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.
Susan Lund: 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 of land 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, Chemical, 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.
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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 needed 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 the 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.