Among the many things that President Donald Trump dislikes are big global companies. Faceless and rootless, they stand accused of unleashing “carnage” on ordinary Americans by shipping jobs and factories abroad.
His answer is to domesticate these marauding multinationals. Lower taxes will draw their cash home, border charges will hobble their cross-border supply chains and the trade deals that help them do business will be rewritten.
To avoid punitive treatment, he told American bosses this week, “all you have to do is stay.”
Trump is unusual in his aggressively protectionist tone, but in many ways he is behind the times. Multinational companies, the agents behind global integration, already were in retreat well before the populist revolts of 2016. Their financial performance has slipped so that they are no longer outstripping local companies. Many seem to have exhausted their ability to cut costs and taxes and to out-think their local competitors.
In short, Trump’s broadsides are aimed at companies that are surprisingly vulnerable and, in many cases, already are heading home. The impact on global commerce will be profound.
Multinational companies—those that do a large chunk of their business outside their home region—employ only one in 50 of the world’s workers, but they matter. A few thousand companies influence what billions of people watch, wear and eat. The likes of IBM, McDonald’s, Ford, H&M, Infosys, Lenovo and Honda have been the benchmark for managers. They coordinate the supply chains that account for more than 50% of all trade. They account for a third of the value of the world’s stock markets and own the lion’s share of its intellectual property, from lingerie designs to virtual-reality software and diabetes drugs.
In the past five years, the profits of multinationals have dropped by 25%. Returns on capital have slipped to their lowest in two decades.
A strong dollar and low oil prices explain part of the decline. Technology superstars and consumer companies with strong brands are still thriving. However, the pain is too widespread and prolonged to be dismissed as a blip.
About 40% of all multinationals make a return on equity of less than 10%, a yardstick for underperformance. In a majority of industries, they are growing more slowly and are less profitable than local companies that stayed in their backyard. The share of global profits accounted for by multinationals has fallen from 35% a decade ago to 30% now.
For many industrial, manufacturing, financial, natural-resources, media and telecommunications companies, in short, global reach has become a burden, not an advantage.
That is because a 30-year window of arbitrage is closing. Companies’ tax bills have been massaged down as low as they can go, and in China factory workers’ wages are rising. Local companies have become more sophisticated. They can steal, copy or displace global companies’ innovations without building costly offices and factories abroad.
The changing political landscape is making things even harder for the giants. Trump is the latest and most strident manifestation of a worldwide shift to grab more of the value that multinationals capture. China wants global companies to locate not only their supply chains in China, but also their brainiest activities such as research and development. Last year Europe and America battled over who gets the $13 billion of tax that Apple and Pfizer pay annually. From Germany to Indonesia rules on takeovers, antitrust and data are tightening.
Trump’s arrival will only accelerate a gory process of restructuring. Many firms are simply too big: they will have to shrink their empires. Others are putting down deeper roots in the markets where they operate. General Electric and Siemens are “localizing” supply chains, production, jobs and tax into regional or national units.
Another strategy is to become “intangible.” Silicon Valley’s stars, from Uber to Google, are still expanding abroad. Fast-food companies and hotel chains are shifting from flipping burgers and making beds to selling branding rights. Such virtual multinationals are also vulnerable to populism, however, because they create few direct jobs, pay little tax and are not protected by trade rules designed for physical goods.
The retreat of global companies will give politicians a feeling of greater control as companies promise to do their bidding, but it cannot bring back all the jobs that the likes of Trump promise. Further, it will mean rising prices, diminishing competition and slowing innovation. In time millions of small companies trading across borders could replace big companies as transmitters of ideas and capital, but their weight is tiny.
People may yet look back on the era when global companies ruled the business world and regret its passing.
© 2017 Economist Newspaper Ltd., London (January 28). All rights reserved. Reprinted with permission.
Image credits: Stephen Crowley/The New York Times