In this section, the advisors of this firm propose some issues to ponder over in Q&A format. As IR covers topics of strategic importance, companies must recognize changes in their operating environment that may have a direct or indirect impact on their business model. Investors will, at all times, assess companies’ preparedness and steering policy in light of such market forces at work (referring to Darwin’s theory). The dates for uploading are as shown.
Significance of US Shale Revolution
- What do people understand by the shale revolution?
- That the US will become a major producer of oil and gas. It goes without saying the country is going to rank among the world’s top producers in a few years. But the significance of the shale revolution is not just about sourcing oil and gas at a reasonable price from the US. The global economic impact is going to be much more far-reaching.
- What, then, is the global economic impact ?
- An Industrial Renaissance in the US. That means a gradual increase in global competitiveness of companies based in the country. It is clear that domestically produced oil and gas will reduce electricity prices, making them 40% to 70% cheaper than in Europe or Japan by 2015. This will be the main catalyst of change in the global competitive landscape.
- What will the US experience ?
- The country could receive much more foreign direct investment. Global companies will likely produce more in the US, as they take advantage of the hidden benefits: lower labor costs, which adjusted for productivity, are estimated to become 15% to 35% lower than in Europe and Japan. So we could see the pendulum swing back to the US as more global companies use the US as a low-cost platform for exports to the rest of the world. Others will use US production to replace their imports from the country.
- Which industries stand to benefit the most ?
- Setting aside resource support industries, such as drilling, 7 key sectors stand to benefit the most from the ripple effects:
(2) oil and coal products
(3) primary metals
(5) transportation equipment
(6) computer and electronic products
(7) electrical equipment and appliances.
The key point to bear in mind is that these industries worldwide account for 75% of exports in terms of aggregate trade for all countries.
- What changes will occur in the export landscape for these key industries ?
- The US will bring about a major disruption in global trade. As the US will be well positioned to boost its exports, it could potentially disturb the status quo for global supply-and-demand. The shift in trade, i.e. exports, is estimated to be $70-115 billion. By 2015, the US could take away $7-12 billion in chemical exports from Europe and Japan. That is due to the cost advantage of US-produced natural gas, a major input factor. By comparison, costs would be higher in Germany by 29%, in China by 16%, and in France by 28%. Also, by 2015, the US could capture $3-13 billion in exports of machinery (construction and industrial equipment, engines, air conditioners) from Europe and Japan (estimates from Boston Consulting Group).
- Where will the new US jobs be created ?
- Naturally, there will be a direct impact through added factory work. But the less visible and yet significant indirect impact will be on supporting services: construction, real estate, transportation, retail. We will see a ripple effect in these industries in particular, stemming from the areas where the shale resources are located.
- What has made all this possible in the US ?
- A US business culture of enterprise and innovation which creates sheer dynamism. Other countries with shale resources will be dwarfed by this vitality in the US. At a micro level, if a landowner is sitting on top of an oil well, that landowner can share in the profit of the extracted resource. At a more macro level, competitive industry, efficient capital markets, scope for local initiatives and innovation, strong property rights (including intellectual) are a powerful combination of factors that bring about the foundation for success.
- How will all this add up ?
- At a macro economic level, we will probably see a decline in the trade deficit and current account deficit. This, in turn, could fuel further interest among global investors to shift more money to the country. This will lead to further economic expansion in the decades ahead, and the advantages will be substantial. Within a few years, we will start to see much more job creation and higher industrial output across most sectors.
- What is the implication for global investor relations ?
- Global investors will scrutinize business plans and strategies. As we are basically seeing the onset of a change in the operating environment, investors will want to know how a company is adapting and staying globally competitive. This could be in the form of direct investment into plant and equipment in the US, an alliance with a US firm, or simply sourcing from the US. The key point will be the extent that proactive measures are taken to ensure a company can compete with US rivals. An insufficient action plan could potentially lead to a prolonged downward trend in the company’s share price.
IMF and World Bank Annual Meetings in Tokyo
Analysis of communique as onsite observer
- What was the general message on the global economy ?
- “Without growth, the future of the global economy is in jeopardy” [Christine Lagarde, International Monetary Fund (IMF) Managing Director]. Deep uncertainty still prevails, so we cannot be at ease yet. But there is room for modest optimism as central banks have taken powerful measures to stimulate the economy. But to ensure the momentum continues, the IMF says it is now the turn of the governments to take strong actions, especially, on fiscal adjustments.
- What is the significance of the IMF’s downward revisions in economic growth ?
- Austerity measures that are too fast will pull down the global economy. Cuts in government spending among advanced countries are having a greater-than-expected drag on their economic growth rates. The IMF had expected a $1 cut in spending would lead to a $0.5 reduction in economic growth (=fiscal multiplier of 0.5). But the actual negative impact seems to be between $0.8 and $1.9. Even the expected growth rates of emerging countries have been pulled down due to their closer connection with the advanced economies.
- So what is the advice from the IMF ?
- The IMF is urging: ① Europe to adjust the speed of spending cuts; ② the US to avoid a fiscal cliff (where long-term payroll tax cuts expire, and public spending is reduced at the same time); and, ③ Japan to stop its political bickering, and quickly put through the bill on deficit-financing bonds to implement the country’s budget plan.
- What are other pressing issues ?
- The need to eradicate poverty. The World Bank says global poverty has halved over the last two decades, and at this rate, it will halve again over the next decade. But it urges measures to accelerate the pace by promoting sustainable and inclusive economic growth. In other words, wealth creation should trickle down to all parts of the global society and lead to the expansion of the world’s middle class. A weak economy causes unemployment, and the poor are affected the most under fiscal tightening. So laying down safety nets is imperative.
- What needs to be done about the ripple effects from a weak economy ?
- The need to address social inequality. Its existence means a weak economic structure, which means more inequality. IMF and World Bank studies suggest that inequality does not lead to sustainable growth. Analyzing what they say: inequality becomes a fixed feature of society, and then the stability of the economy becomes weaker. So a vicious circle is created. Inequality seems to have a stronger impact on economic growth than other factors, such as open trade, exchange rate changes, and power of political institutions. So the lack of extreme inequality in Japan may be regarded as one of the country’s strengths.
- What is the message at the corporate level ?
- At the macro level, the IMF urges: better transparency and governance, equal opportunities, and open access to the credit and financial markets for all. So at the micro corporate level, this translates as: more information disclosure, more rigorous compliance, labor policies that hire talent irrespective of gender, race, color or creed, and profit sharing. Also, in terms of financing, companies should be able to borrow from banks and tap the capital markets without any obstacles.
- How about financial markets ?
- A lack of confidence is the root cause of stagnant stock markets. But once sentiment turns around and the outlook becomes more transparent, the IMF says we may see a sharp rebound. This would then spur global companies to increase spending on factories, and hire more people, leading to a modest rise in interest rates. Based on this optimistic scenario, IR practitioners should prepare now for a busy period ahead, as global investors start to “bottom fish” in the search for value stocks.
- In the years ahead, where can we expect strong growth ?
- Both the IMF and World Bank are pinpointing economies that have been neglected up to now and have implemented reforms. These are the so-called “frontier nations” that could become the next emerging group. One latent continent is Africa, where in 20 years the world’s largest working population of over 1 billion people will be. That will be more than India or China. Nigeria was cited as one country that has come a long way.
Japan: Long-term Vision
- How can Japan address unfavorable demographics and an unbalanced budget ?
- On domestic issues, unfavorable demographics need not hamper economic growth, so long as productivity increases through continuous innovation. Underutilized human resources could be unleashed to spur the economy. Measures could include better childcare for working mothers, extension of retirement ages, and less rigid labor practices that would allow workers to move more freely to where there is greater demand and reward for their skills. On budget issues, tax increases alone will not solve a budget deficit. Further spending cuts, combined with tax adjustments are needed. Ideally, total taxes should be reduced to encourage investment in plant and equipment, venture start-ups, job creation, and personal consumption. So a starting point would be a reduction in corporate taxes, with lower income taxes at a later date.
- How should Japan face free trade deals ?
- The government must clarify the advantages of free trade and globalization to businesses, farmers, medical institutions and the public. Most people think free trade is only for major global companies. So opposition will surely exist, unless everyone understands the benefits. The government must help through retraining, marketing support, and subsidies. Even rice and fruit farmers can potentially profit, if they are guided on how to adjust their sales strategies, by targeting better off consumers across Asia, for example.
Significance of Macro Factors:
- Why should companies consider macro factors ?
- It is very important to be aware of potential risks to a company’s business model that are beyond the company’s control. Macro factors may include anything from economic, political to technological. If you look at the economic factors, a country may suddenly impose capital controls. Clearly, this could hamper cash flows back to the parent company, and adversely affect earnings in the home currency. But such an imposition would stem from the political risk that a country faces. Companies sometimes fail to understand this, with dire consequences for the share price.
- Would currency fluctuations come under macro factors ?
- Definitely. A company should always be aware that a currency in the free markets can quite easily move against a company’s interests. So when the government is asked by the private sector to keep the currency within a certain range to promote exports, the principles of free market forces are broken. Referring to Darwin’s theory, such a macro factor should be viewed as a chance to change the business model and adapt to the changed circumstances. When your home currency is strong, this is a golden opportunity to invest overseas. When your home currency weakens, then it becomes a great time to repatriate those cumulative earnings. Relying on government intervention is not an advisable way to go forward. Companies should instead hedge currency risks through various financial instruments. This will ease investors’ concerns.
- How about concentrations in certain countries ?
- Again, the macro factors here would be political and economic. Companies that make almost all their goods in, or source from, one country, could be subject to excessive political and economic risks, if the policies in that country suddenly change. A diversification strategy is a better way to go forward, and this will reassure investors.