IMD Roadmap

1-Identify 5-7 important dimensions/factors/trends that you believe can and will impact

2-Customer purchase behavior and business performance in the next 3-5 years (generally) in energy industry sector.

509WORLD COMPETITIVENESS YEARBOOK 2014

The “Competitiveness Roadmap” is an attempt to describe and assess the main issues that will affect the world competitiveness landscape over the next four decades. Issues are shown along two axes – degree of impact and timescale – to provide a clear “mental map” of the environment in which nations and companies will operate.

This is a subjective assessment which aims to bring some coherence to the multitude of issues that are said to be having an impact – sooner or later – on the competitiveness landscape. These issues are succinctly described on the fold-out pages.

The Competitiv eness Roa dm a p : 2 014 – 2 050

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26. Life sciences and environment attract massive investments – Life sciences, as the population becomes older (40,000 centenarians in Britain in 2030), and environmental technology, as the world becomes hotter (+ 0.6°C in 20 years), will attract massive investments. Innovation proliferates in these two areas of knowledge. Wellness, in addition to curing existing diseases, becomes a priority for ageing populations. 27. Intellectual property vs. open systems – The intellectual property debate encapsulates two conceptions of world business: On the one hand the respect for innovation and invention and on the other hand the thrust for a more open and collaborative society where information is widely shared. Social network systems flourish and challenge government-controlled information in some parts of the world. 28. From Service to Re-industrialization – Service competitiveness and the ability to integrate and manage a global business model were at the core of the competitiveness of Europe and the US. However both regions have lost 20% of their industry in 20 years, thus creating a higher level of permanent unemployment. Companies reassess extreme outsourcing and delocalization. “Re-shoring” and re-industrialization become an economic and political priority. There is no competitiveness without a sound manufacturing base. 29. Labor cost differences shrink – The difference in labor costs around the world is drastically reduced as nations develop. A range from 1 to 20 today is reduced to 1 to 5 as purchasing power around the world converges. 30. Productivity is harmonized worldwide – Productivity is harmonized around world operations as companies become truly global and widely diffuse the same technology and processes. The value chain is managed at the global level. The nationality of companies matters less and less. The product “made in the world” is born! 31. Corporate taxes converge – Nations, which have competed fiercely in lowering their tax rates to attract enterprises, are developing an international consensus that establishes common and agreed-upon practices for the taxation of companies, no matter where they operate. The bandwidth of corporate tax rates is significantly reduced. Loopholes are severely curtailed. Tax havens are tracked. 32. From cheap manpower to cheap brainpower – The world moves from a competitiveness model based on cheap manpower to one based on cheap brainpower. In total, India, China and Russia have 14 million university students, as many as the US. These students quickly become young professionals eager for success, who are relatively affordable and highly motivated. Through technology, these brains can be accessed from all over the world. 33. Urbanization means congestion – The urbanization of the world economy increases pressure on economic and social infrastructure (roads, water, hospitals, etc.), the environment and also increases social problems (rural migration to cities). In 2030, 60% of the world population lives in cities. 40 mega regions account for two third of the world’s GDP and 85% of the technology. As a drawback, congestion becomes a major issue everywhere. 34. Intense competition between value systems – The competition between value systems is exacerbated by the success of emerging powers. In Asia and Central Europe a “work hard, get rich” attitude competes with a “work-life balance” attitude in industrialized nations. 35. From collective to individual value systems – The value system of societies in Asia gradually evolves from one based on collective values (such as hard work and national pride) to one based on individual values (such as work-life balance), much closer to the US and European value systems. 36. A new business model for the poor – A new business model emerges for the world’s poorest (such as in Africa or the Indian subcontinent). Products are manufactured and sold at a fraction of the price charged elsewhere, and with minimal functionalities. Examples: the $10 phone, $100 PC or $2,500 motor vehicle and services such as micro-finance and mobile phone financial transactions. 37. China, India, Brazil and Russia as technological powers – China, India and Russia regain their age-old status as technological powers. Foreign companies no longer hesitate to transfer research centers to these countries that have a long tradition of excellence in science and innovation.

38. Retirement age increases – The pension systems in Europe and Japan are increasingly at risk. One-third of the population is now over 60 years old; 10% is older than 80! Retirement gets closer to 70 and fluctuates depending on the industry sector and the hardship of work. Some white-collar pension systems now have to deal with an increasing number of centenarians. The financial crisis has reduced accumulated wealth and employees are forced to retire later. 39. Society capitalism – After a period of “enterprise capitalism” aimed at shareholder value, and one of “state capitalism” based on local value, a period emerges focusing on “society capitalism” which redefines the role of enterprises as actors to solve wider societal issues such as the environment, sustainable development, poverty, etc. 40. A new energy mix – The share of sustainable energy – wind, solar, geothermic, water, etc. – is increasing but is expensive (cost and/or subsidies).The withdrawal from nuclear is faster in advanced economies than in emerging. Other alternative sources – liquid natural gas, tar sand, shale gas etc. – favor new players such as the US and can lead to changes in the geopolitical balance of power. 41. In Western industrial nations, some people reject mobility – Although communications and travel are more pervasive, a part of the population rejects excessive mobility and rediscovers the attractiveness of a local environment. Younger professionals reject promotions or re-location of responsibilities when they are too disruptive to their private lives. Congestion in cities, airports and most transportation systems diminishes the attractiveness of mobility. 42. Remoteness becomes irrelevant – The disappearance of most trade and investment barriers, the efficiency of the international logistics system (roads, shipping, trains and air freight) and the pervasiveness of communications technology give every single nation and enterprise instant access to world markets and unlimited opportunities. 43. The technological divide disappears – The technological divide disappears because of the development of a worldwide communications infrastructure and the proliferation of cheap technological products for the poor. 44. Absolute poverty regresses – The level of absolute poverty ($1.25 a day) is being drastically reduced. It has fallen from 1.94 billion people in 1981 to 1.29 billion in 2011 (21% of the population in emerging economies).A new market develops: 2/3 of the world’s mobile phones are in emerging economies; 80% have no internet access, 1/3 no bank account. Mobile money flourishes. 45. Social expenditures in Asia – The OECD countries devote 20.5% of GDP to social expenditures, Japan 16%, but Korea only 7.5% and China a mere 4.6%.With development, social expenditures expand and nations need to plan ahead for the increase of such “non- productive” investments. 46. Low demography hits Europe, Japan and Russia – The low demography in Europe, Japan and Russia takes its toll on the dynamism of their economies and the magnitude of social expenses. Could more lenient immigration policies compensate for this decline, especially for skilled labor, or is it politically unacceptable? 47. Life expectancy increases, expenses also – Life expectancy increases dramatically to well over 85 years old in many industrialized nations.The burden on the health system becomes greater, also due to the early systematic screening of the population for illnesses. 48. Atomization of the value system in the West – The value system in Western societies becomes “atomized”. A common purpose in the population is replaced by a multilayer society where many different value systems cohabit. Social networks linking specific part of the population worldwide supersedes national value systems 49. Climate change affects economic resources – Climate change forces the re-allocation of economic resources. Food and water become scarcer in some regions, while new crops become available in more northerly regions. The prices of basic commodities are totally altered. The “environment cost” becomes part of the economic scenario, and is thus included in statistics such as the GDP. 50. Pandemic risks occur more frequently – As the world becomes more open, transport more pervasive and logistics more efficient, epidemics spill more easily from one continent to another. Pandemics are permanently monitored by international organizations, and companies tighten up their health and safety procedures.

1. Budget deficits remain high – Despite austerity plans, and a soft economic recovery, budget deficits remain high: Country estimates for 2014 range from -8.1% of the GDP in Japan, to -5.4% in the Britain and -2.5% in the Euro area. Unpopular spending cuts will stay although more emphasis will be given to preserving the economic activity. 2. The economy is desynchronized – Globalization is still there but the world economy is increasingly fragmented: some nations continue to struggle with recession – e.g. Greece, Italy – others confront robust growth such as China. Some countries suffer deflation – Japan and Switzerland – others are threatened by inflation, such as India, Russia and Turkey. 3. Unemployment becomes massive – 25 million people lose their jobs in the OECD region and the average jobless rate hits 6.7% in the US and 11.9% in Europe. Youth unemployment reaches record highs, above 23% in Europe and a staggering 54% in Spain. 4. Interest rates remain low – Central Banks continue to flood the market with cheap money, but quantitative easing will ease out. The high amount of liquidity on the market also keeps interest down 5. Inflation/deflation? – In several emerging markets, inflation is back, mainly triggered by higher consumption and wages. In advanced economies, the concern is more directed towards deflation, and its negative impact on consumption and investment. 6. High volatility of currencies – The dollar remains the international currency but is continually tested by financial markets. The Euro stabilizes around 1.35 to the dollar. The Chinese Yuan becomes more present on international transactions. 7. Global debt explodes – The average G20 government debt increases from 78% of GDP to 100% and above. The US national debt now surpasses $21 trillion. Sub-sovereign debt – at regional and city level – becomes critical in the US but also in Spain, and even Germany. 8. Economic nationalism on the rise – Trade protectionism increases as it is linked to national stimulus plans (e.g. “buy national” clauses). New protectionist measures appear that are linked to financial regulations, environmental standards, corporate governance, etc. National champions are favored. 9. New regulations for global financial markets – A fundamental overhaul of the regulatory environment takes place with the objective of laying down new rules for supervision, especially for systemic risk. Basel III standards on capital and liquidity risks are enforced (616 pages), as is the Dodd – Frank act in the US (848 pages). Rules of application are estimated to be 60’000 pages for the first one and 30’000 pages for the other. Companies spend more time on compliance. 10. Energy: the US renaissance – new exploration techniques mean that the US will produce more gas than Russia in 2015 and more oil than Saudi Arabia in 2020.The cost of energy for US companies is half that for Europe. 11. Emerging powers stack up currency reserves – Emerging powers are accumulating foreign currency reserves at impressive rates: Number one is China with $3,726bn, followed by Saudi Arabia $725bn, Russia $493bn, Taiwan $423bn, Brazil $362bn, Korea $348bn and India $306bn. Consequently, money is increasingly used to buy assets (companies) not only in Africa and Latin America but increasingly in the US and Europe. 12. Sovereign funds increase their power – $5,700bn is currently managed by sovereign funds, the largest in the emerging economies being ADIA in Abu Dhabi with assets of $773bn.This money will increasingly be directed to investments in local infrastructure, buying industrial assets abroad and financing the globalization of local companies. 13. The South develops its own economy – In 2013 China directed almost two third of its exports to emerging economies. The “South” can now rely on an unprecedented conjunction of resources: raw materials, money (from sovereign funds), technology, market size (growing middle class) and local companies which are quickly globalizing. 14. New global brands everywhere – Companies that were unknown a decade ago, and originating in emerging economies, are now quickly becoming global players with distinctive brands. 1,000 firms from the emerging economies are now global with revenues in excess of $1bn.

15. Consumers react differently – Industrialized nations are characterized by a “replacement economy” where purchases replace existing products while emerging nations are in a “first-buy economy” stage where purchases introduce new products into households. In other words, an industrialized economy is defined by “I want it” versus one defined by “I need it”. Slower growth can be expected as saturation threatens replacement economies. 16. Food commodities prices higher – Food commodities have seen their prices increase by over 40% since the end of the recession. Despite a temporary slowdown due to a weaker than expected recovery, prices will remain high. An emerging middle class is changing its eating habits and greater demand will push prices up again. For example, China is moving away from a rice-only diet. In a decade it has increased its milk consumption seven-fold, poultry by 60%, beef by 30% and wheat by 25%. 17. State capitalism is fashionable – Governments are moving from being stakeholders to being shareholders of their economies. State interventions increase and national leaders consider it a priority to defend and develop national champions. As a consequence, government spending now represents on average 50% of the GDP in several advanced economies. 80% of the stock market capitalization in Shanghai is done by state-backed companies. 18. Tax reform – Government needs tax revenues to rebalance their budget. A stringent reform of corporate taxes is expected at national and international level. The principle of having global companies paying a “fair” share of tax in a country of activity is pursued. 19.The dollar loses its leading role – More than 60% of the world currency reserves are in dollars and 32% are in Euros (the pound and the yen remain negligible). However emerging economies increasingly worry about their dependency on the dollar and the policies of the U.S. Fed. Rather than switching to another currency, several governments investigate the possibility of turning to a basket of currencies for their reserves or even for pricing their exports (especially natural resources). 20. Emerging powers raise their voices in international institutions – Emerging powers significantly increase pressure to gain access to decision-making in international institutions by emphasizing their predominant economic weight and their financial capabilities to fund such institutions. 21. Emergence of a new middle class – The emergence of a middle class in Asia, Central Europe and Latin America changes the nature of the world economy. Defined as a population living on $10 a day and above, the middle class has exploded from 1,428 million in 1990 to 2,644 million in 2008, and is forecasted to reach 3,600 million in 2030. In India, 50 million people today are middle class; there will be 580 million in 2025. 22. New attractiveness for the Gulf region and Africa – There is $800bn of infrastructure projects under completion in the Gulf region while Africa is attractive for energy and commodity investments. More than 800 Chinese companies operate in Africa. There are 1400 listed companies in Africa and the population of Africa is forecast to reach 2.2bn in 2050! 23. Russia: A world player again – Russia regains its status as a world player. This Russian comeback thrives on oil, gas and commodity prices to re-establish a stronger international presence. Russia addresses its infrastructure problems and the rule of law for a more stable business environment. Politics and economics remains totally interwoven in this new approach to power. 24. More managers needed everywhere – More managers are required in emerging powers. India, China, Russia, Brazil and the Gulf region increasingly focus on management and the creation of business schools, beyond science and engineering education. Strategy, finance and marketing skills are now priorities for ensuring the continuous expansion of local enterprises in a global environment. 25. A new environmental strategy for companies – Climate change and energy security is clearly a priority for public opinion. Governments and companies enhance their visibility on environmental issues and integrate an environmental dimension into their strategy. Companies that fail to do so will not attract the best talents in the younger generation, who are very sensitive to this issue.

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C O M P E T I T I V E N E S S I S S U E S S C O R E B O A R D

2. The recovery is desynchronized

7. Global debt explodes

3. Unemployment becomes massive

1. Budget deficits remain high

5. Inflation/Deflation?

4. Interest rates remain low

10. Energy: the US renaissance

6. High volatility of currencies

9. New regulations for global financial markets

12. Sovereign funds increase their power

13. The South develops its own economy

8. Economic nationalism on the rise

11. Emerging powers stack up currency reserves

14. New global brands everywhere

17. State capitalism is fashionable

18. Tax reform

22. New attractiveness for the Gulf region and Africa

15. Consumers react differently

16. Food commodities prices higher

27. Intellectual property vs. open systems

21. Emergence of a new middle class

32. From cheap manpower to cheap brainpower

24. More managers needed everywhere

25. A new environmental strategy for companies

19. The dollar loses its leading role

31. Corporate taxes converge

26. Life sciences and environment attract massive investments

23. Russia: A world player again

28. From Service to Re-industrialization

20. Emerging powers raise their voices in international institutions

36. A new business model for the poor

37. China, India, Brazil and Russia as technological powers

30. Productivity is harmonized worldwide

29. Labor cost differences shrink

33. Urbanization means congestion

40. A new energy mix

41. In Western industrial nations, some people reject mobility

34. Intense competition between value systems

35. From collective to individual value systems 38. Retirement age

increases

48. Atomization of the value system in the West

46. Low demography hits Europe, Japan and and Russia

49. Climate change affects economic resources

39. Society capitalism

43. The technological divide disappears

50. Pandemic risks occur more frequently

44. Absolute poverty regresses

45. Social expenditures in Asia

47. Life expectancy increases, expenses also

42. Remoteness becomes irrelevant

WORLD COMPETITIVENESS YEARBOOK 2014514

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