Markets face major paradigm shifts as recession approaches

Economic growth

SHARE THIS STORY

Major paradigm shifts are occurring in the global economy, as I describe in a new analysis for ICIS Chemical Business

Over the past 25 years, the budget process has tended to assume that the external environment will be relatively stable. 2008 was a shock at the time, of course, but many have now forgotten the near-collapse that occurred. Yet if we look around us, we can see that a number of major paradigm shifts are starting to occur in core markets – autos, plastics and others – which mean that ‘business as usual’ is highly unlikely to continue.

In turn, this means we can no longer operate a budget planning cycle on the assumption that demand will be a multiple of IMF GDP forecasts. Our business models will have to change in response to today’s changing demand patterns. Of course, change on this scale is always uncomfortable, but it will also create some major new opportunities.

Chemical companies in particular are clearly best placed to develop the new products and services that will be needed in a world where sustainability and affordability have become the key drivers for market success.

The transition periods created by paradigm shifts are never easy, however, due to the level of risk they create. The table gives my version of the key risks – you may well have your own list:

■ Global auto markets are already in decline, down 5% in January-August versus 2018, whilst the authoritative CPB World Trade Monitor showed trade down 0.7% in Q2 after a 0.3% fall in Q1

■ Liquidity is clearly declining in financial markets as China’s slowdown spreads, and Western political debate is ever-more polarised

■ The US$ has been rising due to increased uncertainty, creating currency risk for those who have borrowed in dollars; geopolitical risks are becoming more obvious

■ Some of the main “bubble stocks” such as WeWork, Uber and Netflix have seen sharp falls in their valuations, leading some investors to worry about “return of capital”

■ Chemical industry capacity utilisation, the best leading indicator for the global economy, has been in decline since December 2017, suggesting recession is close, and that bankruptcies among over-leveraged firms will inevitably increase

AUTOS PARADIGM SHIFT

The paradigm shift now underway in the global auto industry typifies the scale of the potential threat to sales and profits. Hundreds of thousands of jobs will likely be lost over the next 5-10 years in auto manufacturing and its supply chains as consumers transition to electric vehicles (EVs). The issue is that EVs have relatively few parts . And because there is much less to go wrong, many servicing jobs will also disappear.

The auto industry itself was the product of such a paradigm shift in the early 19th century, when the horse-drawn industry mostly went out of business. Now it is seeing its own shift, as battery costs start to reach the critical $100/kWh levels at which EVs become cheaper to own and operate than an internal combustion engine (ICE) on a total cost of ownership basis.

China currently accounts for two-thirds of global EV sales and sold nearly 1.3m EVs in 2018 (up 62% versus 2017). They may well take 50% of the Chinese market by 2025, as the government is now focused on accelerating the transition via the rollout of a national charging network. Importantly, though, Europe is likely to emerge as the main challenger to China in the global EV market.

VW is likely to be one of the winners in the new market. It plans to spend €80bn to produce 70 EV models based on standardised motors, batteries and other components. This will enable it to cut costs and accelerate the roll-out:

■ Its new flagship ID.3 model will go on sale next year at a mid-market price of €30k ($33k)

■ Having disrupted that market segment, it will then expand into cheaper models

■ And it expects a quarter of its European sales to run on battery power by 2025

The risk for suppliers to the auto industry is that the disruption caused creates a new playing field. Those who delay making the investments required are almost certain to become losers. The reason is simple – if today’s decline in auto sales accelerates, as seems likely, the investment needed for EVs will become unaffordable for many companies.

Nothing lasts forever. ‘Business as usual’ was a great strategy for its time. But it is clear that future winners will be those who recognise that the disruptive paradigm shifts now underway require new thinking and new business models. Companies who successfully transition to focus on sustainability and affordability will be the great winners of the future.

Please click here if you would like to read the full analysis

PREVIOUS POST

$50bn hole appears in New York financial markets - Fed is "looking into it"

29/09/2019

Most people would quickly notice if $50 went missing from their purse or wallet....

Learn more
NEXT POST

Companies ignore the Perennials 55+ generation at their peril

13/10/2019

Nearly a third of the the world’s High Income population are now in the Pe...

Learn more
More posts
Pandemic redraws the map
11/10/2020

  Companies have entered a new landscape where the coronavirus has accelerated major paradigm s...

Read
What will happen if President Trump loses the election?
04/10/2020

I spent from September 2015 onwards, during the last US Presidential election, trying to explain why...

Read
Covid fears risk a Great Depression and major social unrest
27/09/2020

Governments spent most of February/March ignoring my warnings here on the dangers posed by the Covid...

Read
The state of the global economy in 2020
13/09/2020

Last Wednesday, I gave the opening presentation for the ICIS PET Conference and looked at whether th...

Read
Reality dawns for business as No Deal Brexit approaches
06/09/2020

I warned before the June 2016 Brexit referendum that Brexit was all about politics, and Boris Johnso...

Read
Global chemical industry – key trends for success in today’s New Normal
02/08/2020

The chemical industry is the best leading indicator for the global economy. On Friday, I had the pri...

Read
Oil prices signal potential end to the V-shaped recovery myth
26/07/2020

Oil prices have moved into another ‘flag shape’ – which previously provided critic...

Read
Bankruptcies now the key risk as hopes for V-shaped recovery disappear
19/07/2020

Governments, financial markets and central banks all originally assumed the Covid-19 pandemic would ...

Read

Market Intelligence

ICIS provides market intelligence that help businesses in the energy, petrochemical and fertilizer industries.

Learn more

Analytics

Across the globe, ICIS consultants provide detailed analysis and forecasting for the petrochemical, energy and fertilizer markets.

Learn more

Specialist Services

Find out more about how our specialist consulting services, events, conferences and training courses can help your teams.

Learn more

ICIS Insight

From our news service to our thought-leadership content, ICIS experts bring you the latest news and insight, when you need it.

Learn more