Are today’s high oil prices going to be with us permanently? Everybody’s speculating the answer to this now. If you look at where the price has been going, everybody seems to speculate that yes, it’s going to be with us going forward.
So what are we to make of this new reality? How does this change our lives? How will business de done accordingly? What happens to the global economy?
Well, we are already seeing some loose and fragmented events that suggest what is on the road ahead. Let me summarize in one sentence my own perception into them. BUSINESSES WILL ONCE AGAIN BECOME LOCAL.
Local. Wasn’t it just a couple of years ago when everyone seemed to be talking about globalization? So what is this craziness I’m pointing out now? Business will again be local?
Consider some dose of reality for businesses:
1. Transportation costs are increasingly a large drain on corporate profits.
2. Current economic reality has different effects on different locales – some markets remain healthy, other markets need scaling back.
3. Markets with healthier demand may (in the meantime) have more inflation, which could lead to more currency devaluation, which eats into repatriated income
4. Steeper credit terms means companies can only expand as fast as internal cash flow will afford them. Inflationary environment eats into cash flow, hence less cash flow for growth in the meantime.
5. Airlines are cutting back on destinations, and focusing on just the most profitable routes. What if flights to one of your major markets suddenly was cut off by a major airline? That may mean you have no other choice but the remaining, expensive option.
I have earlier said that today belongs to the larger market players. Now, I say, today also belongs to those closest to the market.
If you are a supplier of a basic good, you can no longer supply your good at uniform prices world-wide. Not when $200 a barrel oil means you have to absorb the transport costs to overseas markets. The farther away the market, the more you have to absorb in transport cost.
If your product can easily be substituted by a local product, manufactured in the overseas market, you’re suddenly going to find yourself the luxury item there. Less people can afford luxuries right now.
It might be different if you’re already a globalized company with global operations.
Your finance is in North America, Marketing in Europe, Production in Asia, and raw materials from Africa? You’ve already established a “beachhead” in many markets? Congratulations. You get to maintain your global operations.
And given that it’s going to be difficult to grow in this stagflationary environment, you’re likely to keep your advantage for some time to come. Not too many competitors can afford to invest in beachhead expenses for now, or have the risk appetite, when the market is this weak.
But more often than not, according to my crystal ball, if you’re a global firm, demand for your products will start to cluster more in the large markets. It is in these markets where a sizeable population exists that can still afford to pay for your increasing costs. Where are these markets? You’ll likely find them in larger cities in the US, Canada, Western Europe, Australia, the BRIC countries (Brazil, Russia, India, China), and the Asian NICs.
The rest of the world? For now, the local markets in the developing world will be owned by local conglomerates - the ones that make and sell their products in the same market. Globalized firms with globalized costs will be too expensive for these markets for the time being.
The demand destruction being talked about right now? Perhaps it’s local demand for the global firm that’s being destroyed. They have too many “beachhead” costs.
But then again, that’s just my own crystal ball. You may have another view. But the way I read it - Right now, businesses will again be local.