Multinational Companies (MNC’s) in the Era of Protectionism

Multinational corporations had been lobbying for a globalized world. They spent a considerable amount of time, human effort, and other resources to convince third world countries to open their markets. Some countries were convinced, and others were threatened. The result was that almost everybody opened their doors to a globalized world. Things seem to have turned on its head since then. The allies of these multinationals i.e. the governments in the developed countries are now turning back on them. The very people that supported the MNC’s in persuading other nations to allow a global world is now turning against them. In this article, we will have a closer look at why it may be time to give up the globalization mantra and move back to localization.

Rising Protectionist Sentiment

The developed nations are losing the very battle that they started. At first, the Asian economies were wary of too much foreign influence. However, it seems like now the cry of protectionism is rising in the West.

All western leaders from Angela Merkel to Theresa May are now increasingly under pressure to put the needs of their residents over and above the globalist agenda. Britain has opted for Brexit to stop immigration from East European nations and to protect its own workers. Similarly, Donald Trump had promised to bring in a buy American, hire American campaign. Even the Dutch elections were largely influenced by right wingers with protectionist views.

From the surface, it appears as if the entire Western world is undergoing a protectionist revolution. The problem with this is the ideology of the multinationals is the exact opposite of this ideology. Hence, this rising protectionist sentiment is ushering in an existential crisis for these multinationals.

Depleting Cost Advantage

For over two decades, companies have steadily moved their manufacturing operations to the Asia Pacific region. As of now, over 45% of the world’s manufacturing is done in Asia. This overcrowding in Asia has led to a dramatic increase in the cost of input resources.

The increasing demand for labor has seen a 15% to 20% rise in wage costs without corresponding increases in productivity. During the same period, rising unemployment in the United States has caused a steady decline in the wages.

Also, American energy companies have discovered a new way to generate energy from shale. This is called hydraulic fracturing or fracking and has narrowed down the cost gap substantially. It now costs, almost the same to manufacture goods in the developed nations as it does overseas.

The next generation is moving towards a robotics revolution. Pretty much every job that is done in a factory may end up being automated. Hence, the percentage of labor cost in the total manufacturing cost will fall abysmally low. It would therefore not matter where the products were manufactured. It certainly wouldn’t make any sense sending the jobs overseas.

Build Resilient Supply Chains

The multinationals, therefore, have their task cut out. The modern protectionist era is very uncertain. While there are some that believe that there will be no impact on globalization, there are others that believe that globalization is about to end.

Companies thus have to build ecosystems which are resilient to changes. They have to innovate and create supply chains that can work at the lowest cost in a globalized world. However, these supply chains must be capable of adapting in no time if affected by geopolitical changes.

At the present moment, the multinationals seem to have no answer. But then they have never been under so much pressure earlier. Necessity being the mother of all invention, some innovation is likely to make its way into the global supply chains of these manufacturing behemoths.

Mapping the Customer Base

Multi-nationals might have to choose between markets if a full-fledged trade war fuelled by protectionism were to break out. With countries levying retaliatory measures on each other, the job of being a multinational will be very challenging. Especially if you are a company whose business is evenly spread out across the globe.

Since operating in both countries may not be possible simultaneously, companies may have to choose between markets.

The other alternative will be to create subsidiaries that will serve as self-sufficient ecosystems in each of these nations. Increasing barriers to trade will end up making the operations of a multinational very complex. Instead of moving towards a better future, multinationals may well have to fight for survival.

Building the Eco-System

The problem with relocating operations is that multinationals are not self-sufficient. Their operations are reliant on a wide variety of suppliers. Over the past two decades, companies have spent a lot of time and built the local eco system in Asian countries. Now, they may have to relocate the entire eco system at the drop of a hat. Not only is this going to be very expensive but also very challenging to execute.

To sum it up, the heydays of multinational corporations seem to be over.

The geopolitical climate all over the world appears to be moving in a direction that will spark a trade war, and this war will create an uneven playing field wherein smaller national players will have a considerable advantage over these 800 pound multinational gorillas.

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