EDWARD GIBBON, the great English historian, begins his “Decline and
Fall” with a glowing portrait of the Roman Empire in the age of Augustus. The
Empire “comprehended the fairest part of the earth”. Rome’s enemies were kept
at bay by “ancient renown and disciplined valour”. Citizens “enjoyed and abused
the advantages of wealth and luxury”. Alas, this happy state of affairs was not
to last: the Empire already contained the seeds of its own destruction. Gibbon
soon changed gear from celebrating triumphs to chronicling disasters.
Perhaps the history of the Western corporation will one day be written
in much the same vein. Today’s corporate empires comprehend every corner of the
earth. They battle their rivals with legions of highly trained managers. They
keep local politicians in line with a promise of an investment here or a job as
a consultant there. The biggest companies enjoy resources that have seldom been
equalled; Apple, for instance, is sitting on a cash pile of more than $200
billion. And they provide their senior managers and leading investors with
“wealth and luxury” that would have impressed even the most jaundiced
Roman.
A new report by the McKinsey Global Institute provides some invaluable
statistics for any future Gibbon, which MGI calculated by crunching data from
nearly 30,000 firms across the world. Corporate profits more than tripled in
1980-2013, rising from 7.6% of global GDP to 10%, of which Western companies
captured more than two-thirds. The after-tax profits of American firms are at
their highest level as a share of national income since 1929.
Yet the men and women from McKinsey change gear as quickly as Gibbon.
The golden age of the Western corporation, they argue, was the product of two
benign developments: the globalisation of markets and, as a result, the
reduction of costs. The global labour force has expanded by some 1.2 billion
since 1980, with the new workers largely coming from emerging economies.
Corporate-tax rates across the OECD, a club of mostly rich countries, have
fallen by as much as half in that period. And the price of most commodities is
down in real terms.
Now a more difficult era is beginning. More than twice as many
multinationals are operating today as in 1990, making for more competition.
Margins are being squeezed and the volatility of profits is growing. The
average variance in returns to capital for North American firms is more than
60% higher today than it was in 1965-1980. MGI predicts that corporate profits
may fall from 10% of global GDP to about 8% in a decade’s time.
Two things in particular are shaking up the comfortable world of the old
imperial multinationals. The first is the rise of emerging-market competitors.
The share of Fortune 500
companies based in emerging markets has increased from 5% in 1980-2000 to 26%
today. These firms are expanding globally in much the same way as their
predecessors from Japan and South Korea did before them. In the past decade the
50 largest emerging-world firms have doubled the proportion of their revenues
coming from abroad, to 40%. Although the outlook for many emerging markets is
more mixed than it was just a couple of years ago, troubles at home may push
rising multinationals to globalise more rapidly.
The second factor is the rise of high-tech companies in both the West
and the East. These firms have acquired large numbers of customers in the blink
of an eye. Facebook boasts as many users each month as China has people: 1.4
billion. Tech giants can use their networks of big data centres rapidly to
colonise incumbents’ territories; China’s e-commerce giants Alibaba, Tencent
and JD.com are doing this in financial services. Such firms can also provide
smaller companies with a low-cost launching pad that allows them to compete in
the global market.
MGI does not dwell on it, but the political environment is also becoming
more hostile. Populists on both the left and the right rage against corporate
greed. In America, presidential hopefuls Bernie Sanders and Donald Trump both
criticise companies for exploiting tax loopholes. Even middle-of-the-road
politicians are sounding a more anti-corporate note. Angela Merkel introduced
Germany’s first minimum wage in 2014; and in Britain David Cameron is phasing
in a “living wage”. Companies may find themselves under pressure to “give back”
to wider society.
How can Western companies navigate these threats to their rule? MGI
advises them to focus on the one realm where they continue to have a
comparative advantage—the realm of ideas. Many companies in labour- and capital-intensive
industries have been slaughtered by foreign competitors, whereas idea-intensive
firms—not just companies in obvious markets such as the media, finance and
pharmaceuticals, but in areas such as logistics and luxury cars—continue to
flourish. The “idea sector”, as MGI defines it, accounts for 31% of profits
generated by Western companies, compared with 17% in 1999.
Capitalist redemption
The relative decline of the Western corporation could also lead to a
rethinking of some of the long-standing assumptions about what makes for a
successful business. Public companies may lose ground to other types of firm:
in America the number of firms listed on stock exchanges has fallen from 8,025
in 1996 to about half that number now. The cult of quarterly earnings may lose
more of its following. A striking number of the new corporate champions have
dominant owners in the form of powerful founders.
They are willing to eschew short-term results in order to build a
durable business, such as Mark Zuckerberg at Facebook, the Mahindras and other
assiduous families in India, and private-equity firms. Gibbon’s great work was
a tale of decline and fall, as classical civilisation gave way to barbarism and
self-indulgence. With luck, the tale of the relative decline of the Western
corporation will also be a tale of the reinvention of capitalism as new forms
of companies arise to seize opportunities from the old.
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