State of the Industries in the Year Ahead

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Written by Lindsey Washington

Although the global economic conditions in 2018 will be generally good, the automotive, retail, energy, financial, healthcare, and telecom industries will all face significant challenges from changing technologies and political uncertainty, according to a new report by the Economist Intelligence Unit released last month. Traditional ways of making money, such as brick and mortar retails stores and call and text mobile services, are becoming less viable. At the same time, high levels of political risk, stemming from changing political leaders and regulations, will complicate firms’ efforts to adjust to changing technology.

Automotive

Only eight of the sixty countries analyzed in the EIU report will see a significant decline in car sales; however, the global automotive industry will face two major challenges from markets in China and the United States in 2018.  First, China has passed new regulation mandating a 7% increase of new energy vehicles (NEV) on the market by 2019.  Because China is the largest consumer market for the global automotive industry, foreign carmakers like BMW and Volkswagen will respond by increasing their own production of NEVs.  The increase in supply of NEVs will decrease prices.  Simultaneously, governments are likely to continue to pass regulation that mandates cleaner conventional cars and promotes NEVs.  In order to keep abreast of these changes automotive firms will have to invest heavily in NEVs over the next year.

Automotive manufacturers also face the challenge of changing trade barriers.  For most of the global industry economic integration and the decrease of trade barriers will continue over the next year; however, in North America the possible renegotiation of NAFTA will have negative consequences.  Currently, carmakers that sell in North America must manufacture 62.5% of their components in North America.  The Trump Administration aims to raise this to 80% with 50% manufactured within the United States specifically.  In that case, carmakers will be forced to restructure their supply chains, raising production costs and decreasing profits.

Consumer Goods/Retail

On the surface the global retail market seems stable at projected 2.5% growth for 2018; however, predicted growth rates vary widely across region, and even more widely from country to country.  The variation across countries is largely due to differences in economic and political conditions within each country. For example, economic instability in Egypt and Brexit largely account for decreased growth in both countries.  In the United States, which is likely to remain the world largest retail market for the next decade, the retail apocalypse will not occur; however, traditional department stores such as Sears and JCPenny will face decreasing profits and increasing debt as they face steep competition from online retailers such as Amazon. The Fed is set to increase interest rates three times over the next year to give debt-ridden retailers more room.  Finally, it is likely that over the next year online retailers will begin to push into bricks and mortar, while traditional retailers expand their online presence.

Energy

The global transition to clean energy will most likely slow due to the Trump Administration’s policies, but it will not halt or reverse. Under the Trump Administration clean energy will remain contentious.  The administration is likely to step into the energy market to protect fossil fuels and shore up coal in the short-run.  Currently, the three most significant countries in the transition are Germany, China, and the UK. Germany continues its push to lower emissions by 40% from 1990 to 2020. However, because it still relies heavily on coal, it will most likely miss this target until it shifts its main source of energy.  China has set ambitious targets to increase renewables capabilities over the next year.  Finally, the U.K. has made dramatic cuts to its CO2 emissions and will step up its efforts over the next year.

Energy prices will remain in 2018.  Despite OPEC’s attempts to decrease the supply of oil, the global supply will remain high, driving prices down.  By March 2018 compliance to OPEC’s supply cuts may crack, driving supply up and prices down even further.  Natural gas prices in the United States, on the other hand, may rise slightly due to increased demand; however, overall prices on natural gas will decline slightly.  Stagnating demand for coal will continue in 2018 and prices will continue to fall.

Financial Services

As mentioned previously, the Central Bank will increase the interest rates modestly three times over the next year.  As a result bonds will have higher yields, attracting investors away from stocks and toward bonds.  More specifically, investors will flock toward high-yield risky bonds such as those issued by Argentina and Greece.  Simultaneously, financial firms hit hard by the Great Recession will begin to return to profitability over the next year.  These firms will most likely begin diversifying portfolios to decrease mature assets and increase assets in developing markets. However, China, the largest developing market, will remain closed to foreign financial firms. On the other hand, Chinese financial firms will take the lead in exploring developing financial markets.

Increased regulation put in place after the Great Recession is likely to ease over the next year. There is a widespread consensus that smaller financial institutions should not be held to the same restrictions as their larger rivals.  Accordingly, regulators will ease restrictions on smaller firms. At the same time, tax-sharing policies will make it easier for regulators to spot and stop illegal tax maneuvering.  Finally, regulators will tightly supervise, but encourage, innovations in finance, such as mobile banking.  However, large Chinese and Indian debt and struggling banks in Russia and Southern Europe could hamper the brighter outlook for 2018.

Healthcare

The U.S. healthcare market remains the largest sector of the global healthcare market. As such, what happens in the U.S. market has global consequences.  Over the next year the U.S. healthcare market will continue to be shaken by Republican efforts to overturn the Affordable Care Act.  More specifically, investors will likely pull out of the system as subsidies are taken away, resulting in unreliable coverage.  Younger citizens will likely opt to pay the fine and switch to private healthcare, leaving an untenable system for the old and sick.  Over the next year and beyond it will become increasingly necessary to reach a sustainable compromise.  Both healthcare and pharmaceutical spending will remain high.

Other large players, most notably China, Japan, and the UK, will pass reforms over the next year to deal with their ageing populations.  Simultaneously, the UK must engage in pharmaceutical trade talks over trade barriers in the next year to prepare for Brexit.  Many smaller countries will reassess funding for healthcare to meet high public expectations in 2018.  Universally, health and life expectancy will continue to increase, benefiting the global healthcare system.

Telecoms

The global telecommunications industry will face huge opportunities in the next year.  Rapidly expanding markets in Asia and Sub Saharan Africa will drive up demand for mobile phones.  Simultaneously, operators will invest in introducing 4G networks into developing countries and testing 5G networks in more developed markets.  On the other hand, exchange rate fluctuations and low economic growth will drive down demand for mobile phones in Latin America.  Latin American demand for data, though, will remain high.

The huge demand for mobile connectivity has a downside.  Telecommunications companies face massive capital expenditure.  Moreover, increased competition from over-the-top (OTT) providers, such as Netflix and Skype, as well as app developers, is driving prices down.  Telecommunications companies will have to adapt to changing marginal costs by partnering with OTT providers and building more flexible infrastructure. At the same time, regulations, such as stricter anti-trust laws, will limit how quickly providers can change their infrastructure and restrict their ability to compete and consolidate. As a result, it will be difficult for the telecommunications providers to effectively take advantage of expanding markets.  As such we will see a 2% decrease in revenue and 3% increase in investment over the next year.