[Note: This item comes from reader Randall Head. DLH]
The retreat of the global company
The biggest business idea of the past three decades is in deep trouble
Jan 28 2017
IT WAS as though the world had a new appetite. A Kentucky Fried Chicken (KFC) outlet opened near Tiananmen Square in 1987. In 1990 a McDonald’s sprang up in Pushkin Square, flipping burgers for 30,000 Muscovites on its first day. Later that year Ronald McDonald rolled into Shenzhen, China, too. Between 1990 and 2005 the two companies’ combined foreign sales soared by 400%.
McDonald’s and KFC embodied an idea that would become incredibly powerful: global firms, run by global managers and owned by global shareholders, should sell global products to global customers. For a long time their planet-straddling model was as hot, crisp and moreish as their fries.
Today both companies have gone soggy. Their shares have lagged behind America’s stockmarket over the past half-decade. Yum, which owns KFC, saw its foreign profits peak in 2012; they have fallen by 20% since. Those of McDonald’s are down by 29% since 2013 (see article). Last year Yum threw in the towel in China and spun off its business there. On January 8th McDonald’s sold a majority stake in its Chinese operation to a state-owned firm. There are specific reasons for some of this; but there is also a broader trend. The world is losing its taste for global businesses.
Their detractors and their champions both think of multinational firms—for the purposes of this article, firms that make over 30% of their sales outside their home region (unless otherwise specified)—as the apex predators of the global economy. They shape the ecosystems in which others seek their living. They direct the flows of goods, services and capital that brought globalisation to life. Though multinationals account for only 2% of the world’s jobs, they own or orchestrate the supply chains that account for over 50% of world trade; they make up 40% of the value of the West’s stockmarkets; and they own most of the world’s intellectual property.
Although the idea of being at the top of the food chain makes these companies sound ruthless and all-conquering, rickety and overextended are often more fitting adjectives. And like jackals circling an elderly pride, politicians want to grab more of the spoils that multinational firms have come to control, including 80m jobs on their payrolls and their profits of about $1trn. As multinational firms come to make ever more of their money from technology services they become yet more vulnerable to a backlash. The predators are increasingly coming to look like prey.
It all looked very different 25 years ago. With the Soviet Union collapsing and China opening up, a sense of destiny gripped Western firms; the “end of history” announced by Francis Fukuyama, a scholar, in which all countries would converge towards democracy and capitalism seemed both a historical turning-point and a huge opportunity. There were already many multinationals, some long established. Shell, Coca-Cola and Unilever had histories spanning the 20th century. But they had been run, for the most part, as loose federations of national businesses. The new multinationals sought to be truly global.