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Can large corporates survive localisation?

The trend towards 'localisation' leaves few easy options for large companies, according to a report from Deutsche Bank Research. The huge advantage from global supply chains and businesses, built up during the last few decades of globalisation, may unwind unless large corporates adapt to local- or multi-local business models. The urgency to adapt has been turbocharged by COVID-19.

The Deutsche Bank report examines five localisation forces that now conspire against large companies and favour small ones. These include plummeting foreign investment, wage rises in outsourced locations, the escalation in ESG focus on global supply chains, and growing political and customer pressures for 'local' products.

Localisation plans lagging

Large companies have enjoyed the last few decades of globalisation as they have been the ones with the resources to invest in global supply chains and businesses. Covid-19 has turbocharged the deglobalisation movement as supply chains have been upended, geopolitical risk has risen, and ESG-conscious customers and investors have pushed companies to be more 'resilient' and local. However, only 35% of companies have begun to implement plans to localise their business.

The FDI factor

Profit margins of large companies are sensitive to foreign investment. As FDI increased after China joined the WTO, so too did the margins of large companies relative to their smaller rivals. However, when FDI decreased, large company margins fell and smaller firms caught up. According to the United Nations Conference on Trade and Development World Investment Report, a 40% drop in global FDI is expected this year. That is a serious concern for large companies that depend upon it (either directly or indirectly). While the pandemic and the drop in FDI will challenge the supremacy of large companies, several other forces are conspiring against them. These include rising wages in China and the lack of outsourcing alternatives that have China's scale.

Customer sentiment

Customers increasingly prefer small businesses. Indeed, the report finds that less than 20% of people now have "confidence" in large businesses, while 75% of people have a favourable opinion of small businesses. Political opinion is also moving against large companies as leaders respond to populism. Corporate tax increases are on the horizon as are greater regulations in some industries.

Investor oversight

This year, large companies have become the focus of attention for ESG investors who have brought supply chain resiliency within their remit. In particular, these investors are concerned about the dependence on a narrow set of suppliers and supplier countries. The extent of this oversight is far greater for large companies that small ones. The report also argues that small companies will find it easier to adapt to localisation. They are not burdened by the scale of investment in global supply chains as are large companies. As they purchase inputs and labour in smaller quantities than do large companies, they will have more options to source locally. Small companies are typically under less investor pressure to build expensive spare capacity into their supply chain. Of course, this spare capacity is extremely useful during a supply shock, but it may be some time before this occurs again.

How to adapt

Large corporates do have several options, but the report makes clear that they all involve cost and change. The first is an acquisition strategy to purchase 'local' brands and maintain them as independent business units. Another is to reform centralised global operations and supply chains into a multi-local configuration. Large firms can also use some advantages from their existing scale. In particular, they can use data more effectively than can small companies. They are also better placed to respond to the growing trend of customisation.

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