Competition for Multinational Corporations
McKinsey & Company, a multinational management consulting firm, issued a report in September titled Playing to Win: The New Global Competition for Corporate Profits. The report reveals fascinating statistics and trends that globalization has brought for the world’s multinational corporations, not least the fact that multinational firms account for more than 80 percent of global trade.
The share of global trade originating in emerging economies has made impressive gains. According to the report,
Emerging economies have launched more than 17,000 large companies since 1990, with China driving the bulk of that growth. The makeup of the Fortune Global 500 illustrates this shift in corporate geography. Between 1980 and 2000, emerging-market companies accounted for roughly 5 percent of the Fortune 500; by 2013, their share had risen to 26 percent.
That share is projected to increase to over 45 percent by 2025. In 1980 US and Western European companies accounted for 76 percent of Fortune Global 500 companies; that share dropped to 54 percent in 2013.
The report also noted significant differences in ownership structures between multinationals headquartered in emerging market countries and those in North American, Japan, and Korea. Three-quarters of the world’s largest state-owned firms are in emerging markets countries. These countries are also home to large family-owned companies, and these two types of companies exhibit different growth strategies and operating styles from the world’s widely held public companies.
A firm with a controlling shareholder – whether family, founder, or state – is more likely to focus on building a leading position and is able to take a longer-term view about the growth and investment needed to accomplish that goal. In contrast, widely held public firms must answer to shareholders every quarter and are more focused on maximizing earnings in the immediate term.
The emerging market firms’ strategy has resulted in rapid growth. In the past decade, Chinese firms have grown four to five times faster than Western firms. For capital-intensive firms in industries such as automobiles, machinery, and construction, competition has squeezed profit margins. The McKinsey report gives the example of Chinese companies’ success in aluminum production. Chinese producers went from a four percent market share in 1990 to 52 percent in 2014, and more than half of Western producers went out of business.
The trend for what the report calls “asset-light, idea-intensive sectors” such as pharmaceuticals, finance, and information technology is far more positive for Western firms. These are sectors in which firms spend more on research and development and have higher profit margins than capital-intensive industries. However, information technology can pose a different kind of threat to large Western corporations from that posed by emerging economies.
Global information technology firms have experienced some of the most rapid growth. The large digital platforms built by firms such as Amazon and Alibaba enable them to expand their customer bases at negligible additional cost. Their platforms serve hundreds of thousands of small enterprises with logistical support and world-wide exposure. As a group, these small enterprises pose what McKinsey foresees as an “existential threat” to firms in some sectors, just as Netflix and Redbox grew to sizes that threatened Blockbuster’s business model. An extensive description of the growth of such small enterprises can be found in a previous post on this blog (https://fiftyyearperspective.com/new-economy-jobs).
The McKinsey report concludes that the world economy will witness the entrance of another 1.8 billion consumers over the next decade. To benefit from this growth, large multinational firms “need to be willing to disrupt themselves before others do it to them.”