Home TypeNews Phil Soar: deglobalisation – the next major issue for trade shows

Phil Soar: deglobalisation – the next major issue for trade shows

by Phil Soar

In his latest column Phil Soar looks at whether deglobalisation is the next major issue for trade shows

Trade shows are about trade

It is in the title.  Sorry to keep repeating myself, but clichés are clichés because they represent a truth.

The last quarter-century has been a very benign one for trade and the world economy. The World Trade Organisation gives the following statistics for all annual international trade:

  • 1975 – $0.318 trillion
  •  1990 – $3.5 trillion
  • 2022 (estimated) $22 trillion.

Zoltan Pozsar of Credit Suisse says: “In the last half century China got very rich making cheap stuff, Russia got rich selling cheap gas to Europe, and Germany got very rich selling expensive stuff produced with cheap gas.”

At the same time the US got richer through financial engineering (quantitive easing etc) and low inflation largely driven by those cheap goods from China. At one point 10% of all goods on the high seas were destined for WalMart stores in the US (when travelling to the US I still buy socks, underwear and t-shirts at WalMart and throw existing clothes away – laundering them in hotels is far more expensive).

Companies have for 30 years been able to use technology, containerisation (critically – arguably the biggest driver of all), cheap labour and economies of scale to reduce the cost of the goods they sell in Europe and North America. Trade boomed.

The economic background

It isn’t easy to summarise three decades in a paragraph, but before 1989 the world economy, as we knew it, largely involved just 1bn of the 6bn people on earth – being North America, Western Europe, Japan and Australasia. With the collapse of the Iron Curtain and China’s drive for growth from 1989, that all changed. Previously, for those 1bn, labour was secure – in the 1960s Detroit was the richest city by personal income in the world. But suddenly, as the world opened up, there were billions more, and far cheaper, in the labour market. The developed world gradually outsourced production to cheaper countries. There were many consequences, but one was that inflation and interest rates fell close to zero. There was increasing insecurity for those with semi-skilled and unskilled jobs in the US and Europe – and there is a reasonably direct line from these changes to 2016, with Trump and Brexit.

Now this has come to something of a halt

We are now in a somewhat different world. No one argues that China will not continue to export things, but there is now a heavy overhang driving on-shoring (in other words not being reliant on China or Russia for critical goods). On-shoring basically means bringing back production and jobs to your home country – most notably in the US (plus Canada and Mexico) and Europe. The cutting of Russian gas and oil (oil is a far lesser problem) doesn’t need repeating here – but the effect on a Germany which chose to rely for over 40% of its energy from a potentially hostile state (and which also thought closing its nuclear power plants at the same time a good idea) is yet to be seen.

The US and Europe will increasingly return manufacturing, energy and control to domestic sources. Inflation must inevitably rise and we are already seeing the consequences.

Various countries seem to have suddenly discovered that being part of a world in which vaccines and even rubber gloves are produced in just two or three countries might not be a great idea. US lawmakers were shocked to learn that 89% of all the paracetemol sold in America came from China. And the US has only recently passed its Chips Act – which attempts to deal with the problem that 90% of the world’s advanced semi-conductors (you have one in your phone) are made by a single producer (TSMC) in Taiwan. Should there be a move on Taiwan by China, then that supply would be cut off – with devastating effect. The act gives domestic chipmakers (Intel etc) $52 bn in immediate subsidies. All of this leads to higher inflation, to generally higher taxes (the 2024 US Election will be critical here) and a slow retreat from globalisation and one driver of the last quarter-century – buy from whoever produces it cheaper.

Remember 1914 and the received wisdom

In 1914 there had not been a significant European war since 1815. Bit by bit the major economies had come closer together. Trade was in many ways as widespread and everyday as it is today (and no-one needed a passport either). Financial links – run largely from London – were particularly strong. There was an almost universal belief that these links were so close, deep and important that it made no sense at all to suggest that there could be a European war. And we all know what happened.

One completely random event – the assassination of Archduke Franz Ferdinand – on 28 July led inexorably to a Europe wide war within just five weeks. It was not just the fact of the assassination which was so random. The Serbian funded assassins had given up after their planned attempts failed. Then the car (strangely numbered 11.11.18, the date of the final Armistice in 1918) carrying the Archduke took a wrong turn and had to reverse. By sheer chance it did so in right front of Gavrilo Princip, who was walking away from the planned route and was astonished to find the Archduke literally a few feet away. War was so unlikely that, two weeks before the outbreak, the British cabinet did not even discuss the situation in Serbia – focussing instead on the problems in Ireland.

The same is argued today. That the supply chains and the economic links are now so intricate that they simply cannot be disentangled. Well, perhaps. But look how quickly Russia has been excluded from international trade and personal interactions.

How international trade might change in the next 10 years

Martin Wolf of the FT has pointed out that international trade as a percentage of GDP actually peaked in 2014, but this largely reflects that China has reduced its own dependence on imported goods in the past decade. International trade still represents 33% of Chinese GDP, compared with 28% for the EU, 27% for Japan and barely 15% for the USA.

And he stresses that on-shoring and de-globalisation will principally affect trade in manufactured goods. Services are harder to read, being much more heterogeneous and often related to the movement of people (tourism etc). Services are rarely affected by traditional trade agreements. A big US firm can employ anyone anywhere to tally up staff expenses, or to read X-rays, or to check CVs, or to provide IT call centre help . White collar workers in high income countries are part of the middle-class, but it will be harder to protect them. Just as semi-skilled manufacturing workers lost job security between 1990 and 2020, so increasingly will traditional middle class office and even professional staff in the 2020s and beyond.

And the consequences for trade shows?

OK, enough of the preamble.

Let’s look at China first. I talked to a lot of private equity houses in 2014 and 2015. There was always one theme – what are you doing in China? It was if a disease had infected the whole PE community. The answer for CloserStill was “very little” – we were too small. But it became something of an obsession and everyone piled in. The German Messen in particular. But where are we now? The political situation has changed. Firstly Trump made negative noises, then human rights became a bigger issue. Then there is the ongoing concern about technology – Huawei being the test case. Tariffs are not a significant issue, but the risk of legal agreements not being upheld in China has come to the fore since Hong Kong lost its quasi-independent status.

The pandemic has taken its toll of confidence. China first disclosed the Covid-19 virus on 31 December 2019 but nearly 3 years later China is still not fully open for business. There are some shows of course, but as we saw with Shenzhen in September, halls can be closed overnight with no notice. At the time of writing, visitors to Hong Kong still have to go into quarantine at a specified hotel for at least three days.

We might assume that medical matters will return to normal eventually. But there has surely been a loss of certainty and belief. Though audiences are returning strongly in the USA and Europe, three (and maybe four) years is a long time. Companies find alternatives.

Other major issue affecting China trade

But there is now another major issue affecting China’s role in the world of trade shows – Ukraine/Taiwan. Until 2022 the prospect of China intervening militarily in Taiwan (which China historically regards as part of the same country) was acknowledged but did not much affect long term decisions. There is no purpose here in trying to predict what China might or might not do (though there is an argument for 2049, the 100th anniversary of the Communist takeover), but what happened so unexpectedly in Ukraine must cause that discussion to arise.

No one expects anything to happen tomorrow, but different questions are now being asked:

  • If we invest heavily in Chinese assets tomorrow, what might happen when we want to sell to another buyer in five or 10 years time?
  • Where might valuations be?
  • How firm can our projections be?

The blow to our industry from the Ukraine invasion has been immense – two major markets effectively being erased from the trade show firmament. China would be on a scale far larger.

Many of our major companies – RX, Informa, Clarion, Tarsus – are heavily invested in China and Hong Kong. They will not withdraw from the market, but it is difficult to see how the profits they generated there will be matched in the foreseeable future

Hong Kong is a particular case – with its massive appeal hit hard by a combination of the National Security Law introduced in 2020 after the 2019 protests, and by its complete lock-down in line with other Chinese cities. Whatever one feels about the political situation, Hong Kong is no longer the destination it was in 2018. The beneficiary in trade show terms would appear to be Singapore, which remains an open and popular destination for the region.

What about Europe? 

Europe is a big place, but in trade show terms we largely mean Germany (home to some one third of all trade show space worldwide). The German market is special because, in addition to purely domestic events, its large venues host an array of truly global shows. It is here that we must see the effect. One of Germany’s major trading partners – Russia – has now been taken out of the picture. That alone will have a material effect. We now know that there is likely to be a decline in some global trading. This will affect the larger international German shows more than any others – in the end, if international trade is declining then so must the showcases for exactly that.

France, Italy and Spain have far fewer major international shows – though furniture and fashion in Italy and SIAL in France stand out.

The disappearance of Russia from the trade show world is probably unprecedented. Of course there are still shows in Moscow, but there are no western companies or visitors. This has not had a major effect for most of our companies – but for Hyve and RX it has been very significant. This may seem an outlier, but it is still a major element in the actual and psychological decline in global trade.

Who suffers the least? 

Those countries which are essentially provincial/domestic markets.

Most obviously the two Anglo-Saxon nations. Not because they have predicted the future or made brilliant decisions (anything but), but because they are both national/provincial markets. There are obviously large numbers of foreign companies who exhibit at US shows as it is the world’s largest market. I don’t see why that would change. But only 15% of US GDP is represented by international trade and the percentage of visitors to the average show in Vegas or Orlando who come from outside the US, Canada and Mexico is very small.

The UK, despite its location, is increasingly a provincial market. It has very few shows which have a truly significant non-UK base, and that number has not been helped by Brexit. The lack of a major conference venue in London which can hold up to 10,000 delegates has always been a negative for larger international conferences (the new Olympia space will hold 4,500). As we have seen, the number of trading interactions between the UK and the EU (one seller selling to one buyer) has fallen by 30% since 2016 – and that downward trend continues.

Other geographies which are largely provincial are South America (excluding Mexico), India and, to a large extent, Australasia.

A general summary

What we are seeing is a complex set of circumstances. The Ukraine war has and will change energy policy dramatically. Substitution for Russian gas and oil will take time and will be costly – but as the energy crises of the 1970s showed, energy is fungible. New resources will be developed relatively quickly and others will be diverted.  But, coupled with the cost of reaching for net-zero, it will be expensive and inflationary. Worldwide inflation is a phenomenon not seen for a quarter-century and global trade boomed in this non-inflationary environment. It is not unreasonable to suggest that higher inflation will have an effect – in particular the seeking of on-shoring to avoid imported (and unpredictable) excess costs. Either way, costs will rise. In a non-inflationary world, it was possible to trade and to predict what goods might cost in 12 months time. Now that is much less true.

We are moving from just in time to just in case

All of this affects supply chains. Just-in-time (spearheaded by Toyota in the 1980s) became an obsession. But with disrupted supply, political uncertainty and inflated costs, security looks a lot more important than cost

As one economist put it succinctly: “We are moving from just in time to just in case.”

The more that trend grows, the lesser the concentration on international trade. We have probably seen peak China in terms of the trade show world and certainly where our industry looks to invest. The massive German events worry about whether they will grow further and may see a decline. Shows which have the wind of on-shoring behind them – particularly in the US – will grow. And the more provincial a market is, the more secure those shows now seem – an excellent example may well be healthcare and energy in the UK, with the government’s massive investment in those sectors.

The broader conclusion is that the worldwide trade show market is likely to be smaller – the loss of Russia and Ukraine, the challenges facing China, the recession which is almost upon us and the pull backs caused by on-shoring will all be echoed through the rest of this decade.

 

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