The student loan systems in the US and the UK are increasingly taking the form of two rapidly expanding bubbles. Both are inflated by a toxic combination of increased competition in a labour market that is ramping up the requirement for advanced qualifications, and the fact that uncapped class sizes with higher tuition fees are incentivising universities to increase student intakes.
But while the two systems may share a parent, they are not twins. Distinctions in the fabric of both loan procedures mean these bubbles differ in shape and size: student loan debt in the UK recently reached £100bn ($129bn) for the first time, whereas in the US, it now stands at $1.3trn.
Inflating the bubble In the UK, individuals face few personal ramifications for failing to pay back their loans in full. UK studies suggest, however, that the ‘graduate premium’ of better job options and increased wages – often touted as motivation for getting a degree in the first place – may only exist for certain subjects and institutions. In the US, where a smaller proportion of the workforce has a university degree, graduates continue to out-earn non-graduates. However, here the personal risks of taking a student loan are far greater, since failure to pay can result in bankruptcy.
A fall in state funding for higher education in both the US and the UK has seen the cost for individuals soar in recent years
Were either bubble to burst, the fallout would look much the same: a mess of personal debt and stagnation in consumer spending. Like the role of housing in the run-up to the global financial crash, the value of a university degree may now be overinflated, but until the bubble bursts, it is hard to see why students would stop buying into it. To let the air out safely, change needs to come from employers and policymakers.
A fall in state funding for higher education in both countries has seen the cost for individuals soar in recent years. Subsidies for public colleges in the US have fallen by 26 percent since the early 1990s, while tuition fees have steadily climbed. The average annual fee for a public college in the US is now $9,700, while private Ivy League institutions command massive sums of almost $70,000. This is in a country where the median annual salary is $50,000.
Tuition fees of £1,000 ($1,290) were first introduced in the UK in 1998. By 2012, these had rocketed to the current level of £9,425 ($12,170). Nick Hillman, Director of the Higher Education Policy Institute, a UK-based think tank, said in an interview with World Finance that the rise in tuition fees was the main reason behind UK student loan debt reaching unprecedented levels: “That £100bn is going to keep growing for a very long time. It will only start coming down when you’ve got very, very many people in the labour market, in good jobs, paying their loans down quite fast. That won’t happen for 10, 15 years, if not longer.”
Across the pond, student loan debt in the US has shot up by over 170 percent in the past decade. This debt mountain is cultivated by a lending system that Business Editor of the Financial Times, Rana Foroohar, has compared to the subprime practices behind the global financial crash.
$1.3trn
Student loan debt, US 2017
$129bn
Student loan debt, UK 2017
$9,700
Average annual fee for US state colleges
$12,170
Average annual fee for UK universities
Certainly, there are parallels to be drawn between the subprime housing bubble and the current student loan system: both involve money easily lent to vulnerable borrowers to help them purchase a product that is rapidly increasing in price, but with questionable returns.
Fit to burst The pile-up of personal student debt in both countries is starting to have tangible effects. In the US, where student loan debt is collected from graduates regardless of salary, default rates are now higher than pre-crisis levels. Worryingly, this is the only type of personal debt for which this is the case – the reigning in of lending practices for things like mortgages, credit cards and cars have kept default rates below 2008 levels.
In the UK, since loan repayment only occurs once the graduate’s salary reaches £21,000 ($27,000), students are insulated from the worst-case scenario of bankruptcy, as Hillman pointed out. He said: “No politician who has supported the big loans in the UK has ever argued every single penny of it should be paid back… If you never get a well-paid job, you never have to pay it back.”
However, the UK system still leaves young people exposed to very high levels of lifelong personal debt. The idea that if you don’t make a lot of money, you won’t pay the loan back is often repeated to 18-year-olds when they first seek a student loan. While this is technically true, it doesn’t capture the reality of repayments: unless a person earns under the income threshold for their entire working life (by no means a high income), loan repayments will leech their salary like an extra tax for up to 30 years. Student debt in aggregate is lower in the UK, but on an individual level, it outstrips the US, despite lower median earnings for graduates. Average debt per UK graduate is £32,220 ($41,600) in the UK – in the US, this figure is $34,000.
This debt has obvious personal consequences. Dampened salaries make saving for a deposit harder, so young people are stuck renting or living with parents for long periods of time. However, the ripple effects on the wider economy are perhaps more troubling: if young people aren’t buying houses, they are also not buying any of the items that fill a house, reducing consumer spending. For as long as salaries are weighed down by student loans, the spending power of an entire generation is diminished.
On top of this, it is hard to find a participant in the UK system who would act to moderate it. Student loans are provided to 18-year-olds who have no financial literacy, no credit history and no incentive to research the basics, such as interest rates or the length of repayment schedules. Usually the lender is the natural regulator, having an obvious incentive not to offer money it will not later recoup. However, in the UK, the power to bestow a student loan is very separate from the money backing it: money is lent by the government upon the offer of a place at any university. Universities then collect tuition fees, but do not have to recoup loan costs.
For as long as salaries are weighed down by student loans, the spending power of an entire generation is diminished
Easing the debt crisis This current situation, with very large numbers of young people crippled by debt they are unlikely to repay, will prove a drain on the entire economy if unchecked. Clearly, the UK Government’s attempts to foist the cost of university back on to individuals aren’t sustainable. Since the cost of fees for the number of people who attend university today is too expensive to fund through taxes, the only clear way forward is to cut attendance rates.
However, whatever the potential risks of student loan debt, young people are unlikely to opt out of the system while the perceived personal benefits of a degree remain high. Hillman said: “Even in the depths of the recession, people with degrees were more likely to be earning more than people without a degree, so it is a pretty good insurance policy.”
Hillman suggested that a potential solution could be to improve transparency around funding: “I’m having a bit of a battle with universities at the minute, because I think they should tell their students more precisely where that £9,000 [$11,620] goes.” Certainly, better information would enable young people to make more informed choices about the value of their education, but fixing the system cannot be left to young people or universities alone.
A large part of the solution would be a shift in how degrees are treated by employers and wider society; more open-mindedness about qualifications aside from university degrees is needed. There are encouraging signs on this front from some firms traditionally viewed as graduate-only destinations, such as Penguin Books and EY, which have done away with the degree requirement. However, the ability to release some pressure from this inflated area of the economy without causing an unpleasant crash is contingent on others following their lead. If firms can tempt enough young people away from the student debt trap, the bubble will start to deflate – hopefully without bursting first.
Located in a sleepy suburb of India’s southern city of Bangalore is a fortress-like data centre, tightly guarded by a triple layer of security. Contained inside are the biometric data profiles of more than one billion Indians – or 15 percent of the global population – who have each provided their fingerprints and iris scans for the world’s largest biometric identification system.
Underneath an armour of encryption, every biometric profile is linked to a 12-digit code known as an ‘Aadhaar’ number, which functions as an officially recognised identity for each given individual.
The number of people registered on this system has rocketed from zero to a billion in just seven years, now covering 99.5 percent of Indians over 18 years old. These registration numbers are a major breakthrough in India, a country where up until 2009 almost half of the population did not have any official identity papers. Now, a $100 biometric scanner – available to businesses and government organisations alike – can verify in a matter of seconds whether someone’s true identity matches who they claim to be.
A key to everything
The implications are enormous. The overarching aim is to rewire the entire economy and governance system, plugging in each member of the population via their biometrics to a new digital framework – something that has never been attempted before by any country. The system is now having an impact on how just about everything is done, from banking and hospital check-ins to mobile phone contracts and tax returns.
Number of Indian citizens registered to the Aadhaar system (billions):
0
2010
0.1
2011
0.2
2012
0.4
2013
0.7
2014
1
2015
1.1
2016
Last year, with the biometric database more or less fully in place, the government launched a new layer to the framework, known as India Stack. The tech, hailed as the “bedrock of digital India”, is a series of connected systems through which people are able to store and share personal data, such as tax filings, bank statements and health, school and employment records. The unique key needed to access the data is a biometric scan of the individual in question.
With India Stack, people can open a bank account, take out a loan, share medical records or start a mobile phone contract using just a fingerprint or iris scan. On top of this, each person’s individual realm of India Stack can be reached through Aadhaar-compatible smartphones, which use iris-sensitive cameras or fingerprint identification.
Following Indian Prime Minister Narendra Modi’s recent push for demonetisation, the government took the system one step further by establishing Aadhaar-enabled financial transactions through smartphones. This payments system makes it possible to transfer money using only a fingerprint and a mobile phone. Already, 337 million Aadhaar numbers have been linked to bank accounts, with 15 million transactions occurring through the system each day.
The power of identity
But while it is not lacking in ambition, the rapid rollout of the system has already suffered some sizable blunders. Failure to identify the fingerprints of manual labourers, as well as some fairly serious data breaches, have been among the numerous controversies that have marred the project so far. Biometrics are slowly becoming a standard feature of day-to-day life in India, and while the project has only just begun, a run-of-the-mill day in the not-so-distant future could involve tens of biometric checks for each person as they go about their routines.
“In many ways, a legally acceptable personal identity is the fundamental pillar on which all other rights and capabilities are based”, read a paper co-authored by Mukesh Sud, an associate professor at the Indian Institute of Management Ahmedabad. This notion that an officially recognised identity is powerful in itself is central to the appeal of the biometric system. Crucially, the ability to prove one’s identity is an important precursor to engagement with the formal economy, and is therefore part of the basic infrastructure of modern life. For this reason, the biometric system is not just a way of saving time and money, it also has the potential to be an effective tool for inclusive growth.
Speaking to World Finance, Sud said: “Imagine a casual labourer travels for work to a different state. In the absence of a definitive proof of identity, they are unable to claim any benefits from the government. They can’t even open a bank account, and find it difficult to keep their savings, which end up under a mattress.” Many of India’s poor are repeatedly held back by a lack of official documentation, becoming locked out of the formal economy. This manifests itself in a number of ways: access to basic financial services is often out of reach, with the simple act of opening a bank account requiring proof of identity. As a result, people who are already living in poverty are often forced to go to extortionate moneylenders as their only option for borrowing cash.
Another key issue for poor residents is the inability to secure official property rights without a recognised identity to attach them to. Without such property rights, assets are reduced to dead capital, which cannot necessarily be loaned, transferred or sold at will. As a result, people are often prevented from making full use of their assets, and are unable to reach their full economic potential. Worse still, exclusion from banking and property rights becomes mutually reinforcing.
The biometric system is not just a way of saving time
and money, it also has the potential to be a tool for inclusive growth
According to Sud: “You can’t borrow from a bank or get a cell phone connection as you have difficulty in establishing proof of who are you. You may not even have property documents, which also require an identity. So it ends up being a circular argument; one thing leads to another.”
This effect is compounded by the fact that an inability to prove one’s identity makes it difficult for people to access the very government privileges that are designed to help them. Taken together, the combined impact of the mass rollout of official identities for property rights, financial inclusion and access to government programmes can bring about a fundamentally more inclusive economy.
As such, the most marginalised members of society will be armed with a newfound means of identification, providing them with access to the privileges that make it possible to capture a slice of the productive economy.
Biometric benefits
From the perspective of the government, the ability to verify every citizen’s identity is a miracle of efficiency. In all middle and low-income countries, administering government benefits and keeping track of tax returns is fraught with logistical challenges. Indeed, in India, government schemes are often dogged by several layers of corruption and bureaucracy that can prevent welfare payments from reaching the intended beneficiaries. These leakages have traditionally created an exorbitant drain on resources, but as systems are switched to the biometric framework, they are slowly being plugged.
Without Aadhaar, the process of administering government benefits would be filtered through several layers of bureaucracy, with each representing a potential leak – be it the bank official, the person signing the cheque or the local government. According to Sud: “Everybody was just siphoning what they could, and some beneficiaries got maybe half of what they deserved. A few, in connivance with the government official in their area, could claim the same benefit multiple times and no one would be any the wiser. For instance, we have food subsidies for people below the poverty line, yet there were three or four times the number of claimants than the actual number of poor.”
One case that illustrates the potential for efficiency gains is that of a government office in New Delhi, where a biometric attendance system was recently installed using Aadhaar. Upon implementation of the system, 23,000 fictitious workers were discovered, whose wages were being siphoned off through the payroll. Collectively, these fabricated labourers were costing the government more than $3m a month.
Various impressive numbers have been publicised regarding the total savings and efficiencies amassed by the government as a result of the technology, with the World Bank estimating savings to be in the region of $1bn per year. This, however, is a relatively conservative estimate, and more extravagant numbers have been touted by the Indian Government: according to Finance Secretary Ashok Lavasa, by shifting 78 government schemes to Aadhaar-enabled ‘direct benefit transfers’, the public purse has already garnered an impressive $5.3bn in savings. Overall, the government claims the cumulative savings made through the project now stand at $7.6bn.
However, Development Economist Jean Drèze, talking to World Finance, cautioned against taking such estimates at face value: “It is very hard to trace the basis of most of these figures. They seem to be acquiring an aura of plausibility by sheer repetition.”
Certainly, the system has at times done more harm than good: often, when it is enforced for government schemes in rural areas, patchy internet connectivity can prevent the machines from functioning properly, which can lead to lengthy queues or a failure to distribute entitlements at all. Furthermore, while growing, India’s low rate of internet usage (see Fig 1) can also act as a barrier to inclusion. Such issues have led many to perceive the system as a frustrating and irrelevant layer of tech imposed by the government.
That said, as it is rolled out evermore extensively, there is no denying Aadhaar has the potential to profoundly improve the efficiency of the systems in place. By cutting out duplicates and linking Aadhaar to tax returns, the project could also go a long way towards stamping out tax evasion. There are plenty more schemes and government functions to which the system could be applied, which will contribute to increasingly streamlined administration in the future.
A man provides an iris scan for the Aadhaar database
Shaking up the markets
The newfound ability to verify identity is also shaking up entire segments of the economy by creating commercial ventures that were not previously viable. For one, branchless banking targeted at those in rural areas has previously been held back by prohibitively high transaction costs stemming from the need to establish customer identity. Yet by synching accounts to people’s biometrics, it could become feasible to reach entire new markets with microsavings and microcredit accounts. A variety of new financial instruments could also pop up, such as microinsurance and micropensions.
Take the telecoms industry, which is also being fundamentally shaken by the technology. Due to the necessity of establishing a customer’s identity to provide a contract, the industry was in the past held back by lengthy bureaucratic procedures and ‘know your customer’ regulations, which have now been dramatically simplified using the Aadhaar framework.
One telecoms player in particular, Reliance Jio, has upturned the entire market by setting data costs far below the prevailing rate. The company, which is a new player in the industry, has managed to enrol 100 million customers in just six months. Sud noted: “Reliance achieved [its] numbers so quickly because [it was] able to eliminate the paperwork involved. Without Aadhaar, it would have taken much longer and an army of people to check each of the applicants and verify their identities. The company has acknowledged it.”
The biometric system has therefore already dramatically affected the proportion of people with access to mobile data, making it an important force in bringing more people into the digital economy.
Guarding the fortress
From a security perspective, rewiring the entire economy and governance system onto a single, highly sensitive central database is a delicate process. Bangalore’s data centre may be fortress-like, but the question remains whether there can ever be a fortress strong enough to adequately protect the data that is being stored inside.
The question remains whether there can ever be a fortress strong enough to adequately protect the data that is
being stored inside
There is also something fundamentally permanent about biometric information. Unlike a PIN, it cannot simply be changed if it falls into the wrong hands – and worryingly, the track record of security protection is not perfect. In February, the Unique Identification Authority of India filed a police complaint against a bank after it was discovered to have illegally stored fingerprint details to attempt impersonations. The incident has since been dismissed as an isolated case, but has nonetheless dented the government’s claim that the system is totally impenetrable.
Furthermore, a huge leap in the amount of private data being stored against biometrics has heightened privacy concerns. Through innovations like India Stack, central servers are linking people’s Aadhaar numbers to a lifetime of private data, including medical histories, financial data, school records and residential addresses. While personal data being held on central servers is nothing new, the sheer quantity of sensitive data that is in need of protection creates an enormous and unprecedented challenge.
Protecting privacy
An even greater fear than that of the data centre being breached, perhaps, is the simple question of who might be handed the key. A fundamental criticism of the project is that a government-administered biometric database like Aadhaar essentially reformats the very relationship between citizen and state. World Finance spoke to Shyam Divan, a lawyer who is currently going through the process of representing challengers to the Aadhaar scheme in the Supreme Court. He said: “With multiple check-ins a day, everyone is essentially leaving a trail through which they can be tracked… We are talking about a brave new world where you have virtually no individuality or space for yourself.”
1.3bn
Population
of India
1.1bn
Indians are currently registered to the Aadhaar biometric database
15%
The above as a share of global population
99.5%
of Indians aged over 18 are enrolled
337m
Aaddhaar numbers are linked to bank accounts
15m
transactions take place each day
$1bn
The amount the World Bank estimates the system has saved the Indian Government
per year
Critically, the very prospect of the state maintaining a watchful eye can have tangible effects on the way people act and even think. “People know that even if they are not watching, they are capable of watching – that has a tremendous chilling impact in terms of behaviour”, said Divan. The concern is that, as well as undermining privacy, this can act to stifle political dissent.
“The government is constantly trying to reward its loyal supporters and marginalise its opponents. So a situation is rapidly developing where, firstly, everyone is being monitored all the time, and secondly, people know that it is in their best interest to be in the good books of the government. Obviously, this is bound to stifle political dissent, or any sort of dissent for that matter”, Drèze told World Finance. This leads to the question that hangs over the entire project: has the government gone too far?
The Supreme Court initially judged that enrolment in the scheme must be purely voluntary, yet being registered has now become a requirement for everything, from filing tax returns to buying a mobile phone. Now the database has been created, the purpose for which it is used seems to be ever-changing. Drèze explained: “Anything is possible. For all we know, the Supreme Court may direct the government to destroy the Aadhaar database next week. It is equally possible that some fanatic will become India’s next prime minister, use Aadhaar to consolidate his power, and create a virtual state of emergency. The point is, we should not take chances in these matters.”
The entire project now hinges on the prospect of designing a system that can create a strong enough shield to protect people’s privacy and civil liberties, without destroying its potential. As Sud said: “We must not throw the baby out with the bathwater. We have to get the best people to institute checks and balances in the system.”
Of course, this is not the first time technological innovations have come up against the important issues surrounding data protection and privacy, but the mass uptake of biometric data will make these debates all the more pertinent. Biometrics are rapidly seeping into people’s everyday lives on an international scale, as they are increasingly put to use in areas such as banking, telecommunications and voting. Furthermore, several countries – Germany, Bangladesh, Brazil and France, to name a few – are moving towards building centralised biometric systems of their own, which again will bring up important questions regarding the relationship between citizen and state.
Biometric systems could well become the new normal. When they do, we can expect something close to a futuristic ideal – but the meaning of privacy may never be quite the same again.
It has been almost a decade since the 2008 financial crisis, and the confrontational politics that emerged in its aftermath remain ubiquitous in the West. But despite similarities between the United States and the European Union, differences in how they address social, economic and fiscal issues have recently been thrown into sharp relief.
Since President Donald Trump’s surprise election victory, the US has seemed to be competing with the EU over which side’s politics are more contentious and dysfunctional. In each case, many potential players can subvert the political process. Trump is learning this in his confrontations with Congress, the courts and state governments. In Europe, domestic political forces routinely clash with constitutional courts and supranational bodies. And every time a national – or even regional – election is held in one of the EU’s 28 (soon 27) member states, Europeans become paralysed by fear of a disruptive outcome.
To address this state of affairs, European Commission President Jean-Claude Juncker recently issued a white paper outlining five possible paths forward: from doing nothing to pursuing systematic reforms to complete European integration once and for all. The US, too, is facing a challenge of political disunity, if not disintegration.
Cliff’s edge
The central problem for both is not just fake news or ‘alternative facts’, though misinformation does flood into most debates on both sides of the Atlantic. Rather, politics itself has become operationally dysfunctional. When citizens and politicians come to regard politics as a zero-sum game and resort to brinkmanship and other bad-faith tactics, malaise sets in.
Both European and American debates have been replete with posturing and tests of will, turning politics into a game of ‘chicken’. In chicken, two drivers race towards a cliff (or towards each other); the loser is the first driver to swerve away in the face of imminent catastrophe. But if neither driver concedes, both are destroyed.
In Europe, countries have threatened to crash out of the eurozone unless the European Central Bank or other European governments underwrite their unsustainable debt, and European policymakers have threatened to cut off support to certain countries unless they implement reforms. In this game, each side believes that its threatened action would be so damaging that the other side must swerve.
Debating the finer points
The Trump administration behaved similarly in the lead-up to the debacle over its attempt to repeal and replace the Affordable Care Act (‘Obamacare’). The administration pressed Congress by using tactics that were almost identical to those employed by the warring parties in Europe’s debt crisis.
Europe may yet learn that a member state’s exit from the EU need not be a destructive gambit in a game of chicken
At first, the administration claimed that an impending conflict would not necessarily be bad, because differing opinions are inevitable – or, in the words of White House Press Secretary Sean Spicer: “Diversity makes our nation strong.” At the start of the eurozone crisis in 2010, the EU also worried about its diversity, and how to reconcile differences between north and south, or centre and periphery.
As the effort to repeal Obamacare proceeded, however, Trump refused to entertain any alternatives: the healthcare ‘debate’ was framed as a binary choice between passing a protean bill that satisfied no one and maintaining the status quo. In offering no plan B, Trump’s approach resembled that of German Chancellor Angela Merkel in the eurozone crisis, when she took a hard line that allowed for no alternatives to the German position.
Finally, there was Trump’s apparently unshakeable confidence that he would win, and that the bill to replace Obamacare would be enacted. Spicer’s claim that “we’re going to get this done” echoes Merkel’s famous mantra in defence of her policy to welcome Syrian refugees: “Wir schaffen das” (“We can do it”). But beyond these rhetorical similarities, the European policymaking approach is very different from that of the Trump administration. And it is telling that, during Europe’s long struggle since the financial crisis, it has avoided any spectacular collapses – with the exception of the United Kingdom’s Brexit referendum.
Working together
Europe’s conflicts have always been resolved with some sort of compromise. And even though critics often caricature the EU’s internal negotiating process as overly lengthy and tedious, it has undoubtedly produced positive results.
Reforms that have improved energy policy coordination or helped to create a banking union have proven to be far more robust than they may have seemed at first. European-style multilateralism depends on constantly tweaking existing arrangements, which makes it the opposite of Trump-style unilateralism.
Constitutional government, too, is based on a process of bargaining and adjusting. At the heart of the US Constitution – which was shaped by the American Founders’ experience with British imperial overreach – is a belief that many people, working through consensus, are wiser than one person. Trump will have to learn sooner or later that consensus building is inherently frustrating, and that the solutions produced by political bargaining are usually neither clear nor simple.
Europe, for its part, reached this realisation in the 1950s, when it discovered that integration would require a series of bargains to preserve large areas of national policymaking autonomy. Europe does not have an uncontested leader to impose policy preferences on everyone else. But, unlike Trump, European leaders today can realistically issue assurances such as “we can do it”, precisely because they understand that trade-offs are necessary and inevitable.
In 2017, Europe may learn two more important lessons: first, a member state’s exit from the EU need not be a destructive gambit in a game of chicken, if the country’s departure removes tension points and preserves the foundation for future bargaining. And second, Trump’s dysfunctional administration is a model of how not to govern, and voters could punish those – like French National Front leader Marine Le Pen – who continue to emulate it.
The leading shareholders of two US activist investment firms – Corvex Capital Management and 40 North Management – have sought to derail the $20bn merger of chemical specialists Clariant and Huntsman, citing concerns over strategic rationale.
A Swiss regulatory filing shows David Winter and David Milestone of 40 North, along with Keith Meister of Corvex, have amassed a combined 5.13 percent of Clariant’s voting rights.
In a joint emailed statement published by Bloomberg, the investors said: “We believe that the proposed merger significantly undervalues Clariant’s shares and that far more value could be created for shareholders through any number of alternative transactions.” Markets responded positively to the development, with Clariant shares jumping 2.8 percent in early trading on July 4.
Markets responded positively to the investors’ attempts to block the deal, with Clariant shares jumping 2.8 percent
in early trading
The Clariant-Huntsman deal was announced in May, and represents an all-share merger with an enterprise value of $20bn. The agreement has been described as a merger of equals, with Clariant shareholders set to own 52 percent of the combined company, while Huntsman shareholders would hold the remaining 48 percent.
Upon reaching the agreement, Clariant CEO Hariolf Kottmann had described the planned merger as the “perfect deal at the right time”, claiming the combined company would gain a broader global reach, more sustained innovation power and fresh growth opportunities as a result. The companies had targeted to complete the merger by the end of 2017, but this schedule remains subject to shareholder approval.
In a press release early this year, the companies claimed the deal would result in cost synergies in excess of $400m, resulting in value creation of over $3.5bn. But the activist investors in question have argued the deal represents a poor piece of business: “The proposed merger has no strategic rationale and is in fact a complete reversal of the company’s longstanding strategy of becoming a pure-play specialty chemicals company.”
In place of merging with Huntsman, the investors are pushing for Clariant to explore its strategic options: “Clariant will be exchanging almost half its shares for what is primarily a commodity and intermediates business, which will further dilute its multiple and create a larger conglomerate discount.”
In response to the investors’ actions, a Clariant statement read: “We have noticed the increased investment of Corvex [and] 40 North in Clariant and their demands… we are taking all of our shareholders’ interests seriously and maintain our long-practiced open and engaging attitude with them. In that spirit we are in contact with Corvex [and] 40 North.”
Africa Segun Agbaje Guaranty Trust Bank
Having studied accountancy at the University of San Francisco and business administration at Harvard Business School, Segun Agbaje went on to cut his teeth at Ernst & Young in California. He joined Guaranty Trust Bank in 1991 and swiftly rose through the ranks into management, becoming Executive Director in 2000 and Deputy Managing Director in 2002. Agbaje was appointed CEO in 2011, in recognition of his diverse knowledge and experience of all areas of the Nigerian banking industry, particularly commercial banking, investment banking, treasury, corporate planning and strategy, and settlements and operations. Guaranty Trust Bank has more than 10,000 employees and operates across Africa from its base in Lagos, Nigeria. Today, the bank is focused on driving financial inclusion in Nigeria through the digitalisation of its banking services.
Europe Ralph Hamers ING Financial Group
Though he began his career with ABN Amro in Canada, Ralph Hamers has been at ING for the vast majority of his time in the banking sector. He joined the company in 1991, first working in structured finance before working his way up to CEO of ING Netherlands, and then CEO of ING Belgium and Luxembourg. He most recently became CEO of ING Financial Group in 2013. A down-to-earth, practical leader with an MSc in Business Econometrics/Operations Research from Tilburg University, Hamers places great value in consumer trust in business. He is also a modernist, and in recent years has led ING to profitable growth in difficult markets thanks to a digital-first philosophy. ING is the Netherlands’ biggest bank by assets, with more than 42,000 employees and 40 countries of operation.
Middle East Mohammad Nasr Abdeen Union National Bank
As CEO of the only bank jointly owned by the governments of Dubai and Abu Dhabi, flexibility has become Mohammad Nasr Abdeen’s stock-in-trade. Under his stewardship, Union National Bank (UNB) has spread across the Middle East and as far as China, with the opening of its Shanghai branch in 2008 making it the first UAE bank to establish a presence in the Asian nation. Abdeen began his career at UNB in 1999, back when it was a standalone operation. The bank now comprises a network of more than 100 branches and employs around 1,800 people across the world. Abdeen’s conservative lending policy and careful approach to investment helped UNB to ride out both the 2008 financial crisis and last year’s oil price crash in the Middle East. Now the bank is on the rise, with Q1 2017 figures already having beaten analyst forecasts.
North America William Downe Bank of Montreal
After graduating with an MBA from the University of Toronto, William Downe joined the Bank of Montreal in 1983. Having quickly established himself as a key player within the group, Downe was appointed Vice Chairman in 1999 before being named CEO in 2007. Since the appointment, Downe has drawn plaudits for increasing the bank’s presence in the US, with the acquisition of Marshall & Ilsley in 2011 more than doubling the bank’s authority south of the Canadian border. Despite holding a variety of senior management positions throughout Canada and the US, Downe has still found time to engage in numerous charitable causes: he currently sits on the board of a number of charities, including acting as Chair for the St Michael’s Hospital Foundation. After more than a decade at the helm of the bank, Downe announced in April 2017 that he plans to retire in October.
Latin America Carlos Hank González Banorte
Born into a family synonymous with South American business, Carlos Hank González followed in his grandfather’s footsteps by becoming CEO and Chairman of Banorte in 2014. Harbouring great ambition from a young age, González specialised in finance while studying at the prestigious Universidad Iberoamericana in Mexico, before going on to hold a number of senior roles prior to joining Banorte at the age of 43. González has since helped to restore confidence in Mexico’s fourth largest bank by assets, bringing stability to Banorte’s operations after shares had tumbled 14 percent in the six months prior to his appointment. By ushering in a “new phase of collaboration between all the institution’s governing bodies and management”, González has greatly improved Banorte’s efficiency, something that was emphasised when the financial group registered a 24 percent profit increase in Q1 2017.
Asia Pedro Cardoso Banco Nacional Ultramarino
After obtaining an MBA from the Catholic University of Portugal, Pedro Cardoso began his journey up the management ladder at Banco Comercial Português, where he worked as Deputy General Manager of its New York branch. Having proven himself in the US banking sector, he returned to Europe, where he took his first executive role as CFO of Madrid’s Banco Caixa Geral. In 2008, he was nominated as a board member of Caixa Geral de Depósitos, the largest Portuguese banking group, before he was appointed CEO of Macau-based Banco Nacional Ultramarino (BNU) in 2011. He also became President of the Macau European Chamber of Commerce in 2015, where he used his almost 30 years of banking experience to strengthen ties between Europe and the Far East. Proficient in five languages including Mandarin, today Cardoso is working to extend BNU’s reach beyond Macau to mainland China.
Australasia Shayne Elliott ANZ Group
Though he spent his formative years studying in New Zealand, Shayne Elliott’s expansive knowledge of the finance industry has come from a truly international career. Beginning his livelihood on the derivatives trading desk at Citigroup, Elliott gained his experience while working in the UK, US, Australia, Hong Kong and the Middle East. Renowned for his numerical aptitude, Elliott became Citigroup’s Head of Australia aged just 38, before becoming Chief Executive of Asia-Pacific Operations in 2003. Elliott ended his 20-year association with Citigroup two years later, moving to the Middle East with EFG Hermes before joining ANZ in 2009. Now CEO of the group, Elliott has successfully consolidated ANZ’s position as a ‘super regional bank’, shifting the group’s focus towards generating returns after years of spending and growth.
On July 3, China finally opened the long-awaited Bond Connect trade link, officially inviting foreign investors to tap into its $9trn bond market. The new link, which was announced in a joint statement by the Chinese central bank and the Hong Kong Monetary Authority, marks the latest in a series of moves to liberalise China’s capital markets.
The move aims to attract fresh funding to the Chinese bond market and strengthen Hong Kong’s position as a global financial centre. The much-anticipated launch coincides with the 20th anniversary of Hong Kong’s return to Chinese rule.
The project represents China’s latest attempt to expand overseas access to its markets, having already established a new trading link between Hong Kong and Shanghai in 2014, and a further link between Hong Kong and Shenzhen in late 2016.
But, despite such moves, restrictions continue to hold back foreign investors: while the Chinese bond market is currently the third largest in the world, Bloomberg estimates overseas investors own just 1.5 percent of Chinese bonds.
The Bond Connect trade link marks the latest in a series of moves to liberalise China’s capital markets
This heavy domestic-bias is expected to change in the coming years, however, as the Chinese bond market becomes an increasingly important asset class. In a recent research paper, Goldman Sachs outlined its expectations that more than $1trn of additional global fixed-income investments would shift towards the market over the next decade.
As reported by the South China Morning Post, Yunho Song, Senior Advisor to the president of Ping An Securities, said: “In comparison with previous rules on foreign investors’ investment in the Chinese bond market, Bond Connect has significantly abridged the procedures for foreign investors who can not only ‘click’ and enter the Chinese bond market but also purchase directly in foreign currencies. These arrangements can greatly save trading cost[s] and improve investment efficiency.”
The new trading link will connect global investors to Chinese bonds by establishing mutual bond market access between Hong Kong and mainland China. However, access to Chinese bonds via the programme will be restricted to overseas institutional investors such as banks, insurers and investment funds.
Under rules issued by the Chinese central bank, offshore investors will be able to trade bonds using foreign currencies. Further, the Chinese central bank will have the right to access offshore investor data.
According to the South China Morning Post, 86 financial firms had already traded Chinese bonds worth a total CNY 3.33bn ($490.4m) by 9.20am on July 3.
As shocking as the 2008 global financial crisis was, what was perhaps as unexpected was just how long the economic recovery would take. Almost a decade on, and post-crisis recovery still continues, restricting growth in countries around the globe and prolonging the pressure applied on numerous markets and industries.
While this state of affairs continues in 2017, we are seeing growth broadening out in more economies, prompting the global economy to draw on greater strength than it has done for years.
This is therefore a key year for investments, with the investment management market undergoing a transition of sorts. Key trends earmarked by Goldman Sachs include the rising tide of anti-globalisation sentiment, climbing inflation rates and a general shift towards fiscal spending on both sides of the Atlantic.
Navigating this transitioning landscape is no small feat for investment management groups, yet there are those that do so with apparent ease. In recognition, the World Finance Investment Management Awards name and celebrate the very best the industry has to offer. The awards look in particular to those firms that have shown fortitude over the past year when it comes to shifting economic conditions and stagnant growth. Our winners have proven themselves agile by combatting a climate that is constantly changing. In doing so, they offer their clients a sense of stability, even in spite of such rough waters.
The current transition towards fiscal spending can be attributed to a backlash after years of austerity measures
The globalisation backlash
For decades, globalisation has pushed forward, driving growth and commanding adherence from economies both large and small. Those who shrank away from economic integration did so at their own peril. Those who embraced it wholeheartedly, on the other hand, witnessed phenomenal growth and a leap forward in their economic development. Just look at China.
Globalisation has made this vast world a much smaller place; it has made trade between even the furthest corners of the Earth easier than humankind has ever known. Rapid advancements in transportation, logistics and technology during the 19th and 20th centuries helped this trend, enabling nations to hone in on the industries and services in which they excelled. Prosperity spread, while both companies and individuals were afforded a whole new world of opportunities.
But despite the benefits brought forth by a once exponential increase in the flow of goods and people across borders and seas, the heyday of globalisation seems to be coming to an end. This change in sentiment can be attributed to the slow, drawn out economic recovery that has prevailed since the global financial crisis. With mass unemployment and a resurgence of inequality, populist parties around the world are now gaining traction with their disheartened and desperate audiences. This discontent can also explain the shock election of politically inexperienced and inordinately crass reality television star Donald Trump as the 45th President of the United States.
A growing inclination towards protectionism can also be seen elsewhere, particularly in Europe (as shown by Brexit and the popularity of France’s Marine Le Pen). An unfortunate consequence has been the emergence of protectionist trade policies, something those in the investment management industry are certainly keeping a close eye on.
Great expectations
Fortunately, the gloomy forecasts that resulted from low levels of inflation and disappointing nominal growth have finally been replaced by better expectations. This long-awaited shift is expected to continue throughout 2017. As stated in the Goldman Sachs 2017 Investment Outlook: “We expect concerns around potential secular stagnation to give way to a more inflationary paradigm in the US.”
The US is now also experiencing declining unemployment which, together with a decline in job vacancies, has resulted in climbing wages. This tightening of the labour market, along with the potential for an inflationary fiscal outlook, has helped price and inflation expectations rise from former lows. According to the report: “Modestly higher inflation driven by an improving global growth outlook should be beneficial for assets, but unanchored expectations or a central bank response that is too aggressive could cause upsets.”
Broadly speaking, experts predict this inflationary environment will be positive for equities, though not all markets and organisations will experience the same benefits. While rising wages help to prop up demand, which in turn bolsters revenue, some companies may not be able to bear the brunt of rising costs, particularly if they cannot be passed on to the customer
due to market competition.
Moreover, an inflationary landscape could also be damaging for government bonds. “We think in the US there is a risk of a sudden re-pricing in rates markets. This implies that bonds could become a source of volatility in other markets, such as credit. If rates move higher, we will closely watch their correlation to risk assets”, according to Goldman Sachs.
From one extreme to another
Also apparent in 2017 is a growing divergence of monetary policy across the Atlantic and Pacific Oceans. The US, for example, already raised interest rates in March to one percent, and is expected to do so at least once more in 2017. However, both the European Central Bank and the Bank of Japan are expected to continue with easing policies, stretching them even closer to their limits. As stagnating growth continues to persevere around the globe, a shift in stimulus strategy will take place, which will see a greater inclination towards fiscal spending. This transition can be attributed to a backlash after years of austerity measures, together with a better understanding of the necessity of infrastructure development.
“This transition is important to watch, as it could provide a better policy mix to support growth and corporate earnings, or it could drive debt and inflation sharply higher and spark more volatility in developed or emerging market assets”, the report noted.
Perhaps even more significant is the potential impact of deregulation on markets and economic growth. The promises Trump made with regards to regulatory changes focus on improving access to capital, as well as improving the ease of business formation. Over in Europe, the business case for Brexit was driven by what was seen by many as excessive regulation within the EU, against which financial institutions across the region are now beginning to push back. China, on the other hand, seems to be creating a well balanced combination of stimulus and regulation, which is successfully driving structural reform, all the while maintaining growth. Consequently, investment managers will continue to look out for regulatory divergence across the globe, as well as the possibility of competitive deregulation.
As investment management firms continue to weave their way through this changing landscape, naturally there will be those that are simply unable to keep up. Industry players have long been required to keep a vigilant ear to the ground, but it would seem that in 2017 – and for the foreseeable future – expectations are higher than ever. As such, investment managers must have the foresight and forward-thinking approach needed to tackle today’s challenges and come out as winners on the other side.
The World Finance Investment Management Awards offer a keen insight into the investment management firms that have managed to maintain their success, even as the industry transforms around them. Our awards panel scoured the industry from one corner of the globe to the next, while also responding to feedback from our readership, in order to offer a truly global view of the brightest names in investment management today.
World Finance Investment Management Awards 2017
Argentina
Puente
Armenia
Capital Asset Management
Australia
AMP Capital
Austria
Kepler
Bahrain
SICO BSC (c)
Belgium – Equities
Degroof Petercam
Belgium – Fixed Income
Candriam Investors Group
Brazil
HSBC Global Asset Management
Bulgaria
TBI Asset Management
Canada – Equities
EdgePoint Wealth Management
Canada – Fixed Income
Optimum Asset Management
Caribbean
Santander Puerto Rico
Chile – Equities
BCI Asset Management
Chile – Fixed Income
BCI Asset Management
China
China Universal Asset Management
Colombia
BBVA Asset Management
Croatia
ZB Invest
Cyprus
Byron Capital Partners
CzechRepublic
Conseq Investment Management
Denmark
Danske Capital
Egypt
CI Capital Asset Management
Finland
LocalTapiola
France
Natixis Asset Management
Germany – Equities
Allianz
Germany – Fixed Income
Helaba Invest
Greece
NBG Asset Management
Hong Kong
BMO Global Asset Management
Hungary
OTP Investment Fund Management
Iceland – Equities
Kvika Banki
Iceland – Fixed Income
Stefnir Asset Management
India
Birla Sun Life Asset Management Company
Indonesia
BNP Paribas Investment Partners
Iran
Turquoise Partners
Ireland
Irish Life Investment Managers
Italy – Equities
Mediolanum Gestione Fondi
Italy – Fixed Income
Generali Investments
Jordan
First Investment Group
Kazakhstan
RESMI Finance & Investment House
Kenya
Old Mutual Kenya
Korea
Korea Investment Management
Kuwait
KAMCO
Lebanon
Blominvest Bank
Liechtenstein
VP Fund Solutions
Luxembourg – Equities Value
Invest Asset Management
Luxembourg – Fixed Income
BCEE Asset Management
Malaysia
AmInvest
Malta
HSBC Global Asset Management
Mauritius
MCB Investment Management
Mexico – Equities
Citibanamex
Mexico – Fixed Income
SURA Asset Management
Netherlands
ING Investment Management
New Zealand
NZAM
Nigeria
FBN Capital
Norway
Skagen Funds
Oman
Bank Muscat Asset Management
Pakistan – Equities
JS Investments
Pakistan – Fixed Income
Al Meezan Investment Management
Paraguay
Puente
Peru
BBVA
Philippines
BDO Unibank
Portugal
Sociedade Gestora dos Fundos de Pensoes
Qatar
QNB Asset Management
Saudi Arabia – Equities
NCB Capital
Saudi Arabia – Fixed Income
JADWA
Singapore
Lion Global Investors
Slovakia
IAD Investments
Slovenia
KD Funds
South Africa
Argon Asset Management
Spain
Santander Asset Management
Sri Lanka
NDB Wealth Management
Sweden
AXA Investment Management
Switzerland
Swisscanto Invest by Zürcher Kantonalbank
“We stand at a critical point in history”, the UN humanitarian chief Stephen O’Brien told the Security Council at a meeting in March. “We are facing the largest humanitarian crisis since the creation of the United Nations.” More than 20 million people are at risk of starvation or death from disease in Yemen, Somalia and Kenya, while areas of South Sudan are already officially suffering famine. In Yemen alone, child malnutrition has jumped 200 percent in two years, and three million citizens have been displaced from their homes.
At the March meeting, O’Brien said more than $4.4bn in aid was needed by the end of July if there was to be any hope of averting this catastrophe. As of the end of May, these countries in crisis had received just 10 percent of the necessary funds.
The recent swing towards protectionism has stoked fears among aid workers that established foreign aid commitments might
now be under threat
Without urgent action from the international community, millions will simply starve. And yet, as the world teeters on the brink of the worst humanitarian crisis in living memory, developed nations are turning their backs on this suffering. From Brexit to Trump, there has been a swing towards protectionism in parts of Europe and the US, stoking fears among aid workers that established foreign aid commitments might now be under threat.
These fears are certainly well founded, as in March the Trump administration outlined plans to cut its foreign aid spending by up to one third, delivering a devastating blow to the world’s poorest nations. With the situation rapidly worsening in East Africa and Trump threatening to further slash funding, the foreign aid debate has once again been thrust into the spotlight.
While NGOs call for immediate, comprehensive action, aid sceptics question whether such measures are effective in achieving long-term stability and growth. But, as 20 million lives now hang in the balance, the foreign aid question has never been so urgent.
Does foreign aid work?
Defying opposition from media critics and members of her own Conservative Party, British Prime Minister Theresa May gave aid workers something to celebrate in April when she confirmed the UK’s foreign aid budget will remain intact at 0.7 percent of GNI. While this announcement was warmly welcomed by the development sector, it quickly prompted criticism from aid sceptics, who believe the nation’s £14bn ($18bn) overseas development budget is largely going to waste.
However, Saira O’Mallie, UK Director of the ONE Campaign, an advocacy organisation focused on fighting extreme poverty, told World Finance: “£14bn sounds like a huge amount of money if you don’t know the context of it and you don’t know what that figure is as a portion of the budget – it’s seven pence in every 10 taxable pounds.”
A culture of pessimism has surrounded foreign aid spending for some time now, with critics declaring that development assistance is not only ineffective, but that a large portion of this money is lost to fraud and corruption each year. Bestselling works such as William Easterly’s The White Man’s Burden and Dambisa Moyo’s Dead Aid have delivered blistering criticisms of existing aid strategies, suggesting that foreign aid ultimately does more harm than good by encouraging economic dependency. While these accusations are certainly provocative, there may also be an element of truth in the authors’ diatribes.
Over the past 50 years, developed nations have sent more than $1trn in aid to Africa in an effort to end extreme poverty and stimulate economic growth. Today, however, the continent still dominates the ranking of the world’s poorest countries, with African nations making up 27 of the World Bank’s 31 low-income economies. Life expectancy in sub-Saharan Africa remains below the global average, while over 414 million are still living in extreme poverty.
The challenges remain great, but that’s not to say foreign aid has been ineffective in the global fight against poverty. In fact, over the past half century, aid finance has played a crucial role in improving quality of life in the world’s poorest countries.
“The UK’s Department for International Development (DFID) has seen 5.3 million girls get an education through its Girls’ Education Challenge”, said O’Mallie. “Elsewhere, the progress foreign aid has made in the fight against HIV, AIDs and malaria is also significant, and the UK has supported this through investment in programmes such as Gavi, the Vaccine Alliance.”
Global vaccine funding now immunises a child every two minutes, helping to prevent millions of early deaths from treatable conditions such as pneumonia, diarrhoea and tuberculosis. Thanks to the medical support provided by foreign aid, the number of children dying before their fifth birthday has been halved since 1900. When it comes to education, significant progress has also been made, with 90 percent of the world’s children now attending primary schools, compared with less than fifty percent in 1950. What’s more, literacy rates in sub-Saharan Africa have more than doubled in the past 40 years.
“Global poverty has been almost halved since the 1950s”, said Peter Smith, Head of UK Media at the ONE Campaign. “The fight against extreme poverty has been incredibly successful, but that war is not over yet.”
Making the money count
From providing education to food security, evidence shows foreign aid has indeed helped to improve lives in developing nations across the globe. And yet, one of the most pressing concerns for aid advocates today is that assistance is simply not reaching those people most in need.
Every year, huge amounts of aid funding are lost through government tax evasion, money laundering and bribery, although it is difficult to calculate just how much money goes missing this way. With corruption rife in many aid recipient countries throughout Africa and the Middle East, fraud not only consistently undermines aid efforts, but also impacts taxpayer support of development spending. As such, media scrutiny of aid wastage is now on the rise, prompting a profound reassessment of current aid delivery strategies.
“In places where there is corruption and there is money lost, then DFID will take action – that’s already happened in Rwanda and Liberia”, O’Mallie explained: “In these cases, DFID either stopped channelling money through the government and instead went straight to civil society organisations, or it just withheld funding altogether until progress was made.”
Critics suggest that foreign aid ultimately does more harm than good by encouraging economic dependency
Aside from the issue of corruption, we also have to consider whether aid is being spent in the most effective way. In 2016, aid experts observed a slight rise in global foreign aid spending, with six developed nations reaching the UN’s spending target of 0.7 percent of GNI (see Fig 1). However, despite this increase in aid funding, developed nations tend to be spending more on refugees already within their own borders, rather than sending the money overseas to help fight extreme poverty.
“The question of what you spend your aid budget on is very important”, said Amy Dodd, Director of the UK Aid Network. “Germany just joined the 0.7 group this year, but the vast majority of its budget is spent in Germany on refugees, and that’s not the most effective aid. Supporting refugees is a great thing to do, but it’s not development aid in action.”
Indeed, refugees arriving in Europe certainly require support, but the needs of displaced citizens in the developed world are undeniably greater. More than three million people have already been displaced by Yemen’s bloody civil war, and local refugee camps are bracing themselves for a worsening famine. Meanwhile, as Kenya teeters on the brink of an unprecedented starvation crisis, the population of Dadaab – the world’s largest refugee camp – has swollen to 250,000, with resources running worryingly low.
What’s more, if governments need to reconsider what they are spending their aid budgets on, they must also reassess the channels through which they provide aid. In the UK, the majority of the aid budget is spent through DFID, but aid workers are concerned an increasing portion of funds is being spent through other government departments, such as the Ministry of Defence. Not only do these departments lack the same level of transparency as DFID, but they also have a largely different focus. “The core purpose of DFID is to end extreme poverty”, explained O’Mallie. “The same can’t be said for the Ministry of Defence.”
Displaced Iraqis receive food from an aid worker
Philanthropic impact
In an age of immense philanthropic giving, some aid sceptics are beginning to question whether official development assistance is still necessary. Founded in 2000, the Bill and Melinda Gates Foundation has had a profound impact on the aid landscape, funnelling billions of dollars into health initiatives, sanitation projects and emergency relief. With investments pouring in from high profile philanthropists such as Warren Buffett, the foundation now boasts a budget of more than $40bn – far outstripping the total US foreign aid budget of $31bn.
As the world’s largest and most charitable foundation, it is hard to overstate the impact the Bill and Melinda Gates Foundation has had on global development. However, its founders recently warned governments cannot rely on philanthropic donations to meet the needs of the world’s poorest people.
Shortly after taking office in January, newly inaugurated President Trump announced he would be reinstating the so-called ‘global gag rule’, a piece of legislation designed to block US funds to any overseas organisation that offers abortion counselling or referrals. While NGOs and governments from around the world have quickly stepped in to fill this urgent funding gap, Bill Gates advised any further aid cuts would “create a void that even a foundation like ours can’t fill”.
$4.4bn
Amount of aid the UN said was required by July to prevent the famine crisis in the Middle East and Africa
10%
of this amount had been received as of May
$1trn
in aid has been sent to African nations in the past 50 years
$40bn
The foreign aid budget of the Bill and Melinda Gates Foundation
$31bn
The foreign aid budget of the US Government
“The US is the number one donor in the work that we do”, Gates told The Guardian. “Government aid can’t be replaced by philanthropy. When government leaves an area like that, it can’t be offset, there isn’t a real alternative.”
Ignoring these warnings of a potentially catastrophic funding gap, Trump appears intent on continuing to slash the nation’s aid budget. In his budget proposal for 2018, the president has suggested a 28 percent cut in overseas development spending which, if implemented, would squeeze the US aid budget to a level not seen in more than two decades.
Reflecting Trump’s oft-scrutinised isolationist vision for the nation, the proposed cuts would see a reduction in US funding for the UN, as well as an extreme reduction in spending on climate change and cultural exchange programmes. “It marks a step back from internationalism, cooperation and multilateralism, which is really concerning”, said Dodd. “Stepping back from working with the UN is a particularly worrying idea.”
“Every country is better off if there is greater global equality, even if you just look at it in terms of potential trade partnerships”, said O’Mallie. “Helping countries to invest in their own infrastructure just makes everyone safer and makes the world a more stable place.”
Over the past 12 months, the world has seen a turn towards isolationism and protectionism, and the impact of such a trend will be felt most bitterly by the world’s poorest nations. In the 40 years since the UN established its 0.7 percent aid funding target, just six countries have met this pledge. With the US turning its back on its foreign aid commitments, it is high time the world’s richest economies fulfil the promise they made almost half a century ago.
As politicians debate the effectiveness and ethics of foreign aid, the world stands on the brink of the greatest humanitarian crisis since 1945. A child now dies every 10 minutes in Yemen from a preventable disease, while more than one million South Sudanese children are suffering from severe acute malnutrition. With 20 million lives now at stake, the developed world can no longer ignore this suffering. Foreign aid may well have its flaws, but the consequences of our inaction will forever haunt us.
According to the latest data released by Japan’s Ministry of Internal Affairs and Communications, the job-to-applicant ratio exceeded expectations in May, reaching its highest point in 43 years. For each applicant in Japan there were an average of 1.49 job vacancies, up from 1.48 in the previous month. The numbers reflect a shortage of labour even more extreme than witnessed during the heated economic climate that preceded the 1990 financial crisis.
Japan’s growing unemployment rate can be explained by an increase in the number of people choosing to seek work, rather than a decrease in those employed
In a seemingly illogical twist, Japan’s unemployment rate actually increased during the same month. According to seasonally adjusted figures, the unemployment rate rose from 2.8 percent to 3.1 percent month-on-month. This quirk, however, can be explained by an increase in the number of people choosing to seek work, rather than a decrease in those employed. Indeed, the labour force participation rate has now reached its highest point since 2008.
More generally, however, unemployment is sitting at a historically low level. The key issue regarding Japan’s workforce has centred on a lack of wage increases coupled with stagnant inflation. Despite labour shortages, wage levels in Japan have seen only minor increases, and inflation is likely to fall short of the Bank of Japan’s target of two percent. The official inflation forecast for 2017 currently sits at 1.4 percent.
While the target inflation rate remains some way off, it seems likely there will be some upward pressure in the future. In an interview with Bloomberg, Takeshi Minami, Chief Economist at Norinchukin Research Institute, said: “Labour participation may be peaking due to supply shortage, which should push up wages and prices… it hasn’t occurred at all yet, but I do think we are getting there soon.”
The Trump administration has accused China’s Bank of Dandong of illicit financial dealings with North Korea, including the laundering of money for the totalitarian state. The US Treasury is now considering cutting the modest bank from the US financial system, increasing pressure on Beijing to clamp down on its wayward neighbour.
In a statement released on June 29, the US Treasury said: “Bank of Dandong acts as a conduit for North Korea to access the US and international financial systems, including by facilitating millions of dollars of transactions for companies involved in North Korea’s WMD [Weapons of Mass Destruction] and ballistic missile programmes.”
Last week, President Trump said China’s efforts to rein in North Korea have “not worked out”, indicating he may be prepared to adopt a more aggressive stance on Pyongyang. Trump has been leaning on the Chinese leader to help curb North Korea’s nuclear ambition ever since President Xi Jinping made his historic visit to the US in April. As a result, China is coming under increasing pressure to fully comply with international sanctions on the state, which include cutting economic ties with the nation.
Trump has been leaning on Chinese President Xi Jinping to help curb North Korea’s nuclear ambitions
However, China has been the reclusive nation’s sole trading partner and only international ally for some years now. North Korea not only relies on Chinese trade to keep its economy afloat, but is also thought to funnel much of this revenue into its flagship nuclear missiles programmes.
Despite mounting international pressure to end the economic relationship, China has been keen to maintain trade relations with the state. However, since the summit in April, President Xi Jinping has taken a somewhat tougher stance on China’s neighbour, halting imports of coal from North Korea.
The US Treasury will now carry out a 60-day review of the Bank of Dandong, after which it will decide whether to fully sanction the Chinese bank. The bank in question is based in the northeastern city of Dandong, which sits on the border of China and North Korea. The border serves as a gateway for trade between the two nations, and has been described as the isolated state’s lifeline to the outside world.
In response to the possible blacklisting, US Treasury Secretary Steve Mnuchin confirmed the US is still keen to work with China to combat the North Korean nuclear threat. “We are in no way targeting China with these actions,” Mnuchin told reporters at a White House news briefing.
Our shopping habits have changed dramatically over the past 20 years. On August 11, 1994, the Sting album Ten Summoner’s Tales became the world’s first secure online purchase, marking the launch of e-commerce as we know it today.
In the years since, the astronomical rise of online shopping has steadily pushed physical stores into decline, with an average of 15 high street shops closing each day in the UK alone. Delivering another blow to the once mighty bricks and mortar, the smartphone era has further digitalised our shopping habits.
With a world of buying options now at shoppers’ fingertips, mobile purchases have boomed: in 2010, mobile visits to e-retail sites accounted for less than three percent of web traffic. Today, that figure has skyrocketed to over 50 percent. As on-the-go mobile payments have become the norm, retail has evolved from its pre-internet form. But as the industry adjusts to this new landscape, another retail transformation is on the horizon: just as smartphones changed the face of retail, Instagram is making inroads into mobile retail.
The ultimate fashion magazine
Since its launch in 2010, the photo-sharing app has been a source of inspiration to its predominantly young user base, with endless beauty, fashion and lifestyle accounts filling users’ feeds with exciting new brands. Now, Instagram wants to monetise this aspirational content, introducing shoppable features and ‘buy now’ buttons to facilitate impulse purchases in-app. Catering to the personalised tastes of its 700 million users, the Instagram store could be the future of retail.
Long before the launch of its ‘shop now’ features, Instagram was already influencing the world of retail. As brands quickly discovered, the visual nature of the platform allows companies to showcase products in an engaging and aesthetically pleasing way. By using hashtags, locations and photo tags, brands are able to reach a wide-ranging audience, and can enjoy a profile boost if featured on the app’s popular ‘explore’ page.
Photo-based apps such as Instagram and Snapchat have created an image-conscious culture within Generation Z
“Instagram is like a fashion magazine with an infinite number of pages”, said Gregory Galant, co-founder of the social media-focused Shorty Awards and CEO of Muckrack. “It’s always been about great photos and finding new people to follow, whereas a site like Facebook is mostly about following friends.”
With a broad reach and visual focus, Instagram has proved incredibly useful for an ever-growing number of fashion and beauty start-ups. By prioritising Instagram in social strategies, brands can effectively use the platform to build a brand identity, gather a following and generate sales. Indeed, some of the largest beauty lines in the world today are independent brands that have successfully grown an audience through Instagram.
One such example is makeup phenomenon Huda Beauty. Launched by Instagram star Huda Kattan in 2013, the high-end makeup line now boasts close to 20 million followers, and has succeeded in turning online attention into physical sales. In the four years since its launch, the brand has developed a global following, frequently appearing among Sephora’s top selling brands in both the US and the Middle East.
While Huda Beauty may be one of Instagram’s brightest success stories, Kattan’s social media might is by no means unique in the beauty world. Independent brands are now thriving on the app, with companies such as Anastasia Beverly Hills, Kat Von D Beauty and Kylie Cosmetics each boasting several million Instagram followers. Of course, this popularity is reflected across all the major social media channels, but Instagram is where these brands have truly found a home.
“Instagram is seeing a lot of traction at the moment – it’s kind of the hot platform”, said Callum McCahon, Strategy Director at Born Social, a London-based social media agency. “According to our research, Instagram has the highest volume of sharing in the UK at the moment, meaning that it’s where people are actively sharing the most content. It’s definitely the key platform right now for the majority of brands.”
It’s a similar story on the other side of the Atlantic. Among US teens, Instagram has dramatically leapfrogged Facebook in terms of popularity, with Generation Z abandoning the social media behemoth in favour of its younger rival. According to research carried out by the University of Chicago, 76 percent of 13-to-17 year-olds use the photo-sharing app, while just 66 percent use Facebook. What’s more, Facebook users are consistently posting less original content, and are increasingly looking to share personal posts elsewhere.
While Facebook struggles to reverse its substantial 21 percent decline in ‘original sharing’, Instagram is enjoying a surge in content creation, helped, in part, by new updates allowing users to upload multiple photos in one post. With a rapidly growing audience of active users, Instagram is fast becoming the app of choice for social-media-savvy brands.
Social spending
Having succeeded in connecting users with brands, Instagram is now hoping to take that relationship one step further. In November 2016, the platform announced it would be rolling out a new ‘shop now’ feature, allowing users to buy the products they see in a photo. With one tap of the shoppable photo tags, users can now make a purchase entirely inside of Instagram without having to leave the app. While the feature is currently only available for a handful of brands, users will likely see much more of the ‘shop now’ feature over the coming months.
“If there’s one thing we’ve learned about consumer behaviour on the internet, it’s that the easier you make things, the more people will do it – a prime example being Amazon’s 1-Click Ordering”, Galant explained. “Until now, Instagram has prevented a lot of behaviour by not allowing links in descriptions. Adding a ‘buy it now’ link will drive a lot more action than before.”
With a rapidly growing audience of active users, Instagram is fast becoming
the app of choice for social-media-savvy brands
Along with facilitating purchases, the platform may also be fuelling spending among young users. The pervasive influence of social media means likes, followers and views are defining the lives of teens across the globe, with photo-based apps such as Instagram and Snapchat creating an image-conscious culture within Generation Z.
As such, teens are coming under increasing pressure to maintain an active online presence, and may be reluctant to repeat the same outfits and make-up looks in the photos they post to social media. This focus on online appearance is quickly driving changes in the way that young people shop, with Generation Z showing an appetite for premium beauty brands and an interest in easily-styled, ‘mix and match’ clothing sets.
“More and more, we’re seeing that the main event of a night out is the photos that get posted, rather than actually being there”, said McCahon. “There’s definitely an added social pressure.”
Aside from encouraging spending on beauty and fashion, however, the rise of photo-sharing apps is similarly driving young people to go out and spend more on experiences, from meals out to holidays with friends. As the first generation to truly grow up online, teens of today are under increasing pressure to live an ‘Instagram-worthy’ life: one full of adventure, socialising and aspirational experiences.
While most members of Generation Z are not yet earning, they are still some of the world’s most active consumers, wielding an impressive $44bn of purchasing power in the US alone. As this generation matures, their buying power is only set to grow, along with the social media impact on global spending habits.
From public to private
Brands may be mastering the art of social media strategy, but the latest online trends could well throw a spanner in the digital works. Our social media habits are rapidly evolving, and experts are noticing a shift from public posting to private sharing. Our Facebook feeds may once have been flooded with personal updates, but today’s social media users are more likely to share these details in the private confines of a WhatsApp Group Chat or a simple Snapchat message.
Mobile visits to e-commerce websites (share of web traffic)
3%
2010
>50%
2017
“Sharing has become less public and more private”, explained McCahon. “Whereas three or four years ago people would share publicly straight onto Facebook feeds, for example, now we’re seeing that sharing happening in more private, curated, small groups.”
As users abandon traditional newsfeeds and embrace ‘private’ social media spaces, brands and advertisers are presented with a conundrum. Until now, social media has made it relatively easy for marketeers to gauge public reaction to content, whether through views, impressions, shares or comments. This has enabled brands to measure the effectiveness of online marketing campaigns and apply the results to future creative processes. However, as private sharing becomes the new norm, it will become increasingly difficult for brands to measure the success of targeted online campaigns.
“’In the past, you would be able to see very clearly how people are engaging [with] and sharing your content, because it all happens in public”, said McCahon. “But now, if someone screenshots something and puts it in a WhatsApp group, or shares a link in Facebook Messenger, then you can’t track that as well.”
With up to 77 percent of content now being shared in this ‘dark social’ space, brands will have to get creative in order to re-engage with social media audiences. However, while their sharing activity might be hard to track, we know social-media-savvy generations are taking to their favourite platforms in their millions to discover new brands and browse products. The internet may have killed the high street, but social media might just save retail.
On June 29, Rio Tinto shareholders approved the sale of the company’s Australian coal assets to the Chinese-backed company Yancoal for $2.69bn, ending a bidding war that also involved Swiss mining company Glencore.
Yancoal had been touted as Rio Tinto’s preferred buyer since announcing its intentions in January, and eventually bested Glencore’s offer of $2.68bn in a heated bidding war, which saw both companies overshoot analysts’ valuations of $2bn.
With some deeming Yancoal to be party to one of Rio Tinto’s major shareholders, Yankuang Group, the dually-listed company held the vote in London to avoid any conflict of interest. Yancoal is a subsidiary of Yanzhou Coal Mining, which is also majority-owned by Chinese state enterprise Yankuang Group.
The deal further illustrates the divergence in companies’ strategies to deal with shrinking fossil fuel reserves
The vote saw 97 percent of shareholders agree to the sale, but, as Rio Tinto Chairman Jan du Plessis revealed, did not specify how the funds would be used in the future: “What to do with the money? That’s a good problem to have.”
As well as offering more money than Glencore, Yancoal also agreed to follow a stricter timetable, setting out plans to complete the transaction by the end of 2017, rather than mid-2018.
The deal further illustrates the divergence in companies’ strategies to deal with shrinking fossil fuel reserves. While some firms have attempted to gradually divest and ease the shock of a move towards greener production methods, like Rio Tinto, others have chosen to monopolise supply in anticipation any future strategies will still require fossil fuels to provide backup.
Yancoal’s purchase, which has given it ownership of coal production facilities at the Hunter Valley, suggests the company has adopted the latter strategy, buying coal in anticipation of the market’s medium-term need.
The South African Reserve Bank has fought back against a proposed mandate change, which would see its primary focus change from that of price stability to a focus on the “socioeconomic wellbeing of the citizens”.
Public Protector Busisiwe Mkhwebane instructed parliament to make the changes during a press conference on June 19. Following this conference, the value of the South African rand dipped sharply, falling 2.05 percent against the dollar.
Mkhwebane’s proposal came against a backdrop of political uncertainty in South Africa, with President Jacob Zuma pledging “radical economic transformation” amid an upcoming leadership battle.
The South African Reserve Bank argued the move consisted of “gross overreach” in the public protector’s institutional power
In response to the proposed change in its mandate, the South African Reserve Bank has filed a complaint to the high court, arguing that the move consisted of “gross overreach” in the public protector’s institutional power. In the court filings, Governor of the South African Reserve Bank Lesetja Kganyago stated: “In the impugned remedial action, the public protector instructs parliament to amend the constitution to strip the Reserve Bank of its primary function – to protect the value of the currency. The public protector has no power to amend the constitution, let alone to instruct parliament to do so.”
He called for the proposed mandate change to be stopped in its tracks, saying that from the moment it was announced, “it has had a serious and detrimental effect on the economy and, for as long as it remains in place, it holds the risk of causing further rand depreciation, further ratings downgrades and significant capital outflows”.
If the mandate changes go ahead, the South African Government would be moving against a global consensus regarding the role of central banks in upholding economic stability. In the court filings, Kganyago fought the case for protecting the current mandate and its focus on prioritising price stability by saying that, if implemented, the proposed change would strip the Reserve Bank of the core function of other central banks.
He added that the move “threatens to undermine the critical contribution that the Reserve Bank makes to the stability of our financial system, which is central to sustainable growth and development, job creation, the reduction of inequality and poverty alleviation”.
Any change to the constitution, however, would be a slow process. According to the court papers, arguments that oppose the suggested changes must be filed before July 26. Furthermore, even in the event of the high court application being unsuccessful, a two-thirds majority in parliament would be necessary to make the proposed changes.
As US President Donald Trump receives bids to build his supposed “beautiful wall” along the border with Mexico, his administration is also poised to build some figurative walls with America’s southern neighbour by renegotiating the North American Free Trade Agreement (NAFTA). Before US officials move forward, they would do well to recognise some basic facts.
Trump has called NAFTA the “single worst trade deal” ever approved by the United States, claiming that it has led to “terrible losses” of manufacturing production and jobs. But none of this is supported by the evidence. Even NAFTA sceptics have concluded that its negative effects on net US manufacturing employment have been small to non-existent.
Trump may prefer not to focus on facts, but it is useful to begin with a few. Bilateral trade between the US and Mexico amounts to over $500bn per year. The US is by far Mexico’s largest trading partner in merchandise – about 80 percent of its goods exports go to the US – while Mexico is America’s third-largest trading partner, after Canada and China.
An exchange of goods
After NAFTA’s passage in 1994, trade between the US and Mexico grew rapidly. America’s merchandise trade balance with Mexico went from a small surplus to a deficit that peaked in 2007 at $74bn, and is estimated to have been around $60bn in 2016.
But even as the US trade deficit with Mexico has grown in nominal terms, it has declined relative to total US trade and as a share of US GDP (from a peak of 1.2 percent in 1986 to less than 0.2 percent in 2015).
The US and Mexico are not just trading goods with each other; they are producing goods with each other
Perhaps more important, the US and Mexico aren’t just exchanging finished goods. Rather, much of their bilateral trade occurs within supply chains, with companies in each country adding value at different points in the production process. The US and Mexico are not just trading goods with each other; they are producing goods with each other.
In 2014, Mexico imported $136bn of intermediate goods from the US, and the US imported $132bn of intermediate goods from Mexico. More than two thirds of US imports from Mexico were inputs used in further processing – cost-efficient inputs that boost US production and employment, and enhance the competitiveness of US companies in global markets. Goods often move across the US-Mexico border numerous times before they are ready for final sale in Mexico, the US, or elsewhere.
Crossing the border wall
When cross-border trade flows are occurring largely within supply chains, traditional export and import statistics are misleading. The auto industry illustrates the point. Automobiles are the largest export from Mexico to the US – so large, in fact, that if trade in this sector were excluded, the US trade deficit with Mexico would disappear.
But standard trade figures attribute to Mexico the full value of a car exported to the US, even when that value includes components produced in the US and exported to Mexico. According to a recent estimate, 40 percent of the value added to the final goods that the US imports from Mexico come from the US; Mexico contributes 30 to 40 percent of that value. The remainder is provided by foreign suppliers.
When the value-added breakdown is taken into account, the US-Mexico trade balance changes drastically. According to OECD and World Trade Organisation calculations, the US value-added trade deficit with Mexico in 2009 was only about half the size of the trade deficit measured by conventional methods.
Trump claims that high tariffs on imports from Mexico would encourage US companies to keep production and jobs in the US. But such tariffs – not to mention the border adjustment tax that Congress is considering – would disrupt cross-border supply chains, reducing both US exports of intermediate products to Mexico and Mexican exports (containing sizable US value-added) to the US and other markets.
That would raise the prices of products relying on inputs from Mexico, undermining the competitiveness of the US companies. Even if supply chains were ultimately reconfigured, the US and Mexico would incur large costs – to both production and employment – during the transition period.
New links in the chain
Imports from Mexico support US jobs in three ways: by creating a market for US exports; by providing competitively priced inputs for US production; and by lowering prices of goods for US consumers, who then can spend more on other US-produced goods and services. A recent study estimates that nearly five million jobs in the US currently depend on trade with Mexico.
Given all of this, it is good news that Trump has lately toned down threats to withdraw the US from NAFTA and to impose large unilateral tariffs on Mexican imports (his position on the border adjustment tax is unclear). Instead, in a draft proposal to Congress, his trade officials are calling for flexibility within NAFTA to reinstate tariffs as temporary “safeguard” mechanisms to protect US industries from import surges.
Importing from Mexico supports US jobs in three ways: by creating a market for US exports; by providing competitively priced inputs for US production; and by lowering prices of goods
for US consumers
The Trump administration also wants to strengthen NAFTA’s rules of origin. As an illustration, current rules dictate that only 62.5 percent of a car’s content must originate within a NAFTA country to qualify for a zero tariff. That has made Mexico an attractive location for assembling Asian-produced content into final manufactured goods for sale in the US or Canada.
If the Trump administration succeeds in raising the share of content that must be produced within NAFTA to qualify for zero tariffs, both the US and Mexico could reclaim parts of the manufacturing supply chain that have been lost to foreign suppliers. Stricter rules of origin could also boost investment by these suppliers in production and employment in both Mexico and the US.
The Trump administration’s draft outline for NAFTA renegotiation also sets objectives for stronger labour and environmental standards – important priorities for Congressional Democrats who share the president’s opposition to the current agreement. Stronger standards could create benefits for all of NAFTA’s partners, but with the Trump administration actively dismantling labour and environmental protections at home, a US-led effort to strengthen them within NAFTA in any meaningful way seems farfetched. Perhaps Canada will take the lead.
Uncertainty over the fate of NAFTA has already hit the Mexican economy. It has also weakened the position of the reformist and pro-market President Enrique Peña Nieto, just over a year before the general election in Mexico. This may aid the rise of right-wing populists riding the wave of anti-Trump nationalism.
A strong, stable Mexican economy, led by a government committed to working with the US, is clearly in America’s interests. Trump would be well advised to work quickly to ensure that the NAFTA renegotiations he has demanded generate this outcome.
There are very few companies that can claim to have had as big an impact on the world as McDonald’s. From humble beginnings, the fast food chain has grown to wield the sort of global influence that is often reserved for finance or technology companies. A true household name thanks to its 36,000-plus locations over 100 countries, a modern cityscape just doesn’t seem right without its own branch.
The McDonald’s business model, revolutionary at its outset, has allowed the company to expand while still keeping a focus on local communities and their tastes. A 1995 study by Sponsorship International in Germany found that a greater proportion of respondents recognised the McDonald’s logo than they did the Christian cross.
However, today McDonald’s is no longer the new kid on the block, and more modern restaurants have drawn customers away from the fast food format pioneered by the ‘Golden Arches’ (see Fig 1). Despite the company’s almost unmatched market presence, it has been slow to adapt to the rise of ‘fast casual’ restaurants. It is also bruised from various campaigns that have attacked its business practices, its marketing campaigns and the content of its food. With all these pressures beginning to impact its bottom line, in 2015 McDonald’s then-newly appointed CEO Steve Easterbrook famously declared that the business would begin a transformation to become a “modern and progressive burger company”.
After leading the market for so long, McDonald’s is unlikely to settle for second best
McDonald’s has indeed made progress, but with its international arms stuck in the experimentation phase, the company is still figuring out exactly what its future will look like. Whether this will see it become a French patisserie or a rather more automated experience, eating at McDonald’s in the future will likely be a very different experience to what it is today. But after revolutionising the food industry once, only time will tell if it can do so again.
Grinding it out
McDonald’s history is tied to the surge of drive-in eateries that emerged in southern California during the 1930s. The McDonald brothers, Maurice and Richard, worked as prop managers for Hollywood movie studios before they went into business for themselves in 1932, purchasing an old movie theatre on a shoestring budget. After seeing the overwhelming success of a hot dog cart across the street from the theatre, they decided to enter the restaurant business in 1937.
Their first restaurants were successes, but the brothers noticed that, despite generally being full, they were unable to significantly increase their customer count or profit. Spying the opportunity for even greater growth, they took a gamble on starting a new burger restaurant from scratch.
The restaurant they opened in 1948 would transform the food industry. Stripped down to the barest of components, the limited menu was prepared on an assembly-line-style system, with speed and simplicity the main focus. Food was prepared to order, with workers making every burger fresh while still maintaining attention to detail. Customers were given their food at the counter, meaning there was no need to hire floor staff. The hamburgers, fries, soda, coffee and milkshakes that were sold were cheap and were soon beloved by locals.
In 1954, the restaurant caught the attention of businessman Ray Kroc, who was surprised to learn that eight of the large milkshake machines he had sold were being used in a single location. In Kroc’s 1977 autobiography Grinding it Out, he recalled the excitement he felt when he first saw the simplicity and effectiveness of the McDonald’s operation.
Kroc saw the potential this establishment had – and the opportunity to sell more milkshake mixers – but the McDonald brothers initially said they were content with the small operation they had established. Undeterred, Kroc struck a deal with the brothers that would allow him to open a series of franchises of his own, based on the McDonald’s process. They were a wild success, and by 1960 McDonald’s had become a nationwide sensation, with its chain of franchised restaurants grossing $56m annually.
However, relations between the McDonald brothers and Kroc grew sour, with each feeling entitled to a greater share of the operation than they received. Kroc eventually bought the brothers out for everything except the original location. He then opened a McDonald’s chain across the street from the original store and cut the McDonald brothers out of the company’s history. It would take until 1991, seven years after Kroc’s death, before the company acknowledged the McDonald brothers on the company’s ‘founder’s day’.
Despite the countless fast food imitators that emerged in its wake, McDonald’s remained the leader of the industry for decades. Its model of food – quickly prepared and both ordered and served at the counter – was efficient, cost effective and, most importantly, loved by the public. The structure of franchised businesses, which roughly 80 percent of the company’s stores still observe today, gives each store a substantial amount of autonomy.
The impact of the company was just as great abroad as it was at home in the US. In 1996, the franchise’s global success and prosperity was used as the basis of a political theory put forward by author Thomas Friedman, who proposed that any country with a McDonald’s within its borders wouldn’t go to war with another country with its own McDonald’s. This assertion proved false in 2008, however, with the beginning of the Russia-Georgia conflict.
Nutrition nightmare
After the peak of its success in the 1980s and 90s, McDonald’s became the subject of increased scrutiny by the public and health organisations. In 1986, the environmental anarchist group London Greenpeace (no affiliation to the international organisation) distributed flyers attacking McDonald’s for its treatment of both animals and workers, its destruction of rainforests, and encouraging litter. McDonald’s engaged in a libel battle with members of this group in a case that dragged on until 1997, but the trial was more damaging to its reputation than the allegations themselves – a multinational corporation attacking a few protestors was compared by many to David and Goliath.
Investigative journalist Eric Schlosser’s 2001 book Fast Food Nation took aim at the practices and poor nutritional content within the fast food industry, including McDonald’s, which became the basis of a film of the same title released in 2006. In 2004, documentarian Morgan Spurlock released Super Size Me, a gonzo-style film where he only ate McDonald’s for a month. Predictably, he saw his health significantly deteriorate.
Shortly after the film’s release, McDonald’s began to phase out its super size meals, while also responding directly to the documentary with an advertising campaign stating: “We do agree with… [the film’s] core argument, that if you eat too much and do too little, it’s bad for you.” Amanda Pierce, a spokesperson for McDonald’s, added: “We wanted to ensure there is a balanced debate so people hear our side of the story.”
However, this string of bad press, combined with growing public interest in the company’s practices, contributed to a sales slump McDonald’s has endured ever since. In January 2017, the firm announced US sales had dropped 1.3 percent over the previous quarter (see Fig 2). Sales in US stores dropped for the first time in 18 months, and group-wide revenue fell five percent. While menu changes like the all-day breakfast offered short-term boosts, they were unable to sway American consumers to make McDonald’s a regular hangout. A note of positivity came from its international business arm, with sales rising 3.8 percent beyond the US.
Speaking to World Finance, IBISWorld fast food industry analyst Andrew Alvarez said McDonald’s is contending with a more discerning customer base in the US: “The country may not be getting healthier here in the US, but people are clearly more educated and aware of what they’re putting in their mouths for the first time in a long time… They are not interested in super salty foods anymore, in the same way that they were back in the 1980s and 1990s.”
However, simply moving away from salty food is not enough for McDonald’s. Despite its popularity being slowly eroded, the firm has spent years building up a customer base with very specific expectations as to the food they will receive.
“You don’t just throw away [your] entire menu because it’s [not] working – you know, you’re still the largest company, you’re just waning a bit”, Alvarez added. The challenge for McDonald’s is creating a menu that keeps its current customers happy, while attracting new ones. “I think that’s a very difficult question for McDonald’s to answer.”
From farm to table
While public relations setbacks may have gradually battered consumer belief in McDonald’s, the other threat the company is facing comes from the dramatically changing restaurant landscape. Whereas McDonald’s may have once counted its biggest rivals as being franchises like KFC and Taco Bell, boutique chains and independent players are now encroaching on the company’s core demographic.
Boasting a more modern restaurant setting, a streamlined menu and a focus on fresh ingredients, fast casual chains like Chipotle, Five Guys, Shake Shack and Bareburger have won over a huge wave of customers. They usually offer some form of limited table service and charge slightly more than a traditional fast food establishment. The rise of the fast casual restaurant has dramatically shifted the dining habits of US consumers.
Another edge is the more limited menu these chains offer. McDonald’s core menu has increased to dozens of items, whereas many of these newer restaurants only offer a few. “You have so much more of a scope with three things on the menu than 20”, Alvarez explained. “You can’t really customise anything significantly when you have 20 different things on the grill, there’s only so much space.” In some ways, these chains have recaptured the simplicity that attracted Kroc to McDonald’s in the first place: a limited menu with a focus on food made fast and well.
Also competing against McDonald’s are small, individual operations set up by well-known chefs. Big names such as April Bloomfield and David Chang have opened their own fast casual restaurants, injecting a sense of creativity and diversity into the sector that McDonald’s just cannot match. While perhaps not a threat on their own, in sum these single stores are putting a huge pressure on the industry.
Alvarez explained: “It’s not a big company’s game anymore – sometimes even having a micro operation is more conducive to creating a better and more appealing product to consumers… It’s harder for a juggernaut to be able to be everything for everyone these days because you have this plethora of options available.”
The last piece of the puzzle may be the store environment. In the US, many McDonald’s restaurants have not seen significant refurbishment for the better part of 20 years. From seating to the way food is displayed, McDonald’s is in some ways looking very out of touch.
“People want to go to these fast casual spots with nice, young and bright chefs because they’re with the times and they understand what it means to build a good atmosphere for their consumers, and an atmosphere those consumers are going to want to participate in”, Alvarez said. “McDonald’s, having to appeal to such a general audience, may have lost a bit of that glamour and a little bit of that pizazz that it may have had back in the day as it continues to experiment with new store formats.”
Morgan Spurlock of Super Size Me
Trial and error
After being a leader in the industry for so long, McDonald’s is a company unlikely to settle for second best. While it has been slow to change in the US, internationally it has been constantly experimenting with new store formats and menus. At the end of 2014, McDonald’s opened a store called The Corner in Sydney, Australia.
The restaurant looks a lot more like a café than a regular McDonald’s, with a menu featuring quinoa salads and pulled pork sandwiches. Last year, the company launched a McCafé in Paris that served club sandwiches, pastries and soups instead of the typical burgers and French fries. While regional differences have always been apparent in McDonald’s menus (like shrimp burgers in Japan and curry bowls in India), these experimental stores are turning the idea of what McDonald’s can be on its head.
Alvarez said these experiments are being closely watched to see if they could be applied to the US market. The company’s international footprint and willingness to experiment is perhaps its greatest asset at the moment. He told World Finance: “I think that… one of the best things about this kind of company is when their tentacles sort of extend so far out, they’re able to develop a playbook that’s much more sophisticated and much more in tune with local communities than a smaller competitor who hasn’t had that experience before, and doesn’t necessarily know what it can do with scale.”
One location where McDonald’s has been continually successful – and so may offer a window to the future of the company – is the UK. McDonald’s opened its first UK location in Woolwich, south-east London, in 1974. By 1993, the number of stores in the country had grown to 500. Today, there are more than 1,250 (see Fig 3).
Trish Caddy, a foodservice analyst at market research company Mintel, said that in the UK market, McDonald’s has been undergoing a transformation into an all-day dining concept: “It’s now offering barista-style coffee, lighter meal or snack options, as well as pushing its 24-hour offers, especially when London launched its Night Tube in 2016. So it has repositioned itself as ‘we’ve got breakfast, you can come in for very cheap barista-style coffee, you can also have a snack, any time of the day’.” Caddy added that, in comparison to its competitors, the company has done this very well.
Another priority for McDonald’s in the UK has been driving home the message that its food now has reduced salt, sugar and fat content wherever possible. Caddy said this has prompted a change in the company’s messaging: “Instead of focusing on price details of its products, McDonald’s ads are now driving the message of food quality. For example, the ‘made with 100 percent chicken breast’ branding from its Good to Know campaign.”
Caddy continued: “All of these efforts should reinforce trust, so again it’s spending money to reposition itself as ‘you can trust us for our food quality, you can trust us that we care about [you]’. It’s got a very caring proposition – ‘we care about you and your children’s health’… This is all paying off, when our Mintel brand research found that McDonald’s in the UK really leads here.”
A fresh look
McDonald’s in the UK is also modernising both its restaurants and its services: customers now have the option of placing an order on large interactive touchscreens, and a mobile order and pay app is currently being trialled in selected locations.
“Its move to digital, I think, is necessary”, Caddy said. “It’s relevant because other brands are doing it, and it can potentially boost revenue. Customers save time, your staff don’t have to spend time on the till, managing orders and processing payments, so I think there is quite a clear kind of benefit that McDonald’s can get from technology and innovation as well.”
Ultimately, the priority for McDonald’s in the UK appears to be giving customers more reasons to visit and more reasons to choose the brand over the multitude of other options that have opened up. While places like pubs and coffee shops were never McDonald’s competitors before, as they operated in entirely different markets, all are now competing for the same diners.
1948
The year the first McDonald’s restaurant was opened
$56m
The company’s annual gross income by 1960
$10.2bn
The company’s gross income in 2016
1.3%
McDonald’s drop in sales during Q4 2016
“This kind of category blurring is very significant and important in the UK, which makes analysing very difficult for us when we talk about specific markets, but it’s a very exciting time for consumers as well”, Caddy said. “And for operators like McDonald’s, Starbucks and pubs, it’s very exciting because for them, it’s like, ‘what [do] I do to grab some of that share?’ [or] ‘what can I do to be relevant to our consumers today?’ I think that makes eating out very exciting in the UK.”
Though the franchise is in a difficult situation back in the US, internationally McDonald’s has proven it is capable of modernising and adapting to the changing tastes and expectations of its customers. Alvarez said: “It does seem that the company is experimenting fervently to see what sticks… They want to still be relevant, and they want to still be significant, and as it stands they still are significant; their market share is just waning.” Alvarez added that, while no company stays on top forever, anyone who is considering McDonald’s to be out of the game doesn’t understand how much of a hold it has on the industry.
While McDonald’s may be facing challenges, the company has time and time again proved it is capable of changing to meet new customer expectations. With its international footprint, McDonald’s has the perfect laboratory to test out the ideas that will come to define its future. While not there yet, it still has the potential to transform into the modern and progressive burger restaurant it is determined to be.
