“Once upon a time, Granny and Grandad used to go to a large shop on the motorway to buy their furniture. They used to stagger around carrying Billy bookshelves and Dombas wardrobes, before treating themselves to Swedish meatballs in the canteen. And then Grandad would spend the rest of the weekend trying to assemble the furniture, whilst Granny turned up the volume on her radio to drown out his swearing.
“What, Granny, you actually bought furniture? But why did you buy when you could just rent it, and change it when you wanted something different?”
That future isn’t very far away. In fact, if you live in Switzerland, you’ll be able to rent furniture from IKEA stores this month on a trial basis. As the boss of Inter IKEA told the Financial Times last week:
“We will work together with partners so you can actually lease your furniture. When that leasing period is over, you hand it back and you might lease something else. And instead of throwing those away, we refurbish them a little and we could sell them, prolonging the lifecycle of the products. The trial is the first in a series of tests that IKEA hopes could lead to “scalable subscription services” for different types of furniture.”
Of course, IKEA aren’t the first company to be moving in the direction of subscribing rather than selling. Not many people buy CDs or videos these days, after all, but instead subscribe to streaming services that enable them to download what they want, when they want it.
But what is new, as the chart from Prof Michael Wade of IMD shows, is that it illustrates a growing move by consumer product groups and manufacturers to follow this lead. And behind the move is an early effort to put the principles of the circular economy into practice, as IKEA describe:
“You could say leasing is another way of financing a kitchen. When this circular model is up and running, we have a much bigger interest in not just selling a product but seeing what happens with it and that the consumer takes care of it. He added that Ikea now designed kitchens so that it was possible to change the cupboard doors without needing to rip out the whole set-up. “It’s interesting if you as a consumer say ‘I can change and adapt and modernise my kitchen if that’s a subscription model’”.”
It also marks a further departure from the concept of globalisation, which has dominated business for a generation. Globalisation was essential for the world of the BabyBoomers, where the world’s population went from 2.5bn in 1950 to 6.1bn by 2000. There just wasn’t enough “stuff” to go round in the rich Western countries, and so companies were forced to develop global supply chains to satisfy demand.
But today, as the chart describes, smart companies like IKEA are starting to plan for a world where services rather than products will be the main driver for revenue and profit growth. Rather than building in obsolescence, so that the consumer was forced to make repeat purchases, the new business model is based on providing a solution that can evolve with the consumer’s needs.
It will also, necessarily, operate on a local scale. It will make no sense, for example, for IKEA to be continually shipping kitchen doors across the world, because the customer doesn’t want a pink colour any more.
The same principle is being applied by the Circular Plastics Alliance in Europe, which is focused on 5 key areas to turn 10 million tonnes/year of recycled plastics into new products within the next 6 years – Collection and sorting; Product design for recycling; Recycled plastic content in products; Monitoring systems; R&D and investments, including chemical recycling.
The days of Granny and Grandad choosing to actually “own” their furniture may well be coming to an end. And for companies, the challenge of developing new business models is no longer something they can put off till the future. Those that recognise the opportunity created by the growing demand for products that are more sustainable, affordable and sustainable will be the Winners in this New Normal world.
Is global economic growth really controlled by monetary policy and interest rates? Can you create constant growth simply by adjusting government tax and spending policy? Do we know enough about how the economy operates to be able to do this? Or has something more fundamental been at work in recent decades, to create the extraordinary growth that we have seen until recently?
- As the chart shows for US GDP, regular downturns used to occur every 4 or 5 years
- Then something changed in the early 1980s, and recessions seemed to become a thing of the past
- Inflation, which had been rampant, also began to slow with interest rates dropping from peaks of 15%+
- For around 25 years, with just the exception of the 1st Gulf War, growth became almost constant
Why was this? Was it because we became much cleverer and suddenly able to “do away with boom and bust” as one UK Finance Minister claimed? Was it luck, that nothing much happened to upset the global economy? Was it because the Chairman of the US Federal Reserve from 1986 – 2006, Alan Greenspan, was a towering genius? Perhaps.
THE AVERAGE BABYBOOMER IS NOW 60 YEARS OLD
Or was it because of the massive demographic change that took place in the Western world after World War 2, shown in the second chart?
- 1921 – 1945. Births in the G7 countries (US, Japan, Germany, France, UK, Italy, Canada) averaged 8.8m/year
- 1946 – 1970. Births averaged 10.1m/year, a 15% increase over 25 years
- 1970 – 2016. Births averaged only 8.5m/year, a 16% fall, with 2016 seeing just 8.13m born
Babies, as we all know, are important for many reasons.
Economically, these babies were born in the wealthy developed countries, responsible for 60% of global GDP. So right from their birth, they were set to have an outsize impact on the economy:
- Their first impact came as they moved into adulthood in the 1970s, causing Western inflation to soar
- The economy simply couldn’t provide enough “stuff”, quickly enough, to satisfy their growing demand
- US interest rates jumped by 75% in the 1970s to 7.3%, and doubled to average 10.6% in the 1980s
- But then they began a sustained fall to today’s record low levels as supply/demand rebalanced
BOOMERS TURBOCHARGED GROWTH, BUT ARE NOW JOINING THE LOWER-SPENDING 55-PLUS COHORT
The key development was the arrival of the Boomers in the Wealth Creator 25-54 age group that drives economic growth. Consumer spending is 60% – 70% of GDP in most developed economies. And so both supply and demand began to increase exponentially. In fact, the Boomers actually turbocharged supply and demand.
Breaking with all historical patterns, women stopped having large numbers of children and instead often returned to the workforce after having 1 or 2 children. US fertility rates, for example, fell from 3.3 babies/woman in 1950 to just 2.0/babies/women in 1970 – below replacement level. On average, US women have just 1.9 babies today.
It is hard to imagine today the extraordinary change that this created:
- Until the 1970s, most women would routinely lose their jobs on getting married
- As Wikipedia notes, this was “normal” in Western countries from the 19th century till the 1970s
- But since 1950, life expectancy has increased by around 10 years to average over 75 years today
- In turn, this meant that women no longer needed to stay at home having babies.
- Instead, they fought for, and began to gain Equal Pay and Equal Opportunity at work
This turbocharged the economy by creating the phenomenon of the two-income family for the first time in history.
But today, the average G7 Boomer (born between 1946 – 1970) is now 60 years old, as the 3rd chart shows. Since 2001, the oldest Boomers have been leaving the Wealth Creator generation:
- In 2000, there were 65m US households headed by someone in the Wealth Creator 25-54 cohort, who spent an average of $62k ($2017). There were only 36m households headed by someone in the lower-spending 55-plus cohort, who spent an average of $45k
- In 2017, low fertility rates meant there were only 66m Wealth Creator households spending $64k each. But increasing life expectancy meant the number in the 55-plus cohort had risen by 55%. However, their average spend had only risen to $51k – even though many had only just left the Wealth Creators
CONCLUSION – THE CHOICE BETWEEN ‘DEBT JUBILEES’ AND DISORDERLY DEFAULT IS COMING CLOSE
Policymakers ignored the growing “demographic deficit” as growth slowed after 2000. But their stimulus policies were instead essentially trying to achieve the impossible, by “printing babies”. The result has been today’s record levels of global debt, as each new round of stimulus and tax cuts failed to recreate the Boomer-led economic SuperCycle.
As I warned back in January 2016 using the words of the OECD’s William White:
“It will become obvious in the next recession that many of these debts will never be serviced or repaid, and this will be uncomfortable for a lot of people who think they own assets that are worth something. The only question is whether we are able to look reality in the eye and face what is coming in an orderly fashion, or whether it will be disorderly. Debt jubilees have been going on for 5,000 years, as far back as the Sumerians.”
That recession is now coming close. There is very little time left to recognise the impact of demographic changes, and to adopt policies that will minimise the risk of disorderly global defaults.
The post Time to recognise the economic impact of ageing populations appeared first on Chemicals & The Economy.
The Stone Age didn’t end because we ran out of stones. Similarly, coal is being left in the ground because we no longer need it any more. And the same is happening to oil, as Saudi Arabia recognised last year in its Vision 2030:
“Within 20 years, we will be an economy that doesn’t depend mainly on oil“.
And so now the debate is moving on, to products such as plastics that are made from oil.
The move began several years ago with the growing concern over plastic bags. Consumers decided they no longer wanted to live in a world filled with waste bags. Now, in a landmark new Study*, the debate is evolving to focus on the question of ‘What happens to plastic after we have used it?’ As the chart shows:
The world has produced 8.3bn tonnes of plastic over the past 60 years
Almost all of it, 91% in fact, has since been thrown away, never to be used again
But it hasn’t simply disappeared, as plastic takes around 400 years to degrade
Instead, the Study finds, 79% is filling up landfills or littering the environment and “at some point, much of it ends up in the oceans, the final sink”
Nobody is claiming that this waste was created deliberately. Nobody is claiming that plastics aren’t incredibly useful – they are, and they have saved millions of lives via their use in food packaging and other critical applications. The problem is simply, ‘What happens next?’ As one of the Study authors warns:
“We weren’t aware of the implications for plastic ending up in our environment until it was already there. Now we have a situation where we have to come from behind to catch up.”
The good news is that potential solutions are being developed. As the video shows, Recycling Technologies, for example (where I am a director), is now trialling technology that will recycle end-of-life plastic into virgin plastic, wax and oils. Other companies are also hard at work on different solutions. And more and more effort is focused on finding ways of removing plastic from the sea, as I noted last year:
“95% of plastic packaging material value is currently lost after just a short first-use cycle
By 2050, there will be more plastics in the ocean than fish by weight, if current policies continue
Clearly, this state of affairs cannot be allowed to continue.”
SUSTAINABILITY IS REPLACING GLOBALISATION AS A KEY DRIVER FOR THE ECONOMY
But there is another side to this debate that is just about to move into the headlines. That is the simple question of “How do we stop putting more and more plastic into the environment?” Cleaning up the current mess is clearly critically important. But the world is also starting to realise that it needs to stop creating the problem in the first place.
As always, there are a number of potential solutions potentially available:
The arrival of 3D printing dramatically reduces the volume of plastic needed to make a finished product. It operates on a very efficient “additive basis”, only using the volume that is needed, and producing very little waste
Digitalisation offers the opportunity to avoid the use of plastics – with music, for example, most people today listen via streaming services and no longer buy CDs made of plastic
The ‘sharing economy’ also reduces demand for plastic – new business models such as car-sharing, ride hailing and autonomous cars enable people to be mobile without needing to own a car
The key issue is that the world is moving to adopt the principles of the circular economy as the Ellen MacArthur Foundation notes:
“Underpinned by a transition to renewable energy sources, the circular model builds economic, natural and social capital.”
This paradigm shift clearly creates major challenges for those countries and companies wedded to producing ever-increasing volumes of plastic. OPEC has an unpleasant shock ahead of it, for example, as its demand forecasts are based on a belief that:
“Over one-third of the total demand increase between 2015 and 2040 comes from the road transportation sector (6.2 mb/d). Strong growth is also foreseen in the petrochemicals sector (3.4 mb/d)”
They are forgetting the basic principle that, “What cannot continue forever, won’t continue“. After all, it took just 25 years for cars to replace horses a century ago. More recently, countries such as China and India went straight to mobile phones, and didn’t bother with landlines. And as I noted last year, underlying demand patterns are also now changing as a result of today’s ageing populations:
In the BabyBoomer-led SuperCycle, the growing population of young people needed globalisation in order to supply their needs. And they were not too worried about possible side-effects, due to the confidence of youth
But today’s globally ageing populations do not require vast new quantities of everything to be produced. And being older, they are naturally more suspicious of change, and tend to see more downside than upside
Of course, change is always difficult because it creates winners and losers. That is why “business as usual” is such a popular strategy. It is therefore critically important that companies begin to prepare today to be among the winners in the world of the circular economy. As we all know:
There is no such thing as a mature industry, only mature firms. And industries inhabited by mature firms often present great opportunities for the innovative”.
As the 3rd chart shows, the winners in the field of plastics will be those companies and countries that focus on using their skills and expertise to develop service-based businesses. These will aim at providing sustainable solutions for people’s needs in the fields of mobility, packaging and other essential areas. The losers will be those who bury their heads in the sand, and hope that nothing will ever change.
* The detailed paper is in Science Advances, ‘Production, use, and fate of all plastics ever made‘
We are living in an ever more uncertain world, where “business as usual” is becoming the least likely option for the future. Companies and investors need to adapt quickly to this new normal environment, if they want to maintain revenue and profit growth. One example comes from the American company 3M, which has become legendary for its ability to identify new trends. Their latest insight continues this tradition, as CEO Inge Thulin has explained:
“Our strategy has changed. If you go back several years, there was a strategy of producing at huge facilities at certain places around the world, and shipping it to other countries. But now we have a strategy of localisation and regionalisation.”
As Thulin suggests, there is plenty of evidence that global supply chains have reached their sell-by date. Political pressures are just one example of the challenges they now face, with America’s President Trump leading the way in starting to redraw the global trade map:
He has already withdrawn from the Trans-Pacific Partnership, aimed at linking the US and 11 Pacific nations
He is also intending to renegotiate the North American Free Trade Agreement with Mexico and Canada
This month, he announced his intention to withdraw from COP-21, the Paris Climate Change Agreement
Similar disruption to previous trade patterns is also underway in Europe, where the UK’s Brexit vote to leave the European Union (EU) means that at least 759 treaties will have to be renegotiated – covering not only trade, but also key areas for business such as air traffic rights and financial services. This process will not be easy in the UK’s febrile political atmosphere, given the Conservative Party’s failure to win an outright majority in this month’s election.
The move away from globalisation towards more local supply chains also highlights the growing importance of sustainability as a key driver for the future. Globalisation was a critically important dynamic during the Baby Boomer–led economic SuperCycle, when demand was rising on a constant basis. But this demographic dividend is now being replaced by a demographic and demand deficit.
Today’s globally ageing population means that economic growth is set to decline in many countries:
Older people already own most of what they need, and their incomes decline as they move into retirement
The younger generation are also owning less “stuff”, as streaming services such as Netflix and Spotify confirm
Digitalisation is playing a key role in enabling this aspect of the paradigm shift, and it seems likely that major markets such as autos will now be prime candidate for disruption. We cannot yet know whether car-sharing, or autonomous vehicles, or another yet-to-be-invented business model will eventually dominate the mobility market of the future. But we can be reasonably sure that major disruption lies ahead.
I discuss these issues in more detail in the above video interview with Will Beacham, deputy editor of ICIS Chemical Business, and in a new article for the magazine. Please click here to download a free copy.
“May God bless the USA and God bless Boeing” was President Trump’s sign-off in his speech on Friday at Boeing’s South Carolina factory. Earlier he had told the workforce building the 787 Dreamliner:
“This is our mantra: Buy American and hire America. We want products made in America, made by American hands. Our goal as a nation must be to rely less on imports and more on products made here in the USA. We’re going to fight for every last American job.”
Clearly the Dreamliner is a great success, with over 500 aircraft already delivered to more than 60 major airlines since its 2011 launch. But the factory assembling the Dreamliner relies on parts from all around the world. As Business Insider describes, “The Dreamliner is like the United Nations of planes:
□ Its wings and batteries come from Japan. Its wing tips come from South Korea.
□ India is the source of its floor beams. The front fuselage is made in the USA and Japan.
□ The center fuselage and horizontal stabilizers are from Italy.
□ Landing gear and doors? France. Cargo access doors are built in Sweden.
□ The wing/body fairings, which cover gaps on the body, are from Canada.
□ The movable trailing edge of the wings are from Canada, except when they’re from the US or Australia.
□ Thrust reversers come from Mexico.
□ Its engines come from either General Electric in the US or Rolls-Royce in the UK”
Over the next 8 years, the President clearly has an opportunity to replace many of these imports with local parts. But he is unlikely to be able to do this without impacting Boeing’s business model, which is based on accessing the world’s best brains and factories to produce the best possible aircraft at the lowest possible cost.
This model also creates a “win-win” for countries when buying the Dreamliner, as they are able to share in the value being created. If Boeing changes its business model to a “win-lose” model – based on increasing US content at the expense of foreign suppliers -then its sales will inevitably suffer. Trade wars will replace today’s global supply chains.
It is a similar story in Europe as the UK prepares to exit the European Union (EU). Nissan’s auto factory in Sunderland is the UK’s largest, exporting 55% of its output to the EU. And it currently operates on the same global principles as Boeing, as the Wall Street Journal describes:
“□ Bridgestone, the Japanese tire maker, supplies the Qashqai with tires made in Poland and Spain. France’s Faurecia provides seats made in Portugal, Poland and France, as well as emissions-control systems made in the UK
□ Italy’s Sogefi supplies springs made in Britain and Spain, and air-intake systems from a UK plant. Denso, a Japanese supplier, provides compressors made in Germany and a crank sensor produced in Japan
□ Parts also can travel back and forth between countries before being bolted to the inside of a car. A spring, for example, might be produced in Britain, sent to Germany to be inserted into a gear box and then shipped back to the U.K. as part of the finished component.”
Yet UK Premier May has promised that the UK will begin the process of leaving the European Single Market next month. In exchange, the government has offered just 4 assurances to UK-based auto companies:
“To ensure more suppliers located in the UK; to commit Britain to research and development into electric and ultra-low emission vehicles; to support jobs and training; and to push for a deal with the EU that allowed automotive trade to continue ‘free and unencumbered’.”
In reality, of course, May has no control over whether auto suppliers choose to locate in the UK. Nor can she guarantee that UK car exports will continue to have free access to the EU. What therefore will happen to the UK’s critically important auto industry if she proves unable to deliver on her promises?
We already know that the EU plans to focus the Brexit negotiations for the rest of this year on finalising the UK’s exit bill (estimated at €60bn, $57bn) and the rights of expatriate citizens. This means the UK will have just a year to discuss longer-term trade deals before exiting the EU in March 2019. Almost inevitably, this means the UK will then be forced to use WTO terms for all its trade – with the EU and the rest of the world – until new deals can be finalised.
MOST MAJOR COMPANIES OPERATE WITHIN WITHIN GLOBAL SUPPLY CHAINS
It is also easy to forget that today’s global supply chains don’t just impact the aerospace and auto industries. These in turn rely on components sourced from a vast range of suppliers – including plastics, chemicals, textiles, paints, electronics, metals and many others. As today’s trade agreements disappear, all of these supply chains will be at risk:
□ A company that currently supplies a customer in Asia, Europe or N America probably doesn’t know that its end-use is in a Dreamliner or Nissan car, or one of the other millions of products that depend on global supply chains
□ They will only find out as as protectionism and trade wars spread, and their sales start to decline
□ Instead of today’s “win-win” relationships, they will find themselves forced to operate under World Trade Organisation rules, which are only designed to meet very basic needs
As the WSJ notes with regard to the UK auto industry:
“Tariffs stipulated by the World Trade Organization, used as benchmarks for countries with no trade pact, stand at 10% for cars and between 2.5% and 4.5% for components.”
History shows that nobody can control what happens next in any war, or trade war. Usually, the “winner” decides they can make further gains, and the “loser” tries to regain what they have lost. Today’s trade wars are following this pattern. They are starting slowly and locally, but will soon spread globally as the list of losers starts to multiply.
Wall Street’s post-election rally suggests that many investors currently have the wrong idea about Donald Trump. They have decided he is a new Ronald Reagan, with policies that will deliver a major bull market.
But those promoting this narrative have forgotten their history. Both men certainly share a link with the entertainment industry. But Reagan took office towards the end of one of the worst recessions in the 20th century. By contrast, Trump takes office at the end of an 8-year bull market.
Prof Robert Shiller’s CAPE Index (based on average inflation-adjusted earnings for the past 10 years), provides the best long-term view of the US stock market, going back over a century to 1881. As the chart shows:
Ronald Reagan took office in January 1980, when the CAPE Index was 9.4
It fell to 6.6 in July/August 1981 at the bottom of the recession, when the S&P 500 was just 109
At the end of Reagan’s Presidency it was still only at 14.7, and the S&P 500 was at just 277
Today, Donald Trump takes office with the CAPE ratio at 28.5 and the S&P at 2271, after an 8-year rally
Is it really credible as a Base Case that the rally could continue for another 8 years? After all, Trump himself claimed back in September that the US Federal Reserve was being “highly political” in refusing to raise interest rates:
“They’re keeping the rates down so that everything else doesn’t go down. We have a very false economy. At some point the rates are going to have to change. The only thing that is strong is the artificial stock market.”
Common sense would also tell us that Trump is about to make sweeping changes in economic and trade policy. He made his position very clear in October with his Gettysburg speech. And his Inauguration Speech on Friday explicitly broke with the key thrust of post-War American foreign policy:
“We assembled here today are issuing a new decree to be heard in every city in every foreign capital and in every hall of power. From this day forward, a new vision will govern our land. From this day forward, it’s going to be only America first, America first. Every decision on trade, on taxes, on immigration, on foreign affairs will be made to benefit American workers and American families.”
Change on this scale is never easy to achieve, and usually starts by creating major disruption. The expected benefits take much longer to appear. This, of course, is why “business as usual” is such a popular strategy. But it is clear that Trump is perfectly prepared to take this risk. As he said at the start of the speech:
“We will face challenges. We will confront hardships. But we will get the job done.”
Many companies and investors are still hoping nothing will change. But CEOs such as Andrew Liveris at Dow Chemical and Mark Fields at Ford have already realised we are entering a New Normal world:
Liveris told a Trump rally last month that jobs would be “repatriated” from outside the USA when Dow’s new R&D centre opened, adding as the Wall Street Journal reported “This decision is because of this man and these policies,” Mr. Liveris said from the stage of the 6,000-seat Deltaplex Arena here, adding, “I tingle with pride listening to you.”
Fields personally told Trump of their decision to cancel the Mexican plant and invest in Michigan, saying “Our view is that we see a more positive U.S. manufacturing business environment under President-elect Trump and the pro-growth policies and proposals that he’s talking about”.
The reversal of US trade policies will impact companies all around the world. The White House website has already confirmed the planned withdrawal from the TransPacific Partnership – and from NAFTA, if Mexico and Canada refuse to negotiate a new deal. China is certain to be targeted as well. Protectionism will start to replace globalisation.
This means that today’s global supply chains are set for major disruption. This will directly impact anyone currently selling to the US, and US companies currently selling overseas. It will also impact every supply chain that involves a final sale either to or from the US. The Great Reckoning for the policy failures since 2009 is now well underway:
The Dow Jones Industrial Average’s repeated failure to break the 20,000 level may well be a warning sign
Japan’s Nikkei Index was also poised to hit 40,000 when closing at 38,916 on 29 December 1989 – but never did
Sometimes, as US writer Mark Twain noted, “History doesn’t repeat itself, but it often rhymes”.