Wednesday, September 30, 2015


World Trade Growth to Sink Below Three Percent for Fourth Straight Year, WTO Predicts

Thursday, October 01, 2015
Sandler, Travis & Rosenberg Trade Report
World Trade Organization economists have lowered their forecasts for world merchandise trade growth to 2.8 percent in 2015 (down from 3.3 percent in April) and 3.9 percent in 2016 (down from 4.0 percent). According to a WTO press release, these revisions reflect factors such as falling import demand in China, Brazil and other emerging economies; declining prices for oil and other primary commodities; and significant exchange rate fluctuations. In addition, volatility in financial markets, uncertainty over monetary policy in the United States and mixed recent economic data have clouded the outlook for trade in the second half of 2015 and beyond. The WTO notes that if these revised projections are realized, 2015 will mark the fourth consecutive year in which annual trade growth has fallen below three per cent and has roughly matched the growth rate of world GDP rather than doubling it as was the case in the 1990s and early 2000s.
Trade Growth in 2015. The WTO finds that so far this year trade growth has remained uneven across countries and regions. After a long period of stagnation, Europe recorded the fastest year-on-year export growth of any region in the second quarter at 2.7 percent, followed by North America at 2.1 percent, Asia at 0.6 percent, South and Central America at 0.4 percent and other regions (including Africa, the Commonwealth of Independent States and the Middle East) at -1.0 percent. Disparity between regional growth rates was stronger on the import side, with positive growth of 6.5 percent in North America, 3.1 percent in Asia and 1.6 percent in Europe along with declines of 2.3 percent in South and Central America and 3.1 percent in other regions.
Projections for Rest of 2015 and 2016. Looking ahead, the WTO expects exports from developed economies to rise 3.0 percent in 2015 and 3.9 percent in 2016. Developing economies’ exports are expected to grow more slowly at 2.4 percent in 2015 and 3.8 percent in 2016. Developed economy imports should increase at around the same rate in 2015 (3.1 percent) and 2016 (3.2 percent), while those of developing economies should jump from 2.5 percent in 2015 to 5.2 percent in 2016. However, the WTO cautions that a slower than expected rebound from recent declines in developing economies’ imports could lower global trade growth in 2015 by half a percentage point.
Asia Struggles due to Slowing Chinese Economy. The strongest downward revision to the previous export forecast for 2015 was applied to Asia, from 5.0 percent to 3.1 percent. The WTO states that this is mostly due to falling intra-regional trade as China’s economy has slowed. The downward revision to Asia on the import side was even stronger, from 5.1 percent to 2.6 percent, partly due to Chinese imports that were down 2.2 percent year-on-year in the second quarter. According to the WTO, the product composition of China’s merchandise imports suggests that some of this slowdown may be related to the country’s ongoing transition from investment to consumption-led growth. Large year-on-year drops in quantities of imported machinery (-9 percent) and metals (-10 percent for iron and steel, -6 percent for copper) were recorded in August while strong increases were recorded for agricultural products, including cereal grains (+130 percent) and oilseeds (+33 percent).
Challenges in Brazil Affecting South America. Imports for South and Central America are now expected to fall faster (-5.6 percent) than predicted in April (-0.5 percent). According to the WTO, much of this reduction can be attributed to adverse economic developments in Brazil, which has been simultaneously hit by a fiscal crisis, a financial scandal involving the country's largest company, and falling export prices. However, a rebound in South and Central America imports is expected in 2016 as Brazil's GDP growth stabilizes and its imports start to recover. Other countries in the region should also see imports accelerate as their economies improve in 2016.


With excess capacity, container lines going bankrupt makes more sense than M&A.  Why acquire unneeded assets, no matter how cheap?

Tuesday, September 29, 2015


How much of the labor shortage in logistics jobs really reflects low pay?  Would better pay cure the shortage?



Except for a handful of firms, do C-levels hold back their companies from the New Supply Chain that drives E-commerce Immediacy and Omnichannel success?


UK retailers across market segments do not seem to understand the New Supply that drives E-commerce.

Amazon begins selling groceries online in Birmingham

Amazon has begun selling groceries online in Birmingham as it gears up for a full launch of Amazon Fresh early next year.
Retail Week understands the online retailer will offer consumers in Birmingham one-hour delivery on about 50 key chilled food products from today as it seeks to test the network. And it is expected the trial will launch in London next month.
The development is believed to be an attempt by Amazon to test the supply chain ahead of a full roll-out of Amazon Fresh, the online grocery service it has already launched in the US.
Amazon Fresh is due for a full launch in the UK in February or March, a source close to the project told Retail Week.
An Amazon spokesman said: “Prime Now customers already benefit from ultra-fast delivery on everything from essentials like bottled water, coffee and nappies. We are excited to be adding a range of chilled and frozen items to this selection as we continue to expand the number and variety of products that can be ordered for delivery within 60 minutes.”
Amazon is leasing a warehouse from Logicor, a 257,855 sq ft site in Bardon, Leicestershire, which would be ideally located to distribute goods to Birmingham.
The warehouse, GT257, is part of Interlink Business Park in the heart of the Midlands Golden Triangle – one of the UK’s most popular distribution locations.
Sources familiar with the situation said that Amazon was “close” to agreeing a lease on another UK warehouse to support the launch of its Fresh proposition.

Food warehouses

Amazon has already taken on Logicor’s 304,751 sq ft Logic305 warehouse, which is similar in size to Ocado’s first warehouse in Hatfield, which measures 300,000 sq ft.
The building already has some food-handling facilities such as chiller cabinets, but Retail Week understands this has been kitted out by Clegg Food Projects, which creates processing and distribution facilities for the food and drink industry across the globe.
In the US, Amazon charges $99 (£63.56) for an annual Prime subscription, with an additional $200 (£128.40) per year billed to Amazon Fresh customers. It is currently only available to residents of Seattle, San Francisco, Los Angeles, New York City, San Diego and Philadelphia.
About 5% of US online shoppers say they belong to Amazon Fresh.

Monday, September 28, 2015


Many e-commerce/omnichannel articles talk warehouses or transport--and not the Supply Chain. Why? Is it now too complex? Are too many still stuck thinking the old supply chain and  "bricks" sales?


Brick and Click Omnichannel requires the New Supply Chain and Supply Chain Duality.



Ports should be focused on pending financial collapse of some container lines--not on size of ships.


Do mega ships mean mega miracles for container lines? Or do they accelerate rate disintegration as carriers push to fill these big vessels?

Hapag-Lloyd plans to raise $500m with IPO

CSAV and Kühne Maritime will double down on their investments in the German container line by each investing an additional $50 million.

   Hapag-Lloyd, the world’s fourth largest container shipping company, plans to raise the equivalent of $500 million through an initial public offering later this year.
   The German liner company, which plans to list its shares on the Frankfurt and Hamburg stock exchanges, said it will use the proceeds from the IPO for further investments in ships and containers as well as to “further strengthen its capital structure, long-term growth and profitability.”
   In an annex to the press release, the company also noted, "One of Hapag-Lloyd’s key strategies is to actively participate in the consolidation within the container liner shipping industry. Its operational structure is set up to efficiently pursue strategic acquisitions or further business combinations in a consolidation driven market environment."
   Citing figures from MDS Transmodal, Hapag-Lloyd said it had more than doubled its share of the container transport sector from 2 percent in 2000 to about 5 percent today, in part through its acquisition of the container business of CSAV last December and CP Ships in 2005.
   Hapag-Lloyd noted it will actually raise the funds in euros, but that it expects they will be equivalent to U.S. $500 million.
   Of the $500 million, $400 million will stem from the sale of newly issued shares to institutional and retail investors.
   In addition, two of Hapag-Lloyd’s largest shareholders, Chile’s Compañía Sud Americana de Vapores (CSAV) and Kühne Maritime, have placed what Hapag-Lloyd termed “cornerstone orders” to each acquire an additional $50 million in stock. CSAV owns 34.01 percent of Hapag-Lloyd, while Kühne Maritime owns 20.75 percent. An investment company owned by the city of Hamburg, where Hapag-Lloyd is headquartered, HGV Hamburger Gesellschaft für Vermögens- und Beteiligungsmanagement mbH, owns a 23.23 percent share and has said it will not sell shares.
   (A chart showing the current ownership of Hapag-Lloyd can be found on its website.)
   Hapag-Lloyd noted that a consortium company owned by CSAV, Kühne Maritime, HGV, owners of 78 percent of its stock, have agreed by way of a shareholders’ agreement to hold a stake of at least 51 percent for 10 years, not to sell any shares in the IPO and to pool voting rights on all decisions relating to the company’s business, “as they are supporting Hapag-Lloyd long-term.”
   The IPO "will also comprise additional shares from TUI and a market standard greenshoe," an overallotment option given to underwriters, said Hapag-Lloyd. The tourism company TUI was once the parent company of Hapag-Lloyd and today owns 13.88 percent of its stock.
   Last month TUI said, "We continue to account for Hapag-Lloyd AG as a business held for sale. With the IPO of the 'new' Hapag-Lloyd AG, agreed in the frame work of their merger with CSAV, and our right to sell our remaining stake via a trade sale, we have kept all our options to completely exit container shipping open."
   “The IPO is an important milestone in the history of Hapag-Lloyd”, said Rolf Habben Jansen, chief executive officer of Hapag-Lloyd. “This move will give us better access to the capital markets which will enable us to further invest in our business to become more competitive, which will be good for our customers, our people and our shareholders. We are especially pleased about the investment of our core shareholders which underlines once more their confidence in the future of Hapag-Lloyd.”
   Hapag-Lloyd has a fleet consisting of 188 container ships with a total capacity of approximately 1 million TEU, according to figures on its website. (Alphaliner, on its Top 100 list of container carriers, lists the Hapag-Lloyd fleet as consisting of 171 ships — 69 owned and 102 chartered — with 919,759 TEU capacity and five ships on order. Hapag-Lloyd said those five 10,500 TEU ships are expected to be delivered between October 2016 and May 2017.)
   By market share, Hapag-Lloyd is “among the leaders on the Atlantic and Latin American trades with a recognized presence on the Far-East and Transpacific trades," the company said. "Membership in the G6 Alliance, the second largest alliance globally by transport capacity, gives Hapag-Lloyd the necessary scale benefits in a fragmented global shipping market.”
   In the press release announcing the IPO, Hapag-Lloyd said “global container volume is expected to grow by a compound annual growth rate of 5.5% between 2014 and 2016. The fundamentals around supply and demand are expected to improve in the coming years, which would provide cyclical upside to the industry.”
   Hapag-Lloyd's own volumes in the first half of this year amounted to 3.7 million TEUs, up 29.4 percent compared with the same period in 2014. About 56 percent of its transport volume in the first half of 2015 was in East-West trades and 44 percent in North-South trades.
   The company also increased revenues by 1.5 billion euro to 4.7 billion euro during the same timeframe, thanks primarily to its merger with and integration of the CSAV container business.
   “Complementary trades, economies of scale and cost reduction with a larger fleet and reduction of procurement costs make Hapag-Lloyd and CSAV a highly strategic fit,” said Hapag-Lloyd, adding that it “targets annual net synergies of around $400 million fully realized by 2017. This is $100 million higher than originally targeted.”
   It added that last year the company launched a profit improvement project dubbed “OCTAVE,” that “targets annual cost savings of approximately $200 million from 2016 onwards and is currently well on track, already delivering tangible results in the first half of 2015.”
   “We have good momentum, our results have improved, and we have made up ground versus our competition,” said Habben Jansen.


What does retailers cutting back on inventories do to container lines and the peak season?  Do it mean increased rate collapse and financial losses?

Retailers Scale Back After Big Inventory Buildups

Large retailers are still working through inventories built up in the first half of the year, which economists say could limit shipping ahead of the holidays.

Containers are seen stacked up at the ports of Los Angeles and Long Beach. ENLARGE
Containers are seen stacked up at the ports of Los Angeles and Long Beach. Photo: Reuters
Some major retailers say they still are trying to pare down inventories from big buildups earlier this year, potentially dampening prospects for a surge in shipping heading into the holiday season.
Inventories swelled in the second quarter as West Coast ports cleared backlogs of imports and exports that had pile dup during a labor dispute. Economists say the inventory expansion helped fuel strong growth in the spring. But a pullback by retailers and manufacturers may slow output through the rest of 2015.
The latest Global Port Tracker report by the National Retail Federation and Hackett Associates LLC projects only modest growth in container imports at U.S. gateways this fall. Freight rates for shipping from Asia, where the largest share of imported goods originate, have been at multi-year lows this year, reflecting the muted expectations and an oversupply of shipping capacity.

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Nike Inc. NKE -3.13 % said its inventories were up 10% year-over-year at the end of August, in part because of the rapid influx of goods as backlogs were cleared at West Coast ports.
“While the flow of product from the port has now returned to normal, we’re working to efficiently clear excess inventory to keep our in-line channel healthy,” said Trevor Edwards, president of Nike Brand.
Pier 1 Imports said it has scaled back inventories that had expanded about 20% year-over-year earlier this year, largely because of what the retailer said were problems managing its supply chain, but that it still is working down stocks and restraining its purchasing.
“We will continue to feel the effects of our elevated inventory levels the remainder of this year,” Chief Executive Alex Smith said on an earnings call. “This is particularly frustrating and we are disappointed about the impact it’s having on our margins and profitability.”


Inventory Finance – Not for the Faint of Heart

I recently spoke to a 35 year veteran of the inventory finance space to discuss any new initiatives here.  According to this veteran, there are not many standalone inventory lenders doing deals between $500k to $5M that are bankable.  Most of the banks do not touch this stuff.  These are the kinds of deals where you have a company that does $10M in revenue across 7 retail stores and the banks won’t give them financing.  Their inventory is hard to value and they continue to lose money as they build brand.
There are firms that will help companies borrow against inventory.  In the boutique retailer’s case above, if they have $3M in inventory, they can get an inventory loan for 50% of that or $1.5M.  So they sell the inventory and our lender gets paid back.  Sounds easy right?
  • Well first, you need to get that inventory appraised.  How do we know its worth $3 million.  So there is an industry of appraisors that provide this service before any funding takes place.
  • How do you track that inventory has been sold?  Again, you need to have the right combination of freight forwarders and other logistic partners to monitor inventory movement.    You may have people in the warehouse that tell you when inventory goes out, track the terms of sale, who bought it, etc.
  • If your inventory finance client sells to Sears or Walgreens or whomever, you also need to track the payment.  Many times the payment will be factored, so you need to collect back the money from the factoring company.  How do you ensure the factor with an invoice of $200K that you get your share?  The factor will advance to this client for the receivable, so out of the $200K invoice to Walgreens, the factor advances 160K to the client but gives 80K to the inventory lender assuming inventory finance is 50% of cost on $200K of inventory.  This is another added complication.  You need to have an intercreditor agreement with that factoring company.
What happens if Sears or Walgreens becomes a bad credit, the inventory finance company has to be careful, because you get the dark hole problem.
This is a real specialized area – it’s not for the OnDecks, LendingClubs, or MarketInvoices of the world.  As you can see, it is not for the faint of heart.  It’s all very specialized, labor intensive and hard to have technology be a game changer.


Shifting tides: Global economic scenarios for 2015–25

Are we in for a bumpy ride? How bumpy? And for how long?

September 2015 | byLuis Enriquez, Sven Smit, and Jonathan Ablett
At the National People’s Congress in Beijing in March 2015, China’s Premier Li Keqiang announced a growth target of 7 percent, acknowledging that “deep-seated problems in the country’s economy are becoming more obvious.”1 Three months later and thousands of miles away in Washington, the World Bank lowered its growth forecasts across the board and asked the US Federal Reserve Bank to delay any contemplated rate hikes. The World Bank’s chief economist said that it had “just switched on the seat belt sign. We are advising nations, especially emerging economies, to fasten their seat belts.”2 So it’s going to be a bumpy ride? How bumpy? And for how long?
Day-to-day developments in the world economy have become increasingly complex and global in their implications. Economic shocks, from Greece to China to Russia, are now of greater concern because around the world, traditional policy tools have already been used and financial resources depleted to help economies recover from the last downturn. Strategic decisions have become correspondingly more consequential. Shocks are inevitable, but strategists must find ways to extract the signals from the noise to understand what’s over the horizon.
Three interlinked factors have the potential to shift the global economy from one long-term outcome to another: aggregate demand, structural challenges, and diverging growth patterns. First, in the near term, the major economies continue to struggle to achieve self-sustaining growth in aggregate demand. This continues despite years of monetary and fiscal stimulus, as well as the recent drop in oil prices. Second, the world’s major economies face long-term structural challenges, including rising debt loads, aging populations, and inadequate or aging infrastructure. Success or failure in resolving these structural challenges will determine the speed of long-term growth in these economies. Third, the world’s major economies have increasingly diverged in the last few years. In the past, global integration has driven convergence. The prospects for further integration have become less certain. The global financial shock was followed by years of weak growth and concerns over rising inequality. The path to renewed and stronger growth remains elusive.
Given the consequences of these interlinked factors, it is small wonder that near-term developments have taken on oversized importance. Our approach has been to work backward from a series of long-term outcomes, determined by the degree to which the structural challenges have been met and global growth has become more or less divergent. We are then able to move forward, articulating the scenarios likely to emerge in the path ahead from near-term developments (see sidebar, “The McKinsey Global Growth Model: Methodology”).

Near-term signals and long-term forces

The world’s major economies, emerging and mature alike, have been experiencing clearly divergent growth paths in the first half of 2015, in some cases due to unexpected challenges (Exhibit 1). The US economy contracted in the first quarter; growth returned to the eurozone, even as a crisis loomed in Greece. Chinese policy makers continued to steer cautiously between the risks of a slowdown and those of rising debt levels. In India, growth accelerated in anticipation of reforms, while lower oil prices and economic sanctions contributed to a contraction in the Russian economy.

Exhibit 1

These developments may signal the return of country-level business cycles, suppressed in the depths of the global economic downturn. Yet they may also be its lingering effects, suggesting that deeper forces are at work.
We believe that three sets of forces will shape the global economy over the coming decade. The first two are stimulus policies and shifting energy markets. These are near-term forces, whose effects are felt on a daily basis. The next two forces, urbanization and aging, are powerful, inexorable trends aggravating ongoing structural challenges. Finally, two forces are of uncertain and variable magnitude: technological innovation and global connectivity. All of these trends could intermittently disrupt and transform sectors.
Near-term factors
Stimulating aggregate demand. Of immediate concern is the persistent problem of weak aggregate demand relative to overall economic capacity. The International Monetary Fund estimates that production in the ten largest advanced economies was 2 percent below potential in 2014. This gap was smaller than it had been in 2009 (3.3 percent) but significantly worse than the surplus of 0.8 percent that prevailed in the early 2000s.3 All major economies except China experienced significantly weaker demand in the aftermath of the global financial crisis. Many governments and central banks responded with fiscal and monetary stimulus programs that fostered the low real-interest-rate environments which have endured for over five years. The McKinsey Global Institute reviewed the recent performance of advanced economies and found that they had all increased rather than reduced their overall debt levels—in some cases, by more than 50 percent.4
Complicating the picture is the question of whether real interest rates will remain low (Exhibit 2). Persistently low interest rates encourage investors to search for yield and safety, creating the preconditions for asset bubbles and further volatility in international financial flows.

Exhibit 2

Economists are concerned that unconventional monetary policies have distorted rather than bolstered the demand picture. In the United States, for example, the Federal Reserve signaled for months that it would raise rates by the end of 2015, heralding a return to a more conventional, interest rate–driven monetary policy. In the interim, however, results were tepid and now a rate hike may be further delayed. The challenges faced by the Federal Reserve in timing rate increases will be encountered in the eurozone and Japan in due time. Demand in major markets remains weak enough, furthermore, that a misstep in any one of them will be felt by the others.
Energy-market transformations. Oil prices fell by 50 percent in the latter half of 2014. Even after a slight rebound, they remained well below average levels of the past five years. For energy consumers, the lower energy prices have provided a welcome respite; for producers, they challenge fiscal stability. The breakeven oil price—the price at which a fiscal surplus turns into a deficit—is estimated at $57 for Kuwait and $119 for Algeria.5 Countries have so far managed the crunch by drawing down reserves and through exchange-rate movements, but these are short-term actions and direct fiscal adjustment lies on the horizon. Elsewhere, the fall in oil prices is slowing further investment in energy sectors, notably unconventional oil and gas.
Global energy intensity has fallen over the past several decades, so oil-price shocks are felt differently in different parts of the globe. The energy productivity of the ten largest advanced economies today is 74 percent of what it was in 1980.6 Beyond the advanced economies, however, the picture changes. Thanks to the increasing size of the emerging economies, world energy productivity was able to rise by 33 percent between 1980 and 2002 (remaining relatively flat thereafter).
In assessing the ultimate impact of recent energy-market shifts, strategists are seeking to discover what will happen not in the next year but in the next decade. Only on two other occasions during the past 30 years, in 1985 and 2008, did the oil price fall as steeply as it did in 2014. The recoveries from these two events were very different affairs and are instructive for today. In 1985, excess production capacity led to stable prices for nearly a decade after the initial price decline. The 2008 decline in prices was part of the financial crisis; prices dropped precipitously and then quickly rebounded as demand recovered, especially in emerging markets (Exhibit 3).

Exhibit 3

Persistent demand weakness and falling oil prices are the stuff of daily headlines, but associated effects could drive alternative economic outcomes for the next decade. The complication is that deeper forces are at work.
Inexorable factors
Unlike the variegated impact of demand stimuli and energy-market shifts, the effects of urbanization and aging are predictable and are tilting the global economy in one general direction: toward emerging markets. Increasing urban congestion and an aging labor force impose burdens—among them, lower productivity, falling demand, and rising health and pension loads—on all economies. The challenges are clear. The uncertainty lies in how economies will adapt to them.
Rapid urbanization. From Brazil to China, emerging economies are urbanizing with unprecedented rapidity. Rural populations are responding to rising industrial opportunities and burgeoning growth, and the economic weight of cities in the world economy continues to rise. McKinsey research indicates that 46 of the world’s 200 largest cities will be in China by 2025, a sign too of the eastward migration of the global economy’s center of gravity.7 In recognition of the urbanization challenge China faces, the Chinese government is moving with astonishing speed to meet its climate goals, because the pollution produced by outmoded power generation and manufacturing is starting to interfere with the quality of life in urban areas. India is facing similar and intensifying urban challenges but has not yet moved with China’s determination.
Demographic pressures. The labor force, on which economic activity depends, is both aging and shrinking. It is expected to contract by 11 percent in China by 2050, even as the country’s economy expands. The shrinkage in continental Europe is expected to be even more dramatic. As life spans are growing and birthrates falling, furthermore, an aging working population in advanced and emerging economies will be supporting ever-higher numbers of retirees. Among the major economies, only the United States has a demographic profile favorable to long-term economic growth. For the rest of the leading economies, expected productivity improvements will not bridge the gap. Without a fundamental economic and cultural shift, favoring continued participation of older workers and the introduction of more women workers and immigrant labor, many economies would face serious growth constraints within ten years (Exhibit 4).

Exhibit 4

Uncertain factors
The direction and potential impact of the final factors in our review are less certain than the effects of urbanization and aging. In one sense, technological innovation and global connectivity are already familiar phenomena. As the science-fiction author William Gibson remarked 15 years ago, “The future is already here—it’s just not very evenly distributed yet.”8 Technological disruption has become a pervasive feature of the modern global economy, but its extent is uncertain. Especially important is the question of how much innovation will come from China, India, and other emerging economies. The opening of markets has accelerated the growth of global supply chains and productivity, but will this growth continue?
Technological innovation. Technological innovation has reached a level in the major economies where significant structural changes are in process or have already occurred. Digitization has transformed the telecommunications, media, financial-services, and retail sectors. Consumers are using mobile devices to connect to an ever-widening range of goods and services, while businesses embed such devices more deeply in functional processes and industrial activity. High-tech innovations in robotics and 3-D printing could enable mature and emerging economies alike to boost labor productivity and rapidly expand industrial horizons, while also shifting global trade patterns.
The deep innovation and structural shifts at the industry level have also given rise to concerns about market power and privacy. The theft of credit-card numbers, industrial espionage, and breaches in personal data all raise new questions about the security of information. Major technology companies face rising antitrust scrutiny. Assuredly, innovation will continue, but to what extent will it occur more globally, and how rapidly will it spread across borders?
Global connectivity. The constituents of the global economy in 2015 are more deeply interconnected than ever before. Trading relationships are increasingly dense and complex, and they have rebounded rapidly since the global downturn. Today, China is a peerless world-trade hub and Latin American, Indian, and Middle Eastern trade has risen in world-economic weight. Among other factors, the recapitalization of banks, regulatory change, and monetary stimulus have exercised countervailing effects on financial flows, which remain well below pre-crisis levels (Exhibit 5). Concerns about the transmission and impact of financial shocks remain high on the global regulatory agenda.

Exhibit 5

More than 20 years have passed since the conclusion of the last round of multilateral trade negotiations in 1994. More economies have been opened since then, and the scope of trade agreements has widened. The focus in developed economies has shifted toward the opening of investment opportunities and easing of restrictions on services; in emerging markets, agricultural subsidies have been a priority. These areas have proved especially intractable in a multilateral context, but regional and bilateral trade agreements of widening scope have nonetheless proliferated since 1994.
As the last two decades have demonstrated, increasing international trade flows can reshape national growth trajectories. A rising caution pervades public debate about deepening economic linkages among countries, however. The principal concerns go beyond the potential impact on growth, even within specific sectors. The reservations are more focused on the wider question of whether nations can agree on global rules that are appropriate and supportive for an evolving economy.

The four scenarios

Our scenarios for 2015 to 2025 have been shaped by the three tightly linked sets of factors outlined above—near term, inexorable, and uncertain. The interaction of these factors will govern a number of crucial outcomes. Is weak growth in advanced economies going to undermine the will to open more politically sensitive markets and sectors? To what extent will inadequate infrastructure or restrictive markets stall growth in emerging countries? How will falling commodity prices complicate efforts to diversify commodity-driven economies? The longer-term factors discussed above—urbanization, aging, technological innovation, and global connectivity—anchor our four scenarios. The near-term factors—monetary stimulus and energy prices—inform the path to the longer-term outcomes. These dynamics have been framed by the intersection of two axes (Exhibit 6).

Exhibit 6

The vertical axis measures the acceleration or deceleration of growth and thus how well (or poorly) economies have tackled their long-term structural challenges. Successful economies drive up productivity and overall growth. The horizontal axis measures the extent to which global growth is convergent. This is determined by a combination of near- and longer-term factors. Countries can converge toward higher (or lower) growth rates, for example, according to how successful they have been in implementing and then unwinding their monetary and fiscal stimulus. In the long term, increasing convergence is also determined by the global evolution of economic rules of the road, covering the extent of economic activity, including goods and services, migration, investment, and intellectual-property rights.
A convergent world would not be impervious to shocks, but it would be better able to absorb them. Higher global systemic resilience means that individual economies can recover more quickly. Divergent outcomes, on the other hand, result when the policies of individual countries are at odds, creating internal systemic imbalances that can magnify the effects of a shock in a particular country. Divergence can also slow the movement of shocks across borders—a movement that, unfortunately, is common in an internationally linked world.
A final consideration is the historical pace of global growth, which provides context for the scenarios. This indicator has been remarkably stable since the mid-1980s. The rolling ten-year average real growth rates hovered between 3.4 and 2.7 percent (Exhibit 7). Exhibits 8 and 9 illustrate how the intersection of the growth and divergence axes over the next decade defines the four scenarios. “Global synchronicity” (scenario 1) describes a world where most major economies tackle their structural challenges, and are able exit from aggregate demand stimulus smoothly. “Rolling regional crises” (scenario 4) describes the opposite outcome. With structural challenges remaining largely unaddressed, the world economy becomes more vulnerable to regional crises and grows increasingly insular. Two other scenarios capture the cases in which growth accelerates but the major economies diverge (scenario 2, “Pockets of growth”), and where the major economies converge to lower growth rates (scenario 3, “Global deceleration”). In Exhibit 8, the four scenarios are illustrated, with a growth breakdown for major economies and for energy- and commodity-driven sector growth. Exhibit 9 presents the scenarios at a glance; more detailed descriptions of each scenario follow.

Exhibit 7

Exhibit 8

Exhibit 9

Scenario 1. Global synchronicity: Convergence and rapid growth
In this scenario, the global economy experiences the most robust long-term growth it has seen in more than three decades, reaching 3.7 percent per year through 2025. The United States, the eurozone, and Japan are able to make the transition to more sustainable growth while exiting from their monetary stimuli with minimal disruption. Likewise, policy makers in China implement incremental changes and guide economic growth smoothly and gradually downward to a sustainable level. India emerges as the fastest-growing economy over this period as it rides a wave of reform, investment, and robust demographics. By 2025, the global economy will have grown to $90 trillion in constant 2015 dollars, from $62 trillion in 2015.
As global growth gathers momentum, liquidity from unconventional monetary policies is gradually absorbed or withdrawn in the United States, eurozone, and Japan. Proliferating trade agreements lead to the lowering of barriers in critical service industries and to revivals of cross-border activity and technology transfer. The rapid diffusion of innovation, bolstered by broader global trade arrangements, boosts the share of exports in GDP for the G-20 from 25 percent today to 29 percent by 2025, or roughly at the growth rate of the early 2000s.
Financial-sector reforms in emerging economies foster more market-driven and robust capital markets. Global interest rates return to the “old normal” levels of the pre-crisis years. Energy and commodity prices are buoyed as productivity-induced supply gains cannot keep pace with emerging-market demand. As might be expected in such an environment, employment growth rebounds and most countries see unemployment rates fall and participation rise. India, China, and commodity-driven economies account for 80 percent of employment growth. Elsewhere, policy changes in advanced economies encourage aging workers to stay in the workforce longer, while making it easier for women and part-time workers to stay employed.
Scenario 2. Pockets of growth: Divergence with rapid growth
In this second high-growth scenario, the growth picture becomes more uneven, as countries tackle structural challenges in fits and starts. Global growth reaches 3.2 percent a year over the course of the decade, a relatively high historical level, and by 2025 the global economy reaches $88 trillion in 2015 dollars.
The United States, China, and India achieve satisfactory and even sporadically robust growth, while the eurozone and Japan struggle. The unevenness of the expansion makes agreements harder to reach on international protections for investors, intellectual property, and agricultural subsidies. As a result, trade growth starts to slow and remains effectively flat relative to GDP at 25 percent.
Some countries find it difficult to exit from unconventional monetary policies, which continue to distort credit channels and capital flows. The search of investors for higher or more stable yields quickens, adding to volatility. Oil prices gradually revive on higher demand, and producers of other commodities encounter more frequent supply constraints.
Scenario 3. Global deceleration: Convergence with slower growth
This lower-growth scenario is defined by global convergence to a slower path. Global growth manages to reach 2.9 percent over the course of the decade, slightly below average for the past three decades. The expansion is especially reliant on positive outcomes in emerging markets. By the end of the decade, the global economy reaches $86 trillion in 2015 dollars.
Structural challenges remain largely unaddressed but are offset in the near term by partly successful efforts to revive demand. China avoids the worst effects of a “hard landing,” but confidence in the financial and fiscal system is shaken, further weighing on growth. China still accounts for nearly 23 percent of global GDP by 2025, however. In the advanced economies, fiscal and monetary buffers to address structural reforms are exhausted.
Near-term demand revives globally, creating an opportunity for Europe and the United States to make progress on financial services, privacy, and M&A activity, which becomes a benchmark for global emulation. Trade is a more important driver of growth in this scenario than in the previous one. The lower growth curve is a constraint, but trade still accounts for 27 percent of the global economy. Demand for energy (including oil) revives, but the availability of additional supply keeps prices from recovering more quickly.
Scenario 4. Rolling regional crises: Divergence and low growth
This scenario is the negative image of the global-synchronicity scenario. Growth stalls and the world economy is $11.4 trillion smaller than it would be in that scenario. “Rolling regional crises” describes a world where structural reforms broadly stall, and aggregate demand, especially in advanced economies, does not return in a sustainable way. Deleveraging remains a drag on household balance sheets, and corporate-debt levels continue to rise.
Increasingly, countries rely on conventional and unconventional forms of fiscal and monetary stimulus. Real interest rates remain in negative territory, but the growth outlook fails to encourage renewed investment growth. Incremental fixed investment in the G-20 countries totals little more than half the level in the global-synchronicity scenario.
With not enough economic incentive, companies fail to invest in R&D and technological innovation remains confined to a few regions. The diffusion of technology also slows down as economies increasingly turn inward. Implicit and explicit restrictions on international M&A activity proliferate, as do regulations inhibiting the expansion of trade and technology. As a result, the share of exports in GDP for G-20 nations rises more slowly, from 31 percent today to 34 percent by 2025. Similarly, employment growth slows and the G-20 nations add 60 million fewer jobs than they would in the global-synchronicity scenario. In a repeat of the 1980s, global oil supplies remain abundant and energy prices stay flat in real terms.
In this scenario, the world economy remains much more vulnerable to economic shocks, particularly from financial flows. Low interest rates, combined with expanded financial liquidity, create the conditions for volatile flows seeking yields in response to the slightest hint of a change in the growth outlook.
Our global economic scenarios suggest that the major economies face significant structural challenges. To revive growth, these countries must tackle the challenges while navigating constant reverberations from an interconnected world economy. Urbanization and aging are tilting growth toward emerging markets; other trends are complicating the picture. For strategists, the course of trade and information flows is of crucial importance, as the direction and forces behind the flows determine how industries will be affected. Rising south-to-south trade in goods creates a very different set of opportunities than does increased services-driven trade or increased investment based on production location.
Volatility and shocks are an ever-present feature of the world economy. To take an example: in 2013, the Federal Reserve suggested that it might slow its bond purchases later that year. Soon yields on US bonds rose dramatically and capital flows to emerging markets reversed, as investors now sought higher and safer yields in the United States (and other developed markets). The World Bank later estimated that the loss in capital flows to emerging markets from this one event amounted to hundreds of billions of dollars in GDP. In many parts of the world, the policy tools and financial reserves needed to absorb such shocks have been expended in dealing with previous events. Understanding susceptibility and resilience to shocks, from a national and global perspective, will allow strategists to make better decisions about market entry, new investment, or market exit.
We hope that companies will find the scenarios laid out in this paper helpful in strategy planning. They have been designed as baselines against which different corporate strategies can be tested, to reveal how industry-specific dynamics may evolve in response to macroeconomic shifts. We believe that most companies will find that regular pressure testing of their strategies in response to both macroeconomic and industry shifts helps sustain growth in the face of challenging conditions.

Saturday, September 26, 2015


Many retailers refuse to recognize the New Supply Chain. The real supply chain challenges that the New Supply Chain addresses are not what are mentioned here.  


Retailers wrestle with consumers’ desires to shop anywhere and anytime

80% of retailers are unprepared for the supply chain changes required to meet customers’ demands to shop any way they want, a study finds.
Retailers have rolled out the “shop anywhere, anytime” strategies that customers want, but they are grappling with how to handle the resulting inventory and financial challenges, a survey shows.
Though retailers say they are working to improve fulfillment capabilities, 80% of those surveyed say their top challenges are inventory visibility and accurate assortment planning between e-commerce and their stores, according to a study by retail consulting firm HRC Advisory. The challenges stem from such shopping options as letting shoppers see real-time inventory, order online and pick up in store, and order in-store and get the product delivered to a customer’s home.
Retailers with e-commerce and store operations find it difficult to compete with online-only retailers in dealing with the challenges, HRC Advisory says. The survey comprises interviews with 20 supply chain executives at retailers throughout North America. The retailers sell food, electronics, accessories, apparel, and health and beauty supplies online and in stores.
“Competing with pure-play e-commerce retailers and accommodating the multitude of new fulfillment options requires a significant increase in supply chain flexibility and better integration between the physical store and e-commerce network,” says HRC Advisory President Farla Efros.
The survey reveals these top challenges:
  • Online returns are expensive: 95% of retailers say their biggest issue in transforming the supply chain is dealing with online returns, which are high (7%-30%) and can be costly. 85% of retailers note the high cost of online returns to a store, particularly when the item is not in stock in that store. And when returning to a fulfillment center or supplier, retailers incur incremental freight costs, the possibility of shipping-related product damage and a lost opportunity for a replacement sale in-store.                    
  • Systems and infrastructure are outdated: 100% of retailers surveyed say fully integrating inventory and fulfillment between the online and store channels would achieve the most effective customer outcome and the lowest margin risk. But more than half (52%) admit they do not have systems  to show sales staff and customers inventory on hand in each store. Further, retailers lack the processes to compete with their e-commerce-only counterparts, as only 35% had such online capabilities as vendor drop ship, or order in-store and deliver to the customer. However, 60% of retailers say they plan to invest further in their e-commerce-related systems.
Brendan Witcher, principal analyst for e-business and channel strategy at Forrester, says it’s not all retailers’ fault.
Retailers have had to scramble to provide shopping options because that’s what customers demand, so they started at the front end and are working to improve the back end, he says.
“In the past, you had inventory teams ordering products for the store channel and then the online channel separately,” he says. “Today, customers are saying, ‘I’m going to buy online and pick up in store; or buy in store and have it shipped to my home.’ It has completely turned inventory models on their ear."

Friday, September 25, 2015


Some container lines look like the USS Indianapolis and the sharks are circling. 



The New Supply Chain drives E-commerce and Omnichannel Customer Experience is Innovative. Too many companies ignore it and lose out.


How far have shippers and Logistics Service Providers gone past the break-even point in rates and service?  Are we at a negative service point?



Cheap fuel cannot cancel out the free fall in rates for container lines.   

Asia-Europe shipping rates still falling as carriers gloomily eye Golden Week holiday

By Gavin van Marle
09.25.2015 · Posted in Loadstar posts, Sea FavoriteLoadingAdd to favorites
Major deepsea container shipping rates tanked again this week, according to the latest Shangahi Containerised Freight Index, with declines on the trunk Shanghai-Europe trades becoming steeper than ever.
The SCFI rate to North Europe dropped by 31%, losing $143 per teu to finish the week at $313 per teu, while the rate to Med also finished at $313 per teu (surely one the first times that the southern gateways are commanding a similar freight rate to Europe’s northern ports), losing 30%, or $135 per teu.
The depth of the rate loss will be a major concern for shipping executives preparing for China’s seven-day public holiday, otherwise known as Golden Week, which begins on 1 October, and sees factories across the country close down – under normal circumstances rates levels should be at their strongest.
It would also appear that the rate restoration programme announced by some carriers for implementation on 20 September – according a customer advisory earlier this month OOCL announced a $550 per teu increase – was either abandoned altogether or completely failed to stick.
On Tuesday, Hapag-Lloyd said it would seek a $950 per teu general rate increase on all westbound shipments to North Europe and Mediterranean ports to be applied on 19 October.
The attempts to force rates up to more sustainable levels will be accompanied by a series of blanked sailings announced by carriers over the past week. The Maersk-MSC 2M partnership has cancelled next week’s AE6 sailing, the AE1 sailing in week 41 due to depart Shanghai on 7 October and the AE5 and AE2 sailings in week 42, departing Shanghai on the 12 and 13 October respectively.
Similarly, the O3 Alliance has cancelled the FAL23 and FAL12 in week 41 and the FAL8 the following week, while the G6 Alliance has cancelled its Loop 6 next week, Loop 7 the week after, Loop 4 in week 42 and Loop 5 in week 43.
The transpacific and Asia-US east coast trades also fell this week, although with nothing like the extremes seen in Europe. The Shanghai-US west coast leg dropped 6.4% to finish at $1,291 per feu while the Shanghai-US east coast route dropped 4.5% to $2,318 per feu.
Ultimately, carriers will have to pull more capacity from the market, liner shipping analyst Alphaliner observed earlier this week, which argued that a series of events earlier this year – particularly the US west coast port congestion subsequent diversion of cargo to the east coast – had kept the global shipping fleet artificially employed.
“The unravelling of some of these factors, as well as the carrier’s recent attempts to tackle overcapacity in the container transport market by means of service rationalisations, have resulted in the past weeks’ sharp increase of the idle fleet. Continuing this trend, more vessel capacity expected to become idle in the coming months,” it said.

Thursday, September 24, 2015


Amazon sees opportunity in 'new normal'

Updated: 2015-09-24 07:28

By Meng Jing(China Daily)

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Amazon sees opportunity in 'new normal'
Doug Gurr, Amazon China president. [Photo provided to China Daily]
While some lament China's economy entering a "new normal" era of slower growth, the head of Amazon China says the cooling growth rate actually fits perfectly with the online retailer's agenda."We see a lot of opportunities in e-commerce-cross-border e-commerce in particular, as the Chinese economy moves from low-cost manufacturing to creating brands," Amazon China President Doug Gurr said.
In mid-August, when the Chinese arm celebrated its 11th anniversary, Gurr introduced a concept called Cross-Border 2.0, which he used to describe the updated cross-border online shopping services Amazon China can offer for faster delivery.
The upgrades also include a series of initiatives to help China-based sellers export globally through Amazon Global Selling. Sales more than doubled in the first half of 2015 compared with the same period last year.
Gurr said Amazon will choose some of the most popular items online and import them directly to China.
"So when Chinese customers place orders online, they will not only get authentic overseas products, they can get their deliveries within three days on average," he said.
He did not reveal exact figures for the company's cross-border e-commerce business in China, but he said it had seen tremendous growth since November.
In November, Amazon China launched its Amazon Global Store service, which allows Chinese customers to buy goods directly from its online shopping platforms in other countries-currently only from its US website, but it's in the process of expanding to other Amazon sites.
Since taking over the China division of the company about a year ago, he has been vigorously refocusing the business, with cross-border e-commerce taking priority.
"Cross-border e-commerce is a booming trend globally and represents the most dynamic driving force in China's e-commerce development," Gurr said. "We take China as a strategically important locale from a global perspective and will continue to invest in China.
"Our vision is very clear: Helping China customers gain access to high-quality and authentic international products at fair prices, and helping China-based sellers to grow their business globally."


Having a Supply Chain Center of Excellence is important for a successful global team.

Global Teams That Work

Idea in Brief

The Problem
When teams consist of people from different cultures working apart from one another in different locations, social distance—or a lack of emotional connection—can cause miscommunication, misunderstanding, and distrust.
The Solution
The leaders of global teams can improve the workings of their groups by using the author’s SPLIT framework to identify and address five sources of social distance: structure, process, language, identity, and technology.
To succeed in the global economy today, more and more companies are relying on a geographically dispersed workforce. They build teams that offer the best functional expertise from around the world, combined with deep, local knowledge of the most promising markets. They draw on the benefits of international diversity, bringing together people from many cultures with varied work experiences and different perspectives on strategic and organizational challenges. All this helps multinational companies compete in the current business environment.
But managers who actually lead global teams are up against stiff challenges. Creating successful work groups is hard enough when everyone is local and people share the same office space. But when team members come from different countries and functional backgrounds and are working in different locations, communication can rapidly deteriorate, misunderstanding can ensue, and cooperation can degenerate into distrust.
Preventing this vicious dynamic from taking place has been a focus of my research, teaching, and consulting for more than 15 years. I have conducted dozens of studies and heard from countless executives and managers about misunderstandings within the global teams they have joined or led, sometimes with costly consequences. But I have also encountered teams that have produced remarkable innovations, creating millions of dollars in value for their customers and shareholders.

Further Reading

One basic difference between global teams that work and those that don’t lies in the level of social distance—the degree of emotional connection among team members. When people on a team all work in the same place, the level of social distance is usually low. Even if they come from different backgrounds, people can interact formally and informally, align, and build trust. They arrive at a common understanding of what certain behaviors mean, and they feel close and congenial, which fosters good teamwork. Coworkers who are geographically separated, however, can’t easily connect and align, so they experience high levels of social distance and struggle to develop effective interactions. Mitigating social distance therefore becomes the primary management challenge for the global team leader.
To help in this task, I have developed and tested a framework for identifying and successfully managing social distance. It is called the SPLIT framework, reflecting its five components: structure, process, language, identity, and technology—each of which can be a source of social distance. In the following pages I explain how each can lead to team dysfunction and describe how smart leaders can fix problems that occur—or prevent them from happening in the first place.

Structure and the Perception of Power

In the context of global teams, the structural factors determining social distance are the location and number of sites where team members are based and the number of employees who work at each site.
The fundamental issue here is the perception of power. If most team members are located in Germany, for instance, with two or three in the United States and in South Africa, there may be a sense that the German members have more power. This imbalance sets up a negative dynamic. People in the larger (majority) group may feel resentment toward the minority group, believing that the latter will try to get away with contributing less than its fair share. Meanwhile, those in the minority group may believe that the majority is usurping what little power and voice they have.
The situation is exacerbated when the leader is at the site with the most people or the one closest to company headquarters: Team members at that site tend to ignore the needs and contributions of their colleagues at other locations. This dynamic can occur even when everyone is in the same country: The five people working in, say, Beijing may have a strong allegiance to one another and a habit of shutting out their two colleagues in Shanghai.
When geographically dispersed team members perceive a power imbalance, they often come to feel that there are in-groups and out-groups. Consider the case of a global marketing team for a U.S.-based multinational pharmaceutical company. The leader and the core strategy group for the Americas worked in the company’s Boston-area headquarters. A smaller group in London and a single individual in Moscow focused on the markets in Europe. Three other team members, who split their time between Singapore and Tokyo, were responsible for strategy in Asia. The way that each group perceived its situation is illustrated in the exhibit below.
To correct perceived power imbalances between different groups, a leader needs to get three key messages across:

Who we are.

The team is a single entity, even though individual members may be very different from one another. The leader should encourage sensitivity to differences but look for ways to bridge them and build unity. Tariq, a 33-year-old rising star in a global firm, was assigned to lead a 68-person division whose members hailed from 27 countries, spoke 18 languages, and ranged in age from 22 to 61. During the two years before he took charge, the group’s performance had been in a precipitous decline and employee satisfaction had plunged. Tariq saw that the team had fractured into subgroups according to location and language. To bring people back together, he introduced a team motto (“We are different yet one”), created opportunities for employees to talk about their cultures, and instituted a zero-tolerance policy for displays of cultural insensitivity.

What we do.

It’s important to remind team members that they share a common purpose and to direct their energy toward business-unit or corporate goals. The leader should periodically highlight how everyone’s work fits into the company’s overall strategy and advances its position in the market. For instance, during a weekly conference call, a global team leader might review the group’s performance relative to company objectives. She might also discuss the level of collective focus and sharpness the team needs in order to fend off competitors.

Further Reading

I am there for you.

Team members located far from the leader require frequent contact with him or her. A brief phone call or e‑mail can make all the difference in conveying that their contributions matter. For instance, one manager in Dallas, Texas, inherited a large group in India as part of an acquisition. He made it a point to involve those employees in important decisions, contact them frequently to discuss ongoing projects, and thank them for good work. He even called team members personally to give them their birthdays off. His team appreciated his attention and became more cohesive as a result.

Process and the Importance of Empathy

It almost goes without saying that empathy helps reduce social distance. If colleagues can talk informally around a watercooler—whether about work or about personal matters—they are more likely to develop an empathy that helps them interact productively in more-formal contexts. Because geographically dispersed team members lack regular face time, they are less likely to have a sense of mutual understanding. To foster this, global team leaders need to make sure they build the following “deliberate moments” into the process for meeting virtually:

Feedback on routine interactions.

Members of global teams may unwittingly send the wrong signals with their everyday behavior. Julie, a French chemical engineer, and her teammates in Marseille checked and responded to e‑mails only first thing in the morning, to ensure an uninterrupted workday. They had no idea that this practice was routinely adding an overnight delay to correspondence with their American colleagues and contributing to mistrust. It was not until Julie visited the team’s offices in California that the French group realized there was a problem. Of course, face-to-face visits are not the only way to acquire such learning. Remote team members can also use the phone, e‑mail, or even videoconferencing to check in with one another and ask how the collaboration is going. The point is that leaders and members of global teams must actively elicit this kind of “reflected knowledge,” or awareness of how others see them.

Unstructured time.

Think back to your last face-to-face meeting. During the first few minutes before the official discussion began, what was the atmosphere like? Were people comparing notes on the weather, their kids, that new restaurant in town? Unstructured communication like this is positive, because it allows for the organic unfolding of processes that must occur in all business dealings—sharing knowledge, coordinating and monitoring interactions, and building relationships. Even when people are spread all over the world, small talk is still a powerful way to promote trust. So when planning your team’s call-in meetings, factor in five minutes for light conversation before business gets under way. Especially during the first meetings, take the lead in initiating informal discussions about work and nonwork matters that allow team members to get to know their distant counterparts. In particular, encourage people to be open about constraints they face outside the project, even if those aren’t directly linked to the matter at hand.

Time to disagree.

Leaders should encourage disagreement both about the team’s tasks and about the process by which the tasks get done. The challenge, of course, is to take the heat out of the debate. Framing meetings as brainstorming opportunities lowers the risk that people will feel pressed to choose between sides. Instead, they will see an invitation to evaluate agenda items and contribute their ideas. As the leader, model the act of questioning to get to the heart of things. Solicit each team member’s views on each topic you discuss, starting with those who have the least status or experience with the group so that they don’t feel intimidated by others’ comments. This may initially seem like a waste of time, but if you seek opinions up front, you may make better decisions and get buy-in from more people.
A software developer in Istanbul kept silent in a team meeting in order to avoid conflict, even though he questioned his colleagues’ design of a particular feature. He had good reasons to oppose their decision, but his team leader did not brook disagreement, and the developer did not want to damage his own position. However, four weeks into the project, the team ran into the very problems that the developer had seen coming.

Language and the Fluency Gap

Good communication among coworkers drives effective knowledge sharing, decision making, coordination, and, ultimately, performance results (see also “What’s Your Language Strategy?” by Tsedal Neeley and Robert Steven Kaplan, HBR, September 2014). But in global teams, varying levels of fluency with the chosen common language are inevitable—and likely to heighten social distance. The team members who can communicate best in the organization’s lingua franca (usually English) often exert the most influence, while those who are less fluent often become inhibited and withdraw. Mitigating these effects typically involves insisting that all team members respect three rules for communicating in meetings:

Dial down dominance.

Strong speakers must agree to slow down their speaking pace and use fewer idioms, slang terms, and esoteric cultural references when addressing the group. They should limit the number of comments they make within a set time frame, depending on the pace of the meeting and the subject matter. They should actively seek confirmation that they’ve been understood, and they should practice active listening by rephrasing others’ statements for clarification or emphasis.

Dial up engagement.

Less fluent speakers should monitor the frequency of their responses in meetings to ensure that they are contributing. In some cases, it’s even worth asking them to set goals for the number of comments they make within a given period. Don’t let them use their own language and have a teammate translate, because that can alienate others. As with fluent speakers, team members who are less proficient in the language must always confirm that they have been understood. Encourage them to routinely ask if others are following them. Similarly, when listening, they should be empowered to say they have not understood something. It can be tough for nonnative speakers to make this leap, yet doing so keeps them from being marginalized.

Balance participation to ensure inclusion.

Getting commitments to good speaking behavior is the easy part; making the behavior happen will require active management. Global team leaders must keep track of who is and isn’t contributing and deliberately solicit participation from less fluent speakers. Sometimes it may also be necessary to get dominant-language speakers to dial down to ensure that the proposals and perspectives of less fluent speakers are heard.
The leader of a global team based in Dubai required all his reports to post the three communication rules in their cubicles. Soon he noted that one heavily accented European team member began contributing to discussions for the first time since joining the group 17 months earlier. The rules had given this person the license, opportunity, and responsibility to speak up. As a leader, you could try the same tactics with your own team, distributing copies of the exhibit “Rules of Engagement for Team Meetings.”

Identity and the Mismatch of Perceptions

Global teams work most smoothly when members “get” where their colleagues are coming from. However, deciphering someone’s identity and finding ways to relate is far from simple. People define themselves in terms of a multitude of variables—age, gender, nationality, ethnicity, religion, occupation, political ties, and so forth. And although behavior can be revealing, particular behaviors may signify different things depending on the individual’s identity. For example, someone in North America who looks you squarely in the eye may project confidence and honesty, but in other parts of the world, direct eye contact might be perceived as rude or threatening. Misunderstandings such as this are a major source of social distance and distrust, and global team leaders have to raise everyone’s awareness of them. This involves mutual learning and teaching.

Learning from one another.

When adapting to a new cultural environment, a savvy leader will avoid making assumptions about what behaviors mean. Take a step back, watch, and listen. In America, someone who says, “Yes, I can do this” likely means she is willing and able to do what you asked. In India, however, the same statement may simply signal that she wants to try—not that she’s confident of success. Before drawing conclusions, therefore, ask a lot of questions. In the example just described, you might probe to see if the team member anticipates any challenges or needs additional resources. Asking for this information may yield greater insight into how the person truly feels about accomplishing the task.
The give-and-take of asking questions and providing answers establishes two-way communication between the leader and team members. And if a leader regularly solicits input, acting as a student rather than an expert with hidden knowledge, he empowers others on the team, leading them to participate more willingly and effectively. A non-Mandarin-speaking manager in China relied heavily on his local staff during meetings with clients in order to better understand clients’ perceptions of the interactions and to gauge the appropriateness of his own behavior. His team members began to see themselves as essential to the development of client relationships and felt valued, which motivated them to perform at even higher levels.
In this model, everyone is a teacher and a learner, which enables people to step out of their traditional roles. Team members take on more responsibility for the development of the team as a whole. Leaders learn to see themselves as unfinished and are thus more likely to adjust their style to reflect the team’s needs. They instruct but they also facilitate, helping team members to parse their observations and understand one another’s true identities.

A case in point.

Consider the experience of Daniel, the leader of a recently formed multinational team spread over four continents. During a conference call, he asked people to discuss a particular strategy for reaching a new market in a challenging location. This was the first time he had raised a topic on which there was a range of opinion.
Daniel observed that Theo, a member of the Israeli team, regularly interrupted Angela, a member of the Buenos Aires team, and their ideas were at odds. Although tempted to jump in and play referee, Daniel held back. To his surprise, neither Theo nor Angela got frustrated. They went back and forth, bolstering their positions by referencing typical business practices and outcomes in their respective countries, but they stayed committed to reaching a group consensus.
At the meeting’s end, Daniel shared his observations with the team, addressing not only the content of the discussion, but also the manner in which it took place. “Theo and Angela,” he said, “when you began to hash out your ideas, I was concerned that both of you might have felt you weren’t being heard or weren’t getting a chance to fully express your thoughts. But now you both seem satisfied that you were able to make your arguments, articulate cultural perspectives, and help us decide on our next steps. Is that true?”
Theo and Angela affirmed Daniel’s observations and provided an additional contextual detail: Six months earlier they had worked together on another project—an experience that allowed them to establish their own style of relating to each other. Their ability to acknowledge and navigate their cultural differences was beneficial to everyone on the team. Not only did it help move their work forward, but it showed that conflict does not have to create social distance. And Daniel gained more information about Theo and Angela, which would help him manage the team more effectively in the future.

Technology and the Connection Challenge

The modes of communication used by global teams must be carefully considered, because the technologies can both reduce and increase social distance. Videoconferencing, for instance, allows rich communication in which both context and emotion can be perceived. E‑mail offers greater ease and efficiency but lacks contextual cues. In making decisions about which technology to use, a leader must ask the following:

Should communication be instant?

Teleconferencing and videoconferencing enable real-time (instant) conversations. E‑mail and certain social media formats require users to wait for the other party to respond. Choosing between instant and delayed forms of communication can be especially challenging for global teams. For example, when a team spans multiple time zones, a telephone call may not be convenient for everyone. The Japanese team leader of a U.S.-based multinational put it this way: “I have three or four days per week when I have a conference call with global executives. In most cases, it starts at 9:00 or 10:00 in the night. If we can take the conference call in the daytime, it’s much easier for me. But we are in the Far East, and headquarters is in the United States, so we have to make the best of it.”
Instant technologies are valuable when leaders need to persuade others to adopt their viewpoint. But if they simply want to share information, then delayed methods such as e‑mail are simpler, more efficient, and less disruptive to people’s lives. Leaders must also consider the team’s interpersonal dynamics. If the team has a history of conflict, technology choices that limit the opportunities for real-time emotional exchanges may yield the best results.
In general, the evidence suggests that most companies overrely on delayed communication. A recent Forrester survey of nearly 10,000 information workers in 17 countries showed that 94% of employees report using e‑mail, but only 33% ever participate in desktop videoconferencing (with apps such as Skype and Viber), and a mere 25% use room-based videoconferencing. These numbers will surely change over time, as the tools evolve and users become more comfortable with them, but leaders need to choose their format carefully: instant or delayed.

Do I need to reinforce the message?

Savvy leaders will communicate through multiple platforms to ensure that messages are understood and remembered. For example, if a manager electronically assigns one of her team members a task by entering notes into a daily work log, she may then follow up with a text or a face-to-face chat to ensure that the team member saw the request and recognized its urgency.
Redundant communication is also effective for leaders who are concerned about convincing others that their message is important. Greg, for instance, a project manager in a medical devices organization, found that his team was falling behind on the development of a product. He called an emergency meeting to discuss the issues and explain new corporate protocols for releasing new products, which he felt would bring the project back on track.
Team members will follow the leader’s example in using communication technology.
During this initial meeting, he listened to people’s concerns and addressed their questions in real time. Although he felt he had communicated his position clearly and obtained the necessary verbal buy-in, he followed up the meeting by sending a carefully drafted e‑mail to all the attendees, reiterating the agreed-upon changes and asking for everyone’s electronic sign-off. This redundant communication helped reinforce acceptance of his ideas and increased the likelihood that his colleagues would actually implement the new protocols.

Am I leading by example?

Team members very quickly pick up on the leader’s personal preferences regarding communication technology. A leader who wants to encourage people to videoconference should communicate this way herself. If she wants employees to pick up the phone and speak to one another, she had better be a frequent user of the phone. And if she wants team members to respond quickly to e‑mails, she needs to set the example.
Flexibility and appreciation for diversity are at the heart of managing a global team. Leaders must expect problems and patterns to change or repeat themselves as teams shift, disband, and regroup. But there is at least one constant: To manage social distance effectively and maximize the talents and engagement of team members, leaders must stay attentive to all five of the SPLIT dimensions. Decisions about structure create opportunities for good process, which can mitigate difficulties caused by language differences and identity issues. If leaders act on these fronts, while marshaling technology to improve communication among geographically dispersed colleagues, social distance is sure to shrink, not expand. When that happens, teams can become truly representative of the “global village”—not just because of their international makeup, but also because their members feel mutual trust and a sense of kinship. They can then embrace and practice the kind of innovative, respectful, and groundbreaking interactions that drive the best ideas forward.
A version of this article appeared in the October 2015 issue (pp.74–81) of Harvard Business Review