Preventing a new global crisis

When the world’s economic elite gathered in the Swiss Alpine village of Davos in January, the rising risk of a new global crisis made for a much more apprehensive atmosphere than in the past, when the annual World Economic Forum was known to be more about networking than political strategy.

Yet, with the most recent collapse of energy prices around the globe, confusion over monetary policy, on-going conflict in the Middle East, the attendant surge of refugees into Europe and the ever-present threat of terrorism, the 2016 agenda didn’t leave much time for schmoozing.

“At the centre of all worries sat China, the world’s second-largest economy,” says Peter Goodman, Editor-In-Chief at the International Business Times. “Officially, China’s economy expanded by 6.9 per cent last year. Though that number would stimulate salivary glands virtually anywhere else on earth, it constitutes China’s slowest pace of growth in a quarter-century.”

According to Goodman, even though China’s Communist Party government had telegraphed what it portrayed as a ‘managed economic slowdown’ for more than a year (see also page 36), “markets worldwide have recoiled, envisioning ripple effects on every shore touched by trade.”

As a result, Goodman says unnerving talk about a second Global Financial Crisis (GFC) emerged during the Davos gathering, and with it more insecurity than those steering the world economy would appreciate. “It’s serious, and the Chinese left it too long to address the changeover in the growth model,” billionaire investor and philanthropist, George Soros, told Goodman in Switzerland. “A hard landing is practically unavoidable.”

While Soros has a history of anticipating market declines and even predicted the momentous 2008 crash, Mario Draghi, President of the European Central Bank (ECB), made a point of bringing a degree of optimism back to the debate. Speaking in Davos, he said 2016 had begun with “market gyrations” and “heightened sensitivity to risk”, but added it was too early to say that economic fundamentals have changed for the worse.

He added that the Eurozone was continuing to recover at a modest pace due to the ECB stimulus, lower oil prices and an easing of austerity programs put into place over the past year or so. A fourth driver of growth, which had yet to have an effect, would be, “the increase in government expenditure that will be necessary to cope with the refugees” – referring to the arrival of more than one million refugees last year, and the expectation of a similar number in 2016.

“We have plenty of instruments, especially the determination and the willingness of the [ECB] governing council to act and deploy these instruments,” he said as if to reassure nervous investors at a general meeting. “So far, we have not seen signs of potential financial instability of the like we’ve seen in the pre-crisis times. One should be very cautious here about being too self complimentary, but certainly the gyrations we are observing would have severely tested the resilience of the banking sector at that time, and so far we have seen they stand pretty resilient.”

Despite Draghi working hard to keep gossip of a new crisis at bay, business experts like Soros are likely to continue speculating about the next “super bubble” until new Chinese performance data arrives in April.

What such gossiping could mean for commercial road transport is all but speculation, as many a large-scale company will only be able to paint a complete picture of 2015 toward the end of Q1. However, most interim results published to date are considered far too optimistic to be able to instigate a second global meltdown – even though some major companies have recently reduced their presence at key industry events like the Mid-America Truck Show, thereby sowing a degree of doubt in the market.

General market data is also overwhelmingly positive, at least from a big picture perspective. The German economy, for example, expanded about a quarter of a per cent in the final three months of 2015, with record employment and expansionary monetary policy fuelling domestic consumption as it is trying to cope with the recent influx of refugees from the Middle East. And according to Joerg Zeuner, Chief Economist at Germany’s state-owned development bank KfW, the outlook for 2016 is favourable too, firmly placing the central European market on the Draghi side of the Davos debate – at least as long as exports to China don’t fully fade in Q2 and beyond.

“Business sentiment in central Europe has stabilised a lot as of late,” agrees Peter Sijs, Services, Sourcing & Operations Director at TIP Trailer Services in Europe, who oversees some 50,000 pieces of equipment. “There should be little disturbance over the next 12 months, which is why people are more inclined to invest again. Lead times at OEMs are going up too, which is generally a sign of a healthy market.”

The same is true for the UK, where commercial vehicle demand has reached an all-time high in 2015, according to Mike Hawes, Chief Executive at the Society of Motor Manufacturers and Traders (SMMT). “CV demand is a key barometer of UK economic confidence and the market’s strong growth in 2015 was particularly encouraging,” he says. “However, with these record figures in mind, we will expect to see the market levelling off slightly in 2016.”

A similar scenario is expected in the United States, even though they will soon have to deal with the effects of rising interest rates for the first time in almost a decade as the country’s ultra-loose monetary policy has been put on hold. The result could be a more modest outlook after a surprisingly strong 2015 season, with Frank Maly, Director of CV Transportation Analysis and Research at consulting firm ACT, confident that overall market performance will remain steady. “While the remaining months of the 2015-16 order season may be somewhat lacklustre on a year-on-year basis, there is still enough momentum for 2016 to be a solid year for industry shipments, although volume is projected to trail the 2015 record.”

Back in Davos, India also demonstrated optimism, with Finance Minister, Arun Jaitley, pointing out that if the country can achieve growth of 7.5 per cent during a global downturn while suffering from two bad monsoons and a reform backlog, it should be able to add another 1.5 per cent with some confidence going forward. In an interview with Indian news site PTI, he admitted that there was “a lot to worry” about China, but added that, “the Indian economy has shown resilience to defy global slowdown and crisis in 2001, 2008 and 2015. Today, we are better equipped to face that situation and [again] show our resilience.”

As such, India will continue to invest in much needed infrastructure, according to Jaitley – a move that could give commercial road transport a welcome boost and also support the use of more efficient articulated combinations for line-haul transport.

Other, more perturbing news circulating in Davos focused on former economic powerhouse and fellow BRIC nation, Brazil, which is battling a stubborn downturn that could affect almost all of South America in 2016. Following a GDP contraction of 3.7 per cent in 2015, the country’s economy will likely decline another 2.5 per cent this year, according to the World Bank, most likely causing a second year of recession and a drop from rank five to nine on the list of the world’s largest economies.

“Given its scale, a weaker Brazil also means a weaker South America,” says local journalist, Angela Pimenta, who is also the President of Projor, a media watchdog NGO. “In 2015, Brazilian imports from the region dropped 28 per cent. As the largest destination of Argentinean, Paraguayan, and Uruguayan goods, Brazil is also an important partner for neighbours such as Colombia, Peru and Venezuela – so the effects of a slowdown could be dramatic.”

As a result, Pimenta says South America’s economic performance will suffer notably from Brazil’s on-going struggle in 2016, citing World Bank estimates of a 1.1 per cent contraction across the region.

Despite the outlook for South America being equally troubling than the one for China, global consultancy Deloitte is confident that North America, Europe, as well as up-and-comers like India will be able to make for a generally positive 2016. “From now to 2024, annual growth of three per cent or more is expected in the global truck market, mainly driven by global GDP growth, estimated at 3.3 per cent per year,” it found in a recent study – pointing out that growth patterns will always vary regionally and therefore test the transport equipment industry’s flexibility. “Growth is slowing down in large truck markets such as China (…). On the contrary, India, the ASEAN countries and Eastern Europe will account for most of the future growth,” Deloitte found. “[That’s why] it is essential for OEMs to focus on both the largest markets and the new growth regions.”

With Deloitte’s findings in mind, economic success will continue to be strongly linked to local strategy in the season to come – regardless of the crisis talk overshadowing the World Economic Forum and the Chinese stock market rout. While George Soros’ warning will continue to keep key players alert to signs of instability, success or failure are therefore more likely to be coupled to local strategy than big politics, with economies of scale, operational flexibility and business smarts the key points of difference.

With M&A activity in the transport world especially high during 2015, there is every chance 2016 will continue to see transport businesses add economies of scale, for example. “2015 saw a number of blockbuster deals take place as the market continued to consolidate,” says John Manners-Bell of Transport Intelligence (Ti). “The same market dynamics – e.g. cheap and available money, fragmented markets, ambitious management teams – exist in 2016, and this will result in further consolidation. Also, private equity companies will be pursuing their own agendas in building out new market players. Few companies are too big for acquisition, as evidenced by the acquisitions of Norbert Dentressangle and TNT.”

On the business model front, Australian based expert Brendan Richards says operational flexibility will be key to prepare for a potentially volatile future. “Managing a business is a bit like flying a stealth aircraft. Without constant tweaking, adjustment and attention they plummet to earth,” he explains. “However, in the case of stealth aircraft, computers do a lot of the work for the pilot, whereas in business it is down to the pilots alone.”

Richard says external forces such as the changing economic climate, digital disruption or changes to government policy can make life tough in the transport equipment industry. “But, if all you do is observe the impact of these forces, you are just a passenger. As the pilot, you need to act. The difference between success and failure lies in the time between seeing a problem and doing something about it.”

According to the expert, pro-active, measured and flexible management is key to dealing with problems and binge able to focus on what’s important – regardless of interest rate hikes or unexpected political developments around the globe. “For most of us, constant reinvention and innovation is imperative for survival. As our world changes, what, how, where and for whom we carry freight is all changing. Many transport companies have failed to adjust to that reality as their traditional business models were challenged.”

With the evolution of what he calls a “digital economy”, Richards says transport operators need to look more to the true meaning of logistics to preserve their relevance, and that means understanding how to become the end-to-end logistician for their customers. “To do so means stepping away from the old transactional way of thinking, and developing deeper relationships based on bringing new ideas and solutions to your clients,” he explains.

“This means sharing your best ideas rather than hiding them, and trusting in your team’s capacity to execute on those ideas for competitive advantage. Sometimes, this means bringing a digital solution to a client that may undermine the historical transactional business. It is short-term pain for long-term gain and it requires an obsession with improving the business and efficiency of the customer.”

Despite energy prices likely to remain highly volatile and on-going conflict in the Middle East, Richards says the worst-case scenario painted behind closed doors in Davos doesn’t have to become a reality. “Every problem in your business is inside your four walls. It is all about your people – the right people, using their time wisely to put the needs of the business ahead of their own, adapting to the circumstances they find themselves in, and knowing exactly where the business is at and wanting to make it better.”

Richards claims that every business failure in the history of capitalism can ultimately be traced back to the actions or inactions of management – with big politics providing all but a gloomy backdrop. “That means that your destiny is in your own hands and, if you choose it to be, 2016 can be a very happy year indeed.”

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