’s like gravity. You will never not have globalization now. Lots of factors make it a momentum that is irreversible. One of them is what’s happening to us in the technology world. In fact, I think the force of digitalization is creating even further the forces of globalization.

Now I do think we are at a pause moment with globalization because of the other factor that’s occurred. We are entering a period of time where Western-based democracies and capitalism haven’t really taken the effects of globalization. I’m going to use a word, which will almost imply socialism, but it’s not meant to. The distribution of the benefits of globalization has not occurred equally or in an egalitarian way. That’s created populism and a pushback.

Bill Winters: I don’t think globalization is stalling. I do think it’s going through an important transition. Clearly the world has experienced 30 years of above-potential growth, effectively, as global connections are made—the largest single component of that being the rise of China. China obviously has gotten to the point where its competitive advantage from cheap labor is coming to an end. It’s no longer the destination for cheap labor. That transition isn’t complete, but we can see that the beginning of that transition is happening.

Joseph Jimenez: We’ve seen it coming for a while, but I still think the worst years are ahead of us in terms of additional anti-globalization. I don’t think populism is a trend that’s going to go away.

Susan Lund: How is your corporate strategy changing in response to globalization?

Joseph Jimenez: What we’re doing at Novartis is, we’re getting ready for a period where it’s going to be more difficult to have free flow of our goods across borders. For example, we have a very large manufacturing supply chain. We have over 85 manufacturing facilities. When you look at our industry, we’re going to have to improve our cost structure significantly—because while innovation is exploding, the health systems that are paying for that innovation are under pressure, which means that pricing is under pressure, which means that we better improve our cost base.

So in terms of rationalizing a manufacturing base to be a truly global, well-integrated manufacturing base, there is more resistance to exiting certain manufacturing sites than there was even three or four years ago. We’re going to have to spend more time thinking about very specific country strategies and how we’re going to specifically deal with the US government versus the UK government versus other governments in Europe—and some in Asia.

Bill Winters: Banks themselves didn’t globalize so much. The bank’s customers did, and banks helped them do that. The fact is, banks today are in a very different place. They’re hyperregulated—the most regulated industry on the planet, probably right up there with pharmaceuticals—for very understandable reasons. Local banking regulators want to have control of a local bank. They want international banks to break up into local banks, regulated as a series of local banks, which has the effect of balkanizing capital and cash liquidity within separate countries.

Banks are being strongly encouraged—or required, in many cases—to convert branches to subsidiaries, the effect of which is to give the regulators greater control over these local entities.

So while the economy is becoming better connected, the global financial system is becoming less well connected, as a practical matter. Standard Chartered is bucking that trend, and one of our key advantages as a bank is our global network.

Andrew Liveris: Today I think of strategy very differently. The dynamics of competition, the intensity, the speed, the need for agility—no matter how big your corporation or entity is, they are very different. I consider the most important thing you do is to have your North Star defined—your navigation point. Call it your vision, if you wish. Your strategy is a bunch of zigs and zags. The zigs and zags in that moment in time are very logical based on the notion of what’s happened that you didn’t expect. That changes the type of leader you have to have, and the dynamic aspect of that leader, to not live yesterday’s paradigms.

Susan Lund: What can companies do to build more support on globalization?

Bill Winters: I think there’s a real denial about the fact that individuals or large groups of individuals were fundamentally impacted and needed help. They needed help, and they need hope and purpose. I think that, as a global community, we failed to recognize that, and we’re now experiencing some of that backlash, whether it manifests itself in Brexit or manifests itself in potentially populist trade policies in the US or elsewhere. We need to do more work to help observers and citizens of our countries understand the benefits of trade, which are genuine and real, but at the same time recognize that people will be impacted by this. That could mean a significantly stepped-up focus on reeducation—which is going to start with primary education, which we know is also lacking in a number of our communities—and then reeducation, job training, and financial assistance to people through transition. I think if we don’t recognize both parts of that, the anti-globalization forces and the anti–free trade forces will overwhelm us.

Joseph Jimenez: I think there are a few things that we can do as business leaders and as overall businesses. The first is to be the voice of communicating the benefit of free trade. There are massive benefits of some of the multilateral free-trade agreements that have been put in place over the last 20 years. Countries and populations have benefited from that. So I think being the voice of the continued benefit of free trade is the first. The second is that we cannot avoid the fact that this wave of populism is not going to stop anytime soon. We have to be realistic and understand that we must treat those governments now as customers in ways that, perhaps, we didn’t just three or four years ago.

Andrew Liveris: It puts the onus on us as business leaders, as thought leaders, to actually be there in the front lines and help our workers, our communities, and all affected stakeholders understand how globalization is a force for good, not a force for the negative.

We have to get politicians who are in policy, that’s where the term comes from, first—and getting reelected second. I’m a great advocate that every business leader, myself included, that once they leave their primary role, whatever it may be—go out there and do public service

and civil service—and run for office as actually a service to everyone, with no view to getting elected beyond one cycle. I think if a lot of people like that got into politics, we can reverse what’s going on now, which is the frustration, fear, and anger at the forces of globalization.

Joseph Jimenez is the former CEO of Novartis, Andrew Liveris is the former executive chair of Dow, and Bill Winters is the CEO of Standard Chartered. Susan Lund is a partner in McKinsey’s Washington, DC, office.

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