IS Big always good? How are the biggest companies in the world doing?
Prior to the global financial crisis, it was always assumed that Big was Better. Every
company strived to become global companies, with scale, global reach and brand
reputation.
Telcos to supermarkets tried to be global and dominate global trade, especially in
opening up new markets and putting in place global supply chains. With the invention
of the Nespresso capsule and coffee machine, Unilever brought top-quality coffee
direct to your home.
In 2014, the Fortune Global 500 largest companies generated US$31.2 trillion in
revenues, US$1.7 trillion in profits and employed 65 million people. The largest of
them, ICBC Bank of China, had US$3.3 trillion in assets.
But as Walmart, the largest global retailer, signalled a profit warning, have global
companies peaked as the world moves into secular stagnation?
The Fortune Magazine analysis of the Global 500 companies showed that between
2005 to 2015, the geography of these companies had changed.
In the last decade, number of advanced country (US, Europe and Japan) companies
had shrunk from 452 out of 500 (90.4%) to 353 companies or 70.6% of the total.
The big entrant is China (98 companies or 19.6%, compared with only 16 or 3.2% 10
years ago). South Korea (17), Taiwan (8) and India (7) also had more global
companies than 10 years ago.
Other than China, technology was the big disruptor. The newcomers that became big
through technology such as Apple, Google, Amazon, Visa and Facebook, have more
market value per dollar of physical assets than older giants such as GM, Exxon and
the like.
If hardware was the age of the 20th century, software defined the 21st century
companies. No company demonstrated this disruptive shift than the shrinkage of
Kodak, the company that was created the chemical film and photo industry.
By ignoring the challenge of digital media, it is a shadow of itself.
Technology is disrupting the value of hard assets in more ways than one.
For example, the shale oil and alternative energy revolution in the form of solar, wind
and nuclear power means that fossil fuel producers, such as oil, gas and coal
producing companies must write off all their recent heavy exploration costs.
These reserves made sense at US$120 per barrel of oil price, but not at the present
price range of US$40-50 per barrel.
The third disruptor after technology is the post-crisis reforms in financial regulation. In
a period of low interest rates, large companies like GE made money from financing, in
effect leveraging their capital.
General Motors made more money from car financing than from making cars.
Once Dodd-Frank legislation threatened to make them financial holding companies,
subject to many complex rules, these industrial giants decided to get out of the
finance business.
Furthermore, the regulatory reforms also cut back on global bank profits by requiring
large capital and liquidity increases and imposing huge compliance costs.
Global banks are shrinking their balance sheets and lowering risk appetites to
concentrate on where they have comparative advantage.
At the same time, high regulatory costs and the constant need to increase
transparency is causing many family-owned companies to re-think the benefits of
going public. Instead, there are more de-listing and less IPOs in many markets.
The total number of listed companies, according to the World Federation of
Exchanges remains relatively small at 44,540, with a market capitalisation of US$63.5
trillion at the end of 2014, or roughly 21% of global financial assets.
Such disruptive forces meant that the life of a company on the Fortune Global 500 list
has now shrunk from 61 years half a century ago to 16 years by 2014.
Competition is no longer coming from existing giants, but from minnows in emerging
markets that are growing to become sharks, as McKinsey Global Institute called them
in its latest book, “No Ordinary Disruption”.
Who are the minnows threatening to be sharks? These are the small and medium
enterprises (SMEs) around the world that have begun to access global markets
through the Internet.
In China alone, there are only 2,800 listed companies compared with roughly 40
million SMEs, so when the IPO window was temporarily closed after the A-share
turmoil, thousands of startups queued up to register on the Third New Market, the
over-the-counter market for transactions in unlisted company shares.
Big companies are discovering that as they grow in size, they become too complex to
manage and not just too big to fail (TBTF). The problems of Volkswagen in emission
quality control turned out to be serious governance issues.
Once reputation is damaged, as the Japanese airbag manufacturer Takata
discovered, the consequences can be almost fatal.
From an investor point of view, large cap companies do not necessarily deliver
superior returns compared with small caps. Indeed, the real returns come from
nurturing start-ups to become unicorns (companies that are valued more than
US$1bil), as private equity and angel funds have learnt to do. There is of course
some concern that even technology startup valuations have become a bubble, but as
long as investors are betting with their own money, rather being leveraged, the
systemic impact will not be that big.
My own bet is that the next Apple will be a startup no one would have heard of even
five years ago.
It will probably be in the bio-technology area, producing a new drug or medical tool
that will change healthcare and medicine. It is more likely to come from an Asian start-
up because of the massive efforts of Asian governments in fostering new
entrepreneurship from Osaka to Shenzhen, Singapore and Bangalore.
The reason is simply scale. Never have so many (SMEs) been able to access so
much knowledge and markets at such speed and ease. The time of small companies
in new markets is only just beginning.
Of course, many innovative SMEs will be bought up by the giants. That is the stark
cycle of corporate life.
As in the jungle, the many small plants fight for sunshine, and one day, one of them
becomes the tallest tree, only to die and feed the next generation of weeds and trees.
With massive disruption, the survivors will be the small. Governments will do well to
foster the eco-system for innovation and change.
Andrew Sheng writes on global issues from an Asian perspective.
A version of this article appeared in The Star Online, 14 November 2015
|
|
