If you ask the average CEO what’s making them lose sleep these days, it’s a good bet that the answer will be tariffs and trade wars. One-third of respondents in a recent McKinsey survey of global executives said that uncertainty over trade policy is their greatest concern—and three-quarters of all companies say their global investment strategies are changing as a result.
But companies can’t afford to merely react to the news cycle. Every decision needs to be informed by the bigger picture—and when we step back, it’s clear that longer-term structural shifts are reshaping the very nature of globalization. Our new research looks in detail at 23 different industry value chains across 43 countries to get a better view of what companies are already doing on the ground and how they add up to fundamental changes that will shape the next era.
First, the geography of global demand has radically changed over the past decade. China, India, and other emerging economies originally plugged into global value chains by making labor-intensive manufactured goods and exporting them to advanced economies. But now their billion new consumers are a powerful force. It’s an outdated assumption to think of them as “low-cost factories to the world.” They are lucrative consumer markets in their own right, and their companies are a new source of competition.
The developing world’s share of global consumption has risen by roughly 50% over the past decade. China now imports as many final goods as Germany—and more than Japan, the United Kingdom, or France. It’s now importing higher-value goods as well. China is reaching the tipping point of having more millionaires than any other country in the world and now represents roughly a third of the global market for luxury goods. Collectively, emerging economies will likely consume almost two-thirds of the world’s manufactured goods by 2025, with products such as cars, building products, and machinery leading the way. In knowledge-intensive services, including IT services, financial services, and business services, 45% of all exports from advanced economies already go to the developing world.
While local demand is rising, emerging economies are also reaching a new level of industrial maturity. They are building out domestic supply chains and importing fewer of the intermediate inputs they need to keep their factories humming. China, in particular, is modernizing multiple industries and developing its capabilities in design, engineering, and high-tech manufacturing. Multinationals in advanced manufacturing industries may come under pressure in the years ahead as China moves into new and higher-value market niches. Furthermore, developing economies are giving rise to their own multinational giants—companies now going global themselves through both exports and foreign acquisitions. Western multinationals are facing new competitive challenges in their own backyards.
Industry value chains are also being reshaped by a wave of next-generation technologies. Some, including digital platforms and logistics applications, will continue to reduce the costs, delays, and frictions of trade. Ultrafast 5G networks will provide a backbone for the IoT, smarter grids, autonomous vehicles, and virtual reality to realize more of their potential. Perhaps most profoundly, automation technologies in manufacturing are changing the way goods are made.
Today multinationals are studying a map of global demand that doesn’t look anything like it did a decade ago—and they have new technologies at their disposal that reduce the importance of labor costs. The calculus that goes into decisions about where to locate operations and where to invest in new capacity is changing, particularly in light of new automation technologies. Because shipping goods halfway around the world hampers responsiveness and slows speed to market, some manufacturers are establishing or consolidating more regional supply chains to serve their major markets more efficiently.
These shifts in corporate decision making are starting to show up in trade statistics. Trade intensity (that is, the share of global output that is sold across borders) is dropping as more of what gets made is consumed locally. The world also appears to be moving past the days of companies chasing low wages around the globe. Today only 18% of trade involves advanced economies importing from the lowest-wage countries. Factors such as proximity to customers, the quality of infrastructure, and the availability of a more highly skilled workforce are assuming greater weight than the drive to find the lowest possible global labor costs.
At the same time, service flows are growing 60% faster than trade in goods. Technology is starting to make it viable to deliver services such as industrial maintenance and telemedicine remotely. Across multiple value chains (including manufacturing), more value is coming from services, whether software, design, intellectual property, distribution, marketing, or after-sales services. In industry after industry, companies in every industry are adding new service lines or experimenting with subscription and “goods-as-a-service” business models.
Companies are absorbing and reacting to these deeper shifts even as they try to cope with policy uncertainty. With both industry structures and the global economy in flux, this is a moment to re-evaluate where to compete along the value chain and where to operate around the globe in the future.
This article appeared first in Harvard Business Review.