Commodity prices may soar if trade war erupts: Kevin Sneader, CEO, McKinsey

India may not be directly affected if a global trade war erupts but of greater impact on its economy may be second-order effects such as surge in commodity prices, McKinsey’s global CEO Kevin Sneader told Vinod Mahanta and Sachin Dave in Mumbai. In his first media interview after taking over at McKinsey on July 1, Sneader also spoke about the consultant’s entanglement in the South Africa corruption scandal related to the Gupta family. “We made mistakes that we should apologise for. The governance process didn’t work well enough. It’s a partnership failure,” he said. Edited excerpts:

What impact could a trade war have on the Indian economy?
We have to look at things in perspective. India’s steel exports are about 10% of the total output; it’s a serious number but not huge. I think the bigger impact may be on global prices for some of the commodities. What will happen to oil prices when it all plays through? It will be the second-order effects that will impact India and other countries, not the tariffs. And probably the biggest irony of all of this, I suspect, is that China will be the least impacted because it will diversify sources of import and find new markets. It won’t be the two main protagonists who will feel the hit. Perhaps that’s the reason we are seeing what we are seeing. I just hope that everybody sees that the value of total trade is important to preserve because you don’t know how the second-order effects will play out.
Should Indian CEOs start factoring in the possibility of a slowdown in their plans?
I think it’s a bit late if they are starting now. All CEOs have to plan for different economic environments.

We are in an unprecedented period of synchronous growth; the whole world is growing. IMF had a forecast of 3.5% growth in January, revised to 3.7% in April.

We were seeing that steady uptick but our surveys show that sentiment has started to flatten. It’s not bad, it’s just more cautious. I think everyone should be prepared for all eventualities. Because the other side of this, of course, is that if the unexpected happens — trade war clouds disappear — that will give a big boost to the global economy. You should be prepared for that too.

With elections in India next year, will global investors wait or will investments continue regardless? 
CEOs aren’t looking at India from that lens anymore. The $16-billion Walmart-Flipkart deal happened recently. Global investors now look at India on fundamentals, economic prospects, demographics and its place in the world. They understand that Indian politics are what they are.

How would you rate the government’s performance?
I am tempted to do so but I won’t go there (laughs). Given the growth prospects in the present global scenario, India at 7.5% has the highest GDP growth rate amongst major economies. And global CEOs I speak to feel that GST (goods and services tax) and demonetisation might have created minor, short-term, hiccups but overall there is a general sense of optimism. They expect more changes on the regulatory side but the underlying trends in India are very encouraging and that’s what makes India attractive. CEOs are looking at opportunities in India that weren’t there a few years ago.

McKinsey recently got embroiled in a corruption case in South Africa. How are you dealing with the reputational crisis?
I was in Johannesburg last week and I will be there next week. When our partnership makes mistakes, we have to very quickly own up and fix the underlying reasons. We made mistakes that we should apologise for. The governance process didn’t work well enough. It’s a partnership failure. The way in which we engaged with people who brought it to our attention was wrong. We should have been grateful to them and I am planning to do that next week. Thirdly, we have to look very hard in the way in which we became associated with the third parties that we became associated with. That can never happen again. There are learnings for us in this episode.

How realistic is the possibility of atrade war involving the US, China, European Union and Canada?
I think it’s worth putting this in context. If you take the US-China trade relationship, US exports to China are about $125 b while imports from China amounted to $500 billion. If we go by the first round of tariffs announced in mid-June, then business worth $100 b out of a $635 b trade relation was affected and that wasn’t much. That wasn’t a trade war but the real issue is the escalation after the June 18 announcement of tariffs on $200 billion of China’s exports and that changes the game.

That would mean tariffs on nearly half of China’s exports to the US and that’s a big issue. At the moment we aren’t in one but we definitely are on the brink of a trade war.

The second point is that it’s not just China, because we’ve got the whole Nafta negotiation that’s twice the size of US-China trade flow. Then we have got the auto industry tariffs, that’s another $200 billion. It’s clear all of that adds up to a very large number. In global trade, there will be winners and losers on every side. It’s a very complicated situation.

I’m not going to pretend to understand the fear of personalities and how they see their ability to win.

But what I do know is that it will not be good for the world. It will impede global trade and we have already seen global trade fall. It used to be over 50% of global GDP and that’s down to 34%. If it declines further, it won’t be good for the global economy.

How bruising will a global trade war be for the global economy? 
The week after announcements of the US position on tariffs, we saw $30 billion of value in equity markets wiped off. If we see the forward-looking impact more tariffs will have on trade, it clearly points to a significant impact on the global economy.

We know trade is a key determinant of many aspects of living standards. And if it starts to get serious and we start seeing real restrictions in the flow of goods and services, that will have a major effect. We’re already seeing what’s happening to the price of commodities with the prospect of tariffs coming on those and that will not be good for manufacturers and the global economy.

McKinsey is a market leader in high-value consulting but competition is catching up. After completing 25 years in India, are you happy with the market position, revenue growth and profitability of the India practice?
We are a good distance away from anyone who is close to us. We have a proposition that is unique, no one else can bring global capability and match that with local insights the way we can. We don’t have revenue targets. We are here to serve our clients; it’s a profession for us not a business.
What are the major shifts that consulting is undergoing?
First and foremost, the environment is changing. The demand for technology and the role that technology is playing has clearly increased, especially in the digital and analytics space. Second, there is a real demand for global expertise and local insights because of macro changes in environment. We also need more diversity in society and also in our firm, we need more women in the firm.

A bunch of mid-level consulting firms imploded or sold out to competitors. Will consolidation continue in consulting?
A fair bit of consolidation has occurred with some famous names now not in the picture. How far the consolidation will go, clients will determine. Clients demand a certain degree of expertise and that does require a minimum degree of scale and that in turn will put more pressure on smaller firms. There will be real shifts in the structure of the profession. It could well be Big Three of Big Four in the future.
Will big data, artificial intelligence and analytics disrupt the consulting model that’s traditionally been based on solving complex business problems using data and insights?
No question that technology can disrupt the basic analysis bit. What’s more important is we should be ready for that eventuality.

McKinsey has been investing and developing solutions, which are ways to solve problems using analytics that previously we sold through labour. I fully expect us to do our fair share of disrupting, and I’m excited about that. I don’t think it’s necessarily a bad thing that we can give our clients better answers because we’re making very good use of technology. At the end of the day, there’s still a human element that really matters.

Can China’s ambitious One Belt One Road project realistically reshape global trade?
One Belt One Road (OBOR) has been evolving. They have over time realised that they have got to be real economic benefits of some of the projects they got into. There were quite a few projects initially that were questionable in terms of value. As the Asian Infrastructure Investment Bank (AIIB) has got going, they have started to think about the way these projects would work. There is recognition that the economics has to be much better. Equally, some of the countries which were very welcoming of OBOR are now wanting to ensure there’s enough local content and not just the China export model.
But let’s be clear, the ambition is huge and if they deliver even half, it will change the political balance because there is a shortage of money for infrastructure. OBOR does provide money to meet some of those infrastructure needs in this and other parts of the world.

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