Geopolitics and Global Companies

By Parag Khanna

The Global Connectivity Revolution

Highways, railways, bridges, tunnels, airports, seaports

Skeletal System Transportation

The Infrastructural Matrix: Exoskeleton on the Planetary Body

Vascular System Energy

Nervous System Communication

Oil & gas pipelines and refineries, electricity grids and power plants

Internet cables, satellites, data centers

Planetary Urbanization:Megacity Archipelagos Define Humanity

The IMF’s about-face: From austerity to stimulus; public unlocks private investment that fuels income growth, productivity gains and imports/trade

Take advantage of ultra-low interest rates: Invest $300T of financial stock into the “connectivity asset class”

Patient capital: Private wealth, pensions, insurance, SWFs, asset managers seek inflation-linked yield

Invest in the future: Low volatility, non-correlated to business cycle, steady cash flow and dividends

Connectivity is the Most Important Asset Class of the 21st Century

Towards the Supply Chain World: Free markets (Adam Smith)

Comparative advantage (David Ricardo)

Division of labor (Émile Durkheim)

IoT/Big Data/AI (Ray Kurzweil)

“Perfect Capitalism” (Michio Kaku)

Trading atoms and bits: “Where” are complex global value chains? Things are “Made Everywhere”

The Most Powerful Law of History: Supply and Demand

Supply of anything can meet demand for anything

Perpetual optimization of land, labor & capital for production

Inefficiency is the enemy

Fungible investment, relentless competition

Supply Meets Demand: Trade Envelopes the World

Source: DHL Index 2014

Global trade to GDP steady ~50-60%; growing 2% in 2017 (WTO)

EU-China trade > $400B; EU-ASEAN trade > $200B; EU-Japan = $150B; EU-India ~$100B

China-Africa trade reaching $400B by 2020

US-EU goods/services trade tops $1T/year

US-China trade = $660B; US deficit > $400B

Resilient global services trade at $5T; services > goods as share of output growth

Lat-Am exports to China: $90B; China exports to Lat-Am: $160B (both 50% of Asian total)

Data flows ~60% of US services exports and 34% of total export value

Competing over Connectivity: Trade not shrinking but optimizing

East Meets West: Eurasia’s Iron Silk Roads

AIIB and the Compression of Eurasian Space: China Becomes a Two-Ocean Power

“Iron Silk Roads” win the “New Great Game” (over Iran)

Rising cross-EM trade as % of EM exports

“Unlimited demand”: Demographics and urbanization

The next supercycle: Structurally low commodities prices driving consumption of cars, cement, steel, etc. around Indian Ocean rim

South-South FDI crossing $300 billion/year

Surging cross-EM trade/FDI patterns: Asia outbound FDI up to $200 billion by 2020

CHIMEA/New Maritime Silk Road: China trade/FDI with Africa / GCC > US (but < EU)

New post-Western institutions: AIIB, BRICS Bank plus non-USD denominated trade and lending

A Post-Western World?

The Great Supply Chain Tug-of-WarSupply chain alliances: national supply chain nexus: Toyota/Nagoya and Samsung/Seoul; Boeing versus Airbus; GE w/o Ex-Im

China’s German quest: From low-value “Made in China” to high-value “Made by China” (e.g. IT GVCs)

Capture global markets: Export credits; national champions (batteries, medical, solar, rail, robotics, semiconductors etc.)

Vertical warfare: JDI vs. 3D Robotics

Attract investment, displace investors: Industrial policy at home (SEZs, IP theft, patent trolling, #MakeInIndia)

Net benefit: wages, skills, jobs, tech, tax

“Give us your investment, not your companies.” - Sachin Bansal, FlipKart

Complexity Outlook Index (2013) ranks countries according to their potential to improve productive capabilities, especially by gaining know-how from large or proximate trade partners to raise the complexity of their own goods.

The Race to Complexity: Horizontal + Vertical = Diagonal

No dominant national market: Global revenues; chasing demandNo dominant investor pool: Distributed financingNo dominant employee location: Mobilizing global/local talentMultiple or shifting HQs: “20 Hubs and No HQ”Transfer pricing / inversion: Perpetual arbitrage

What constitutes a cloud company?

Taxes, Technology, Talent

“I have long dreamed of buying an island owned by no nation and establishing the world headquarters of the Dow company on truly neutral ground beholden to no nation or society.”

- Carl Gerstacker, CEO, Dow Chemical, 1972

What it Takes to Go Global Scale

Procter and Gamble products available in 180 countriesDHL services available in 220 territories/countriesGoogle dominates search and mobile in 40+ languagesWalmart services 200 million customers per weekCoca-Cola runs 450 brands worldwide with 1B daily servings

AffordabilityUnilever products used by est. 2 billion people/dayGE Healthcare investing $300m to build robust andlow-cost healthcare solutions for emerging markets

Training 2m healthcare workers by 2020 $500 portable ECG machines for rural India

AdaptationYUM Brands: Opened 2,497 KFCs in China since 1987LG: Local design and manufacturing (e.g. one-touch“Indian menu” microwaves)Samsung: Fridges withstand power fluctuations in Africanmarkets

Is FDI stock/GDP ratio headed for a plateau -- or new wave as EM MNCs go global?

Can FDI flows/GDP rebound on the back of tech sector expansion?

Foreign profits (RoE) of OECD MNCs down 17% from 2011-2016 (US, UK, Dutch MNCs down to 4-8% only) Tech exception: 50% of total overseas profits of top 50 American MNCs East to West Politically motivated regulatory nationalism raising costs for MNCs, forcing preservation of labor force and national character (e.g. Softbank-ARM, SinoChem-Syngenta) West to East EM governments back domestic competitors sparking sell off (e.g. McDonald’s, YUM)

Stateless No More?

Global Regulators: US, EU, China

US pressure to repatriate est. $2.7T offshore cashEuropean anti-monopoly litigation; privacy/ data protection policies; fees for search-based new republishingChina strengthening firewalls, local data storage requirements, and IP theft

EMs Getting Wise to the Global Shell GameAggressive audits and finesRaising capital gains taxesDemands for country-by-country reporting on profits and tax payments

Reigning in the Corporate Giants

Paul Ryan

Margrethe Vestager

Xu Lin

State-owned Assets Supervision and Administration Commission (SASAC) of the State Council:

NuclearAviationShipbuilding and shippingManufacturing Industries (Machinery)ElectronicsOil/gas (CNOOC, CNPC, CPC)Power (electricity grid, dams, coal)AirlinesTelecom (CTC, China Mobile)Steel and aluminumChemicals (SinoChem)RailwaysPharma

The Future of Chinese SOEs is Singapore-Style GLCs Supply-side reforms boosting profits (~7% in

2016)

Reduce over-capacity

Consolidate and scale through $50B China Structural Reform Fund

Dividing b/w profit-making and public welfare entities

Strategic assets and utilities plus newer tech and consumer goods (e.g. medicine, tea)

Mixed ownership models

Float/sell shares

BRICS: Bending on Strategic Assets KEY ISSUES:

Balancing local and foreign investors

Energy: Waiting for oil to rise

Avoiding intra-state asset transfer

Distributing gains

Stepping in when projects fail

Improving corporate governance and ease of doing business

Brazil● 2016: Temer launches privatization in oil

and gas fields/distribution, power plants, infrastructure (highways, airports, rail)

● Petrobras divestment: Weak currency fuels strong M&A activity, foreign participation

● “Project Growth”: Reduce debt, partner with private sector, attract investment, curb corruption

● Goal to raise $9B in privatization revenue in 2017

India ● Goal to raise $10B by selling government

stakes (Jaitley): ONGC, Coal India, Bharat Heavy Metals

● Majority shares bought by Life Insurance Company of India

● Sensitive military shares: GoI reduces stake in Bharat Earth Movers Ltd to 28%

● Public banks: Consolidate then privatize● Energy: Provincial utilities and oil/gas fields

Russia● 20% Rosneft sold to

Glencore-Qatar for $11.3B in 2016

● Prospective sectors/companies: Aeroflot, Sovkomflot, VTB, Russian Railways

● Widening deficit not offset by revenue gains

China● Declining share of SOEs among

industrial firms; listing companies on exchanges; selling shares to managers

● Transfer of assets to municipalities that launch LGFVs

● PSBC 2016 IPO raised $7.5B● Singapore/Temasek-style GLCs:

mixed/partial privatization● Other sectors: Qunar/Ocean

Management (travel); Alibaba/Intime retail stores

ASEAN: Maintaining Liquidity Amidst Currency PressuresVietnam

● 2015: Vietnam Airports Corp. <5% stake offered; 85% foreign buyers● 2016: GIC buys 7.7% stake in Vietcombank● 2017: FPT Telecom and Securities listings; Binh Son oil refinery IPO● Vietnam Airlines (listing plus ANA investment) and Vietnam Textile

and Garments Corp.● State Capital and Investment Corp. (SCIC) increasing sale of

Vinamilk stakes from 10% to 45%

Indonesia● First wave (1990s/2000s): Ports, cement● Political risks: Jakarta court bans water supply privatization; forced

closure and sale of Newmont mine● Next wave: oil/gas services, transport, marine, land development● 100% foreign ownership allowed in hospitality (hotels, restaurants)

Thailand● Continuing Thaksin’s revolving door: Since 2014 coup, junta has

expanded control of 56 SOEs

Philippines● All Pagcor casinos to be privatized during 2017

Managing Volatility Beware ripple effect of recedingcredit and weak currenciesManage financial risk: Maintain cash and liquidity to avoid solvency traps Boost regional investment: Deepen ASEAN Bond Markets Initiative

Support GrowthSME and trade finance to strengthencross-border supply chains and exports(only 30% of ASEAN exports from SMEs)Invest in services sector productivity and value-added

AEC: Engage Now to Shape the Future

Promote ResilienceInstitutional harmonizationand transparencyFrom round-tripping to FDI:Make investment sticky

Pax Aseana: How to Grow From Billions to Trillions

THANK YOU!paragkhanna@gmail.com

@paragkhannawww.facebook.com/DrParagKhanna