Deglobalisation is not just for countries

FORTY years ago, Theodore Levitt – then the most respected marketing thinker at Harvard Business School – wrote a pathbreaking article in the Harvard Business Review that contained the resounding phrase “the earth is round, but for most practical purposes it’s sensible to treat it as flat”.

As globalisation gathered pace, a growing number of companies followed his advice. Ford Motor launched an ambitious plan to build a one-size-fits-all car company under the slogan “Ford 2000”. The carmaker abolished a score of separate national units and replaced them with global product teams.

International Business Machines tried to turn itself into a “globally integrated enterprise”, defined by Sam Palmisano, the company’s chief executive officer from 2003 to 2011, as “a company that fashions its strategy, its management and its operations in pursuit of a new goal: the integration of production and value delivery worldwide”.

Management gurus and journalists coined phrases for the new companies: “transnationals” (Christopher Bartlett and Sumantra Ghoshal), “metanationals” (Yves Doz and Gary Hamel) and “multicultural multinationals” (John Micklethwait and Adrian Wooldridge). Whatever you called them, these new companies were strikingly different from old-line multinationals which had been more like federations of national companies than truly global enterprises.

Today, the wheel is turning once again, as multinational companies respond to global tensions by unpicking organisational structures that have served them for the last four decades.

Back to the future

It is a transition that carries more than a whiff of Back to the Future. Most multinationals started off as national companies that planted local offices as they expanded abroad. These local offices always had a habit of doing their own thing, given the difficulties of travel and communication. But the nationalist tensions of the 1920s and 1930s drove them further apart.

Multinationals increasingly dealt with the problems of high tariffs and stringent local content rules by making clones of themselves in all the countries where they operated, with their own head offices, design facilities, production plants and supply chains.

Alfred Sloan, the architect of General Motors (GM), recognised early on that what he termed “economic nationalism” meant that the company needed to rethink its habit of simply exporting American factories and know-how. GM purchased local car companies in both Britain (Vauxhall) and Germany (Opel), and increasingly used locally produced tires, glass and other components.

Coca-Cola advertised itself as a German company in Nazi Germany and was a major sponsor of the 1936 Olympic games. It even gave into pressure to manufacture its secret syrup in Hitler’s fatherland. This multi-local approach not only continued during the postwar years but also became a template for the organisation of multinationals.

The move to more global structures produced lots of savings and valuable synergies: National headquarters were folded into regional headquarters; duplicate products were rationalised; supply chains were simplified; expensive expats, who traditionally kept these national federations together, were “managed out”; and national plants were transformed from replicas of other local plants into global centres of excellence. Nestle put the headquarters of its global pasta business in Italy, for example.

The rationalisation often went too far, to be sure: The quest for the global car was frustrated by the enduring American preference for bigger cars, and dozens of companies were embarrassed by their lack of understanding of local languages and customs – 7 Up means “death through drinking” in the Shanghai dialect and Kona Coffee suffered in the Portuguese market because “cona” is a vulgar name for a vagina.

But most companies responded to these problems by trying to find a better balance between the global and the national – think global, act local – rather than abandoning the ideal of a truly global company.

Now come early signs that the age of the Globocorp is drawing to an end – and that the future will resemble the 1930s more than the 1990s. Multinationals are beginning to build internal walls. National headquarters are gaining more independence. And global-centered strategies are being downplayed or abandoned entirely.

The most striking change is in the treatment of China. Some companies are acting as if they are one company in China and another in the rest of the world, sometimes with tragicomic consequences.

HSBC, which once branded itself “the world’s local bank” and still likes to surround itself with lots of feel-good multicultural guff, now has two great power centres – in the United Kingdom and Hong Kong – and growing problems straddling the divide between China and the West. Ping An Insurance, an insurance giant and the bank’s biggest shareholder, is campaigning hard to split the bank into West and East.

Even Apple, one of the world’s most resolutely global companies, screens out certain apps from its app store in China to avoid offending the government.

Many more are trying to isolate their Chinese operations from the rest of the world. At its simplest, this means “local for local” production: Merck, a German pharma and chemical company, reserves most of the products it makes in China for the Chinese market.

Building walls

At its more sophisticated, this strategy means introducing “Chinese walls” – or silos – between your Chinese operations and the rest of the world. This ideally gives you the best of both worlds: You can continue to produce in China’s giant market, but you can also protect yourself from the accusation, or indeed the reality, that you are transferring critical Western technology to a potential military rival.

Rockwell Automation, a US software and automation giant, says that it does not use its Chinese facilities to develop software that is embedded in devices that control the operation of machines or industrial processes, and that it conducts all vulnerability testing in the US.

Salesforce, a business software provider, has given up on the idea of running its own data centres in China, and instead formed a partnership with Alibaba Cloud, China’s biggest cloud provider, in order to isolate its China business from its global operations.

Volkswagen is planning to keep technology that it is developing with Horizon Robotics – a Chinese automotive software and chip maker focused on autonomous vehicles – inside China. This is to avoid being caught in the crossfire between the US, which has limited the sale of advanced semiconductor technology to China, and Beijing, which has retaliated by banning firms from buying US chips.

Sequoia Capital Operations, one of the world’s leading venture capital companies, has gone one stage further than creating a silo and split itself into three regional units – the US, India and China – largely in an attempt to protect itself from a looming executive order from the Biden White House that could curtail US investments into foreign entities.

China aside, the growing fashion for tariffs and industrial policy, combined with a more hostile attitude to business, is encouraging companies to put down deeper national roots. “Local for local” is taking over from “think global, act local” as the business mantra of the moment.

Both Trane Technologies and Emerson Electric, two US manufacturing companies, talk about localising their leadership structures and limiting the number of expats running overseas businesses. British-based companies are jostling to establish good relations with the Labour opposition in anticipation of a Labour government.

The world of the 1980s-plus will not disappear. It is still far easier than it was before the age of the internet for a company to be born global, or for a tiny organisation to reach into the furthest corners of the world.

Consumer goods companies such as Unilever and Procter & Gamble are freer to treat the world as their market than, say, semiconductor companies. (Christians and Hindus might worship different gods, as Levitt liked to point out, but they still need to wash their hair.) But when it comes to managing multinationals, we are likely to see the 1980s and the 1930s jumbled together in some exotic and, indeed, mind-boggling ways. BLOOMBERG