Get Ready for a Tumultuous 2024: A Deepening Fragmentation in Global Economy.
Welcome to The Executive Perspective.
In the current global landscape, geopolitical fragmentation has emerged as a catalyst for change in developed and emerging economies as well. One crucial factor driving this shift is the West's strategic encouragement to diversify global supply chains away from China while at the same time completely isolating Russia due to its unprovoked invasion of Ukraine.
Consequently, previously less competitive alternatives in various regions, ranging from Mexico and Brazil to Vietnam and India, are swiftly capitalizing on this opportunity by stepping in to fill the resulting gaps.
Furthermore, amidst the escalating rivalry among superpowers vying for secure commodity supply chains, a noteworthy trend has surfaced.
Producers across diverse locations, spanning from Chile to the Democratic Republic of the Congo, are finding themselves in a more advantageous position. This newfound strength is empowering them to negotiate from firmer ground, as superpowers vie for the assurance of critical resources.
Simultaneously, seizing the prevailing circumstances, several nations within the Gulf Cooperation Council are also strategically positioning themselves. They aim to serve as pivotal trade and finance hubs that can facilitate transactions and connections for both sides involved in this shifting global landscape.
My take on this:
The current global economic scenario is witnessing a pivotal transformation driven by unprecedented geopolitical shifts leading to an unprecedented test of global governance system.
The deliberate push by the West for supply chain diversification away from China due to national security concerns has opened up avenues for previously less competitive economies. As manufacturers seek alternative locations, countries like Mexico, Brazil, Vietnam, and India have swiftly stepped in to take advantage of this redirection.
Moreover, the struggle among superpowers for secure commodity supply chains has resulted in producers in various regions gaining leverage. This shift has altered the dynamics of negotiation, granting them a stronger hand in dealing with powerful entities seeking resource security.
Additionally, the strategic positioning of Gulf Cooperation Council countries to become trade and finance hubs underscores their astute recognition of the opportunities emerging from this geopolitical fragmentation. By positioning themselves as facilitators, these nations are positioning themselves to capitalize on the evolving global economic landscape.
Let's now carry on with putting global events in perspective.
Here are the latest developments on global trends that I believe will shape the way we do business in 2024.
If you don't want to miss the new issues of?The Executive Perspective, please feel free to subscribe.
1. Management Strategy
Navigating Economic Fragmentation: Corporate Management Strategies in an Evolving Landscape.
In an era defined by globalization's retreat and a resurgence of localized economic forces, corporate management finds itself at a critical juncture. The concept of economic fragmentation, once an abstract concern, now stands as a tangible reality reshaping business landscapes worldwide. As companies grapple with the challenges posed by this paradigm shift, strategic recalibration emerges as the cornerstone of survival and success.
The Evolution of Economic Fragmentation
The onset of economic fragmentation is a byproduct of multifaceted forces: geopolitical tensions, trade disruptions, and socio-political shifts. These factors have catalyzed the redefinition of trade blocs, the imposition of tariffs, and the resurgence of protectionist policies. Simultaneously, technological advancements have fueled niche market emergence and enabled localized production, further diversifying economic structures.
Navigating the New Normal
Adapting to economic fragmentation requires a departure from traditional, monolithic business strategies towards a more adaptive and decentralized approach. Embracing agility and flexibility becomes imperative as companies confront divergent market regulations, consumer preferences, and supply chain disruptions.
Localization and Regionalization: Companies are reorienting strategies to cater to localized preferences, leveraging regional partnerships, and establishing flexible supply chains to mitigate risks associated with global disruptions.
Diversification: A strategic diversification of markets, suppliers, and production locations offers a shield against localized shocks, ensuring continuity amidst regional economic fluctuations.
Technology as a Catalyst: Leveraging technology to streamline operations, optimize supply chains, and harness data-driven insights becomes pivotal in navigating the intricate fabric of fragmented economies.
Resilience Through Innovation: Embracing a culture of innovation, fostering adaptability, and investing in research and development fosters resilience in the face of economic uncertainty.
Leadership's Role in Adapting
The onus falls on corporate leaders to steer organizations through this transformative period. Embracing a mindset shift towards agility, empowering local teams, and fostering cross-functional collaboration emerges as crucial elements in devising and executing successful strategies.
My take on this:
Economic fragmentation poses both challenges and opportunities for corporate management. Those agile enough to embrace the diversification of markets, innovate in operational strategies, and nurture adaptability within their organizations stand poised to thrive in this evolving landscape.
And, I know by experience that that is easier said than done.
The path forward demands a risky but calculated departure from conventional paradigms, advocating for a more nuanced, decentralized, and adaptable approach to corporate management in the age of economic fragmentation.
2. Geopolitics and Investment Climate
Xi's foreign investment promises contradict with the reality investors face.
Chinese President Xi Jinping's recent message expressing a desire to make China more attractive to foreign businesses stands in stark contrast to the challenging realities many companies face on the ground. While Xi pledged to take more "heart-warming" measures to make China an appealing investment destination, the business climate has deteriorated significantly in recent years.
The world's most stringent COVID-19 restrictions, investigations into foreign companies, and increased compliance risks due to sanctions have all taken a toll on foreign firms operating in China.
Despite Xi's optimistic message at the APEC CEO Summit in San Francisco, where he stated that China has become synonymous with the best investment destination, many companies are grappling with uncertainties and challenges. A measure of foreign direct investment this month turned negative for the first time in 25 years, reflecting a growing reluctance among businesses to invest in China.
A recent survey by the American Chamber of Commerce in Shanghai indicates that respondents are more pessimistic about the business outlook than they have been in decades.
Businesses operating in China face a growing list of challenges, including tepid economic activity, unpredictable regulations, worries over employee safety, and curbs on transferring data overseas. The U.S. Commerce Secretary Gina Raimondo remarked in August that businesses told her China was "uninvestable." From stringent COVID-19 measures to investigations into foreign companies, many firms are reassessing their strategies in the Chinese market.
Several multinational corporations, including Ford Motor Co., have announced plans to scale back future investments in China. Technology companies like Apple Inc. and HP Inc. are considering moving production out of China due to rising geopolitical risks, including potential conflicts over Taiwan. The challenges have led some companies to think twice about pouring more money into China.
China's recent easing of some regulations and its attempts to engage with foreign companies signal an effort to address concerns. In November, the Ministry of Commerce asked local governments to clear discriminatory policies facing foreign companies.
Additionally, a 24-point plan announced in August includes pledges to offer overseas firms better tax treatment and facilitate visa procedures.
My take on this:
Skepticism remains among investors, and concerns about issues such as data flows and geopolitical risks persist.
The Chinese government's simultaneous focus on security this year has undercut policy predictability, impacting foreign firms' trust. Security-related incidents, including fines on foreign companies for alleged illegal data collection and raids, have raised concerns among businesses.
While Xi seeks to reassure foreign investors, his administration's efforts to balance security and economic openness present challenges.
Rebuilding trust with foreign investors will require sustained positive signals from the Chinese government and concrete actions to address the accumulated challenges faced by foreign businesses operating in the country.
3. Friendshoring and Supply Chains
U.S. and Indonesia are discussing critical mineral partnership with a focus on nickel.
The United States and Indonesia are set to discuss the potential for a minerals partnership, focusing on the electric vehicle (EV) battery metal nickel. Indonesian President Joko Widodo's visit to the White House for a meeting with U.S. President Joe Biden recently provided an opportunity to explore next steps in advancing the partnership.
Indonesia, home to the world's largest nickel ore reserves, has expressed interest in a trade deal for critical minerals to facilitate U.S. imports under the U.S. Inflation Reduction Act (IRA). The Biden administration is assessing environmental, social, and governance standards in Indonesia before moving toward formal negotiations on the partnership.
The discussions aim to ensure that any nickel supply from Indonesia has minimal environmental impact, addressing concerns about deforestation and water pollution associated with nickel mining in the country. Indonesia's vast nickel reserves present an opportunity to develop an EV supply chain by processing nickel into battery materials. The Biden administration's focus on environmental considerations aligns with its commitment to sustainable practices in critical minerals sourcing.
The U.S. Trade Representative Katherine Tai is part of the discussions, emphasizing the importance of responsible nickel production. The momentum toward a potential partnership is promising, but there is acknowledgment of the need for substantial work before formal negotiations can be announced. Indonesia's request for discussions on a trade deal aligns with the global push for secure and responsible supply chains, particularly for critical minerals essential in the EV industry.
The discussions also consider the requirements of the U.S. law, which stipulates that a portion of critical minerals in EV batteries must be produced or assembled in North America or a free trade partner for eligibility for tax credits. As Indonesia lacks a free trade agreement with the United States, the negotiations explore ways to ensure compliance with these guidelines. There are also discussions about excluding nickel extracted from Indonesia but processed in China from receiving IRA credits.
My take on this:
The global market value for the nickel industry is estimated at $33.5 billion in 2022, with Indonesia holding a significant share of the world's nickel supplies.
The discussions reflect the Biden administration's efforts to secure a stable and environmentally responsible supply of critical minerals, contributing to its goal of leading in EV manufacturing.
The partnership discussions are crucial for addressing potential over-reliance on foreign sources and ensuring a sustainable and strategic approach to securing essential materials for the growing EV industry.
4. Energy Security and Diversification
Europe's gas market is still vulnerable to geopolitical challenges.
As Europe transitions into winter, the demand for heating increases, and gas prices tend to rise. Last year, Europe experienced a relatively mild winter, but this year's outlook appears different. Currently, Europe's gas storage facilities are well-supplied due to a steady inflow of liquefied natural gas (LNG), particularly from the United States.
However, with the onset of peak consumption during the winter season, demand is expected to rise, raising the potential for price spikes.
The recent volatility in LNG prices, particularly in Europe, has underscored the market's susceptibility to external events. The European benchmark prices reacted swiftly to news of Houthi rebels seizing a cargo ship in the Red Sea.
The vessel, associated with an Israeli company, fueled concerns about an escalation of tensions in the Middle East. This incident triggered a 3% increase in gas prices in Europe, emphasizing the region's vulnerability.
Despite the current ample global supply of LNG, recent softening in prices, and full gas storage in Europe, the market remains sensitive to geopolitical developments and disruptions. The global LNG market's resilience may be tested by incidents such as the seizure of the cargo ship, especially considering the complex dynamics of shipping routes and geopolitical risks.
The ongoing global shipping challenges, including restrictions in the Panama Canal and heightened risks in the Suez Canal due to the Israel-Hamas conflict, contribute to the uncertainty in LNG transportation. With movement through key chokepoints becoming riskier, LNG buyers are seeking alternative routes, potentially increasing freight rates.
The situation in the Panama Canal, caused by a prolonged drought reducing water levels, has already led to higher freight rates for various commodities.
While some in the gas trading industry believe that LNG prices are unlikely to experience a significant uptick due to ample supply, others point to the increasing importance of shipping news in influencing commodity prices.
The restrictions in the Panama Canal, coupled with the perceived risks in the Suez Canal, have led to a reassessment of shipping routes for LNG, adding complexity to the market dynamics.
My take on this:
The LNG market's resilience is further challenged by the potential for supply disruptions. The industry experienced this vulnerability last year when an explosion at the Freeport LNG facility led to its shutdown for several months.
With winter approaching and gas demand rising, the potential for price spikes remains, particularly in Europe, despite the availability of LNG storage.
While the global LNG market currently benefits from abundant supply and softening prices, external factors such as geopolitical events, shipping challenges, and the risk of supply disruptions introduce elements of uncertainty. The winter season adds an additional layer of complexity, highlighting the need for careful monitoring of market dynamics and potential price fluctuations.
5. Sanctions and Trade Restrictions
Greek shipping firms stop carrying Russian oil to avoid U.S. sanctions.
Three major Greek shipping companies—Minerva Marine, Thenamaris, and TMS Tankers—have ceased transporting Russian oil in recent weeks to avoid U.S. sanctions imposed on shipping firms involved in Russian oil transport. This development reduces the number of shipping firms willing to transport Russian oil to consumers in Asia, the Middle East, Africa, and South America. While the exit of these Greek shippers narrows the field, Moscow still has sufficient shipping firms for now.
The decision to stop transporting Russian oil follows tighter U.S. sanctions imposed on such shipments. The three Greek firms, which had been shipping Russian oil for decades, had been handling nearly all of Russia's oil exports from European ports. They operated over 100 oil tankers capable of handling approximately 10 million tonnes per month or 2.4 million barrels per day.
The Greek shippers' exit has led to concerns about the availability of the "dark fleet," referring to shippers moving oil from sanctions-hit countries and not covered by Western insurance.
However, for now, Russia is managing with other shipping companies stepping in, including its shipping company Sovcomflot and several little-known firms registered in various locations worldwide.
The vessels used by these alternative shipping companies carry flags from different states, ranging from Liberia to the Cook Islands. While there are worries that the "dark fleet" might not be enough to transport all of Russia's oil, traders cite several factors contributing to the challenge.
One major reason is that Russian oil now takes 8-10 weeks to reach customers in Asia, compared to the previous two weeks when it was sold in Europe. This extended travel time increases the number of tankers required for the trade.
My take on this:
The exit of Greek shipping companies from transporting Russian oil has consequences not only for Russia but also for global oil markets. Russia is a major oil exporter, and any disruption in its ability to transport oil to various regions can impact global oil supply chains.
Keep in mind that the overall aim of price cap is not to deprive the world from Russian oil but to reduce Kremlin's oil revenue to fund its war.
The situation highlights the complexities and challenges associated with geopolitical developments and sanctions in the energy sector, affecting both producers and consumers worldwide. The evolving dynamics of oil transportation and the role of various shipping companies will continue to be closely monitored as geopolitical tensions and sanctions persist in the energy landscape.
6. Decarbonization and E-Mobility
Automakers are working to minimize rare earths usage in EVs to reduce reliance on China.
Automakers worldwide are intensifying efforts to reduce or eliminate the use of rare earth elements in electric vehicle (EV) motors, a domain predominantly dominated by China. Traditionally, EV motors have relied on rare earth-based permanent magnets, particularly neodymium, known for their efficiency in providing torque. However, the growing push for sustainability, coupled with concerns about over-reliance on China, is driving automakers to explore alternatives.
Tesla made headlines earlier this year by announcing plans to eliminate rare earths from its next-generation EVs. Other major players in the automotive industry, such as General Motors, Jaguar Land Rover, and suppliers like BorgWarner, are actively researching and developing motors with low- to zero-rare earth content. One alternative gaining traction is the use of magnet-free externally excited synchronous machines (EESMs), which generate a magnetic field using electric current.
German supplier ZF has developed an EESM motor matching the size and performance of permanent magnet motors, aiming to reduce dependence on China. ZF is in discussions with U.S., European, and Chinese automakers for potential motor supply. The push for rare earth-free motors is not only driven by concerns about supply chain security but also aligns with sustainability goals. The refining process for rare earths involves solvents and generates toxic waste, presenting challenges to sustainability efforts.
BMW claims to have already achieved success in developing rare earth-free motors after years of research. Other companies, such as Vitesco and U.S. startup Niron Magnetics, are also working on rare earth-free alternatives, emphasizing stability and sustainability. While neodymium prices have experienced significant fluctuations, automakers are exploring alternatives to avoid supply chain vulnerabilities and wild price swings.
Nissan, for instance, is adopting a dual strategy, developing both EESM motors and permanent magnet motors with a phased-out approach to rare earths. The broader trend in the industry is a shift toward alternatives that reduce or eliminate reliance on rare earth elements, reflecting a commitment to sustainable and secure EV manufacturing practices.
My take on this:
The efforts extend beyond motors, with companies like Warwick Acoustics developing rare earth-free speakers for EVs, contributing to overall sustainability goals.
As automakers explore various technologies, the industry anticipates a shift away from rare-earth permanent magnet motors, albeit at varying paces across regions and manufacturers.
The pursuit of alternatives aligns with a broader industry commitment to reduce environmental impact and enhance the resilience of the EV supply chain.
7. Rare Earths and Commodities
Exxon sets target to start production of lithium in Arkansas by 2026.
Exxon Mobil is poised to make a significant entry into the lithium production market by unveiling plans to start operations in Arkansas by 2026. This move is part of Exxon's broader effort to diversify its portfolio amid the global push for electric vehicles (EVs) and the growing demand for EV battery materials.
The initiative, known as "Project Evergreen," involves a partnership with Tetra Technologies, and Exxon aims to produce at least 10,000 metric tons of lithium per year by 2026. This initial production volume is approximately equivalent to the amount required to manufacture 100,000 EV batteries.
Exxon's venture into lithium production is significant as the company, which invented the lithium-ion battery in the 1970s, has not been actively involved in the technology for decades. The move aligns with the broader trend in the energy industry as traditional oil and gas companies seek opportunities in the electric vehicle and renewable energy sectors.
The company's lithium production plans are centered around Arkansas, where it has been drilling wells to explore the lithium-rich Smackover Formation, a geological formation known for its lithium- and bromine-rich brine deposits. Exxon has also been testing direct lithium extraction (DLE) technology, a critical component for commercial lithium operations.
The significance of Exxon's move into lithium production lies in its potential to leverage existing resources and expertise. The company has been extracting water containing traces of lithium as a byproduct of its fossil fuel production activities.
This could position Exxon as a significant player in the lithium market if DLE technologies can be successfully commercialized. While details about the specific DLE technology chosen by Exxon remain undisclosed, the company has reportedly held discussions with various technology providers.
The Biden administration's focus on environmental, social, and governance (ESG) standards is also reflected in the discussions around Exxon's lithium production plans. The administration is reportedly examining how a potential deal would align with ESG criteria, and further consultations with U.S. lawmakers and labor groups are expected in the coming weeks.
My take on this:
Exxon's entry into lithium production follows broader industry trends where major oil and gas companies are exploring opportunities in the electric vehicle supply chain. The move is seen as a strategic response to the changing energy landscape, driven by the global transition toward cleaner and sustainable technologies.
Exxon's attendance at the Benchmark Minerals conference, a major event in the critical minerals sector, signals the company's commitment to being actively involved in discussions and developments in the rapidly evolving lithium market.
8. Aerospace and Defense
Investors are flocking to defense funds amid geopolitical tensions.
In recent months, investors have exhibited a notable surge of interest in exchange-traded funds (ETFs) tracking defense companies, signaling an anticipation of heightened military budgets in both the U.S. and Europe amid an escalation of geopolitical conflicts. One of the key beneficiaries of this trend has been the Invesco Aerospace & Defense ETF, which has experienced net inflows exceeding $100 million in November, building upon the nearly $180 million it attracted in October.
Other ETFs in the same sector, including the iShares US Aerospace & Defense ETF and the SPDR S&P Aerospace & Defense ETF, have also witnessed significant net inflows, demonstrating a broader investor sentiment favoring defense-related investments.
The impetus behind this increased interest in defense-oriented ETFs is the recognition of growing national security threats and the escalating complexity of geopolitical challenges.
Investors are positioning themselves to capitalize on the expanding demand for cutting-edge defense technologies, particularly as the U.S. and other NATO countries show a willingness to increase spending on high-tech surveillance and deterrence capabilities. Companies strategically positioned to benefit from these trends are expected to perform well.
The Invesco fund, in particular, has seen a substantial rise in its total net assets since February 2022, nearly quadrupling from $632 million to $2.37 billion. The conflict in Ukraine has played a role in boosting military spending and aid, contributing to the fund's growth.
Additionally, assets further increased by 19% following the October 7 attack on Israel by Hamas, which resulted in Israeli military strikes on Gaza. The geopolitical tensions in various regions have underscored the perceived need for robust defense capabilities.
In response to the evolving geopolitical landscape, U.S. President Joe Biden has sought additional funding from Congress, requesting $106 billion in supplemental funding. This includes significant allocations for Ukraine and Israel, reflecting the ongoing geopolitical challenges in these regions.
The proposed funding encompasses support for Israeli air and missile defense, as well as provisions to supply weapons to Ukraine and replenish U.S. stocks.
The approval of substantial funding for defense-related initiatives has had a positive impact on defense ETFs, aligning with a broader trend of increased interest in technology stocks.
My take on this:
The defense industry's reliance on advancements in artificial intelligence (AI) and other technological innovations has contributed to the sector's attractiveness for investors.
Defense ETFs have also benefited from the growing interest in tech stocks, given the technological nature of advancements in the defense industry. Overall, the investment landscape reflects a confluence of factors, including geopolitical tensions, increased defense spending, and the intersection of defense and technology, shaping the trajectory of defense-related ETFs.?
That's all for now and hope to see you again in the next edition.
Do not hesitate to drop me a line should you need any further information.