Prepare for a new normal

11 June 2012 00:00  [Source: ICB]

The world economy has changed irrevocably as a result of the financial crisis and the demand changes created by the aging of the Western Baby Boomers.

We are about to set out on a great journey as the New Normal of sustained lower economic growth develops. There is no going back.

packing, REx Features

  Rex Features

Pack for a long journey - there's no going back, the experts say

In the 12th and final chapter of our ICIS/International eChem ebook, Boom, Gloom and the New Normal, we provide our view of how individuals, chemical companies and politicians can best prepare for the journey ahead.

For the chemical industry, this will require nothing short of a radical re-examination of all the old assumptions about how the global economy behaves, and what this means for demand-growth patterns in end-use industries.

In chapter 4, we imagined two sets of parents addressing their children during the late 1990s, one in Britain and one in China.

The British parent told his child not to bother with a degree that would enable him or her to do something productive for the world, but to instead buy several properties in London. In China, the advice was to get a degree in engineering in order to help make the products Westerners were buying in abundance from China, thanks to the credit bubble.

What advice should parents give their children today? One option is to remain as cynical as our imaginary 1990s parents and look for new opportunities to make a quick buck. But it is better to take a more refreshingly positive view because, by so doing, each of us can help shape a better future.

The world has converged, and so we make no distinction between a British parent, a Chinese parent or any parent in the West or in the emerging world.

We suggest: "Go and get a degree that will allow you to work for a company that will constantly innovate, making products that meet the needs of the future - the 55+ generation in the West and those emerging from poverty in the developing world. The firm you work for must also be mindful of the other megatrends - food and water scarcity, carbon footprint - in everything it does and everything it makes."

So what exactly does a New Normal company look like? How, also, should the Old Normal corporate world go about making this transition?

TOO MUCH COMMODITIZATION

Michael Porter, the management thinker, in his Shared Value article in the Harvard Business Review (January 2011) neatly summarized the kind of company we need to watch out for, the type still welded to the Old Normal, when he wrote about firms that have "focused on enticing consumers to buy more and more of their products."

paradigm of loss model

"Facing growing competition and shorter-term performance measures from shareholders, managers resorted to waves of restructuring, personnel reductions and relocating to lower-cost regions, while leveraging balance sheets to return capital to investors," Porter also said.

"The results were often commoditization, price competition, little true innovation, and no clear competitive advantage Companies have overlooked opportunities to meet fundamental societal needs Our field of vision has simply been too narrow."

The key for companies to avoid this trap is to break away from the tyranny of the focus on short-term financial metrics. They instead need to start planning for the longer term. Companies also need to establish and stick to a set of values that enable them to meet the needs of society and be successful, which we also discuss. But what is also needed is the support of policymakers. Unemployment is a major problem across the Western world. It has the potential to create repeated waves of social unrest that could bring governments down and wreck economic growth. If skills atrophy, and people lose the energy to learn new skills, it will become much harder to make the products and services of the future.

STRONG SOCIAL POLICY IS NECESSARY

Good social policy is therefore needed, as without a healthy society there cannot be a healthy economy. For example, increased investment in education is required to create the skills necessary to make the products of the future. This will involve partnerships between governments, both central and local, and industry in order to provide the right type of education and retraining programs.

Many developing countries have social policies that emphasize job creation over short-term profitability. But they face their own challenges. A key part of the New Normal journey will be the realization that the financial market's view of emerging markets is over-simplified and often wrong: their rise cannot inevitably replace lost demand in the West. In the case of China, additional challenges exist. These include the battle against economic reform by those who have done well out of the existing growth model, such as the state-owned enterprises.

China's economic model, which has prioritized exports and infrastructure over domestic consumption, needs major reform. India's continued economic rise is also far from guaranteed, as a result of corruption and stalled reform. Hopefully, the right politicians will come along to resolve these issues.

DON'T UNDERESTIMATE EMOTION

And then there is the emotional reaction to the changes now underway that could completely change the course of events. We look at this through the insights of Elisabeth Kübler-Ross, the Swiss-American psychiatrist, who identified five stages of grief while working with terminally ill patients, as detailed in the chart.

Today, many companies and governments remain in the Denial stage. They think that we can carry on past this "blip" in the old model of growth through fiscal stimulus or tax cuts.

THE NEW NORMAL

Chapter 12 of Boom, Gloom and the New Normal - How Western Baby Boomers are Changing Global Chemical Demand Patterns, Again is now available free to download at icis.com/NewNormaleBook.

It is co-authored by Paul Hodges, chairman of International eChem, who writes the ICIS Chemicals and the Economy blog, and John Richardson, director, ICIS training Asia, who writes the Asian Chemical Connections blog. ICIS and International eChem have also launched a training course, aiming at helping companies to become a winner in the New Normal. Visit icis.com/newnormalseminars

Paul Hodges John Richardson

"If we can just get the Western consumer to start buying again" is the argument of policymakers. But the problem is that the Baby Boomers' transition into retirement means demand is not there any more to fuel the kind of growth we saw in the 1982-2007 SuperCycle.

In some countries, we are already seeing the first signs of the next stage - Anger. In turn, this is causing investors to take fright, as they worry their loans may not be repaid. This is happening now in the eurozone, where interest rates in Greece reached 30-40% before it defaulted. Countries such as Spain and Italy are dangerously close to the 7% level that makes repayment almost impossible.

Working through these first two stages will probably take a long time. The Bargaining stage is still to come. Old Normal companies will have run out of road in their cost-cutting efforts, and may find themselves forced to make asset sales on a distressed basis in a market where there are few buyers.

Understandably, therefore, if the parallel with Kübler Ross' work holds true, what will follow is Depression. This will be derived from a sense of hopelessness at the scale and difficulty of the tasks ahead. It is at this point, as in the 1930s, that we risk seeing a return to protectionism.

Only after all this time will we approach the end of our journey and reach Acceptance, where individuals, companies and countries start working together again in a search for solutions. This will allow creativity to really flourish and encourage confidence to return. New opportunities will then emerge as we arrive in the New Normal.


By: John Richardson
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