Natalie Blyth, Global Head of HSBC’s trade finance business, recently shared her views on how the world will change as a result of Covid-19 and other geopolitical challenges. Blyth oversees the approximately $750 billion of trade annually that HSBC facilitates with 2 million clients and is well-positioned to see the changes underway in the global landscape.
The summary: Look for more geopolitical tensions and new technologies to continue a period of great disruption in supply chains, business models, and consumer behavior. Asia will continue to rise but companies will be hurt by continuing Sino-U.S. tension. There will be a thickening of ties between different regions, such as Latin America and Asia. Labor cost differences will matter less, technology use more. Corporate purpose will be under increased scrutiny.
This is disruption on a scale we’ve never seen. For entrepreneurs savvy enough to harness these trends, it will be a time of creative destruction, and they will rise from the ashes with new business models, new companies. For others, it will just be an era of destruction.
Here are an edited version of Blyth’s key points:
Geopolitical tensions are putting globalization under pressure. Globalization was already under stress, but U.S.-China trade tensions have hastened its decline. An increasing number of countries have adopted nationalist and protectionist narratives.
Trade policy crisis: The pandemic has heightened prospects of government interventions in strategic sectors, the emergence of national champions, and the push for economic self-sufficiency.
Digital platforms changes how trade takes place: As digitalization of trade accelerates, it will place a greater focus on platforms that service transactions, in financing, logistics, payment, and insurance. Trade is not actually very easy and all of these are done in silos. The next generation of trade is going to build a digital thread that will bind those all tighter. This transparency will completely disrupt business models and cut out middlemen. It will connect billions of people, businesses, and trade effectively in that single ecosystem, which itself will create value and efficiencies. We are seeing innovation on a scale and pace never seen before, and it’s touching every thread of our societies, whether it’s the iPhone reshaping an entire industry or the rethinking of economic and capital models (blockchain and Uber are good examples of that).
Digitalization is transforming what gets traded: It’s catalyzing the trend of services trade. This is more than professional services or digital content. We’re seeing new innovations in trade like 4D printing and the cloud—this could be the digital printing of instructions, or tech companies effectively providing infrastructure as a service. The fastest area of trade growth is in the movement of trade from the physical to the digital.
The post-Covid new normal: We know things will be different but we don’t know yet how and to what degree. We will see a growth of virtual services and the “platformization” of the economy, that is, as more and more companies move toward a business model that depends on an electronic marketplace or logistics platform to facilitate exchanges between buyers and sellers.
Unprecedented changes in consumer behavior: This will make forecasting demand and planning very difficult, especially in the near term. All the algorithms we have are built on historical data and a lot of the models do not work today.
Labor costs will matter less: The labor-cost arbitrage will become less important in a world of robotics and artificial intelligence, and where manufacturing can quickly be redeployed, re-shored, near-shored, or become multi-local.
“The great accelerator” or the “great inflection point.” The Covid-19 pandemic is like rocket fuel for these trends. The pace of tech adoption and trade digitalization have increased massively. But it’s no longer just the economic and capital models that are being challenged—it’s entire sectors and their business models.
Asian economies: Asia will bounce back faster than the West, which means the rise of Asia will continue. But as the superpowers escalate their ideological struggle, the economies will feel a chill. What are the new trading blocs that will be formed? Who is impacted the most?
Supply chains will become more regional: We are tilting to a new form of regionalization which will require significant strategic and structural change. Further challenges to full-blown globalization and multilateralism will continue, which in turn will place increasing emphasis on regional trade agreements and regional supply chains. To take one example, the rules of the U.S.-Mexico Canada agreement (USMCA), the successor to NAFTA, will make it difficult for Mexico to negotiate a bilateral trade agreement with China or other non-market economies.
Latin America can carve out a new role for itself in the supply chain: Trade between Asia and Latin America was strong before the crisis, but its growth was not balanced. Much of Latin America’s trade with Asia was driven by the export of commodities used in manufacturing in China. But Latin America has shown through its trade with the U.S. that it has the capability to export and re-export electronics, and that will help it carve out a new role in the global manufacturing value chain.
How should businesses respond? Businesses will need to transform their capital and business models, moving from just-in-time supply chains to just-in-case supply chains; building resilience; and potentially for re-shoring and near-shoring.
Transformation of supply chains: This will include more horizontal and vertical integration. We’re seeing this with our customers as they look to shore up the most critical points in their supply chains. Technology will make supply chains more sophisticated, driving efficiency and control, and leading to greater precision and agility in decision-making.
Corporate purpose: On values and the debate around a company’s purpose, we’re seeing a societal shift that will take us further faster. The pandemic highlighted interdependencies between the people and planet and the need for a more balanced carbon footprint. That carbon footprint is critical for supply chains. Eighty percent of a corporation’s carbon footprint is through their supply chains and logistics. It’s a real problem that we have to solve for trade. But the shift in societal values is going to run much deeper and be centered on tackling injustice, creating a much more equal society between the haves and have-nots, and providing a social safety net through new social contracts. For corporations, that means redrawing their implicit contract to society in a way that demonstrates that they are part of the solution.