The end of globalisation at Davos

This is an audio transcript of the FT News Briefing podcast episode: The end of globalisation at Davos

Jess Smith
Good morning from the Financial Times. Today is Tuesday, May 24th, and this is your FT News Briefing.

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The global economic elite are in the Swiss mountain resort of Davos this week for the World Economic Forum. Our correspondents are hearing a lot of talk among executives about the end of globalisation.

Kaye Wiggins
For the business elite that goes to Davos, the stars are no longer perfectly aligned for the way that they want to operate, the way that they like to do business.

Jess Smith
Plus, private equity firms are circling around Toshiba and a deal would likely be Japan’s largest-ever buyout. I’m Jess Smith, in for Marc Filippino. And here’s the news you need to start your day.

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Ukraine’s president, Volodymyr Zelensky, arrived in Davos by video link. He spoke to a room filled with powerful business leaders and policymakers, and he urged them to help rebuild Ukraine when the war is over.

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Zelensky put forth a reconstruction plan that could cost more than $500bn. He suggested that separate countries and companies rebuild specific cities and industries. He also wants frozen Russian assets to be used as compensation for victims of the war.

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Corporate executives in Davos and around the world are taking stock of how the war in Ukraine has changed the way they do business. That already changed during the coronavirus pandemic, but executives are now talking about the end of globalisation. To find out more, I spoke with our private capital correspondent Kaye Wiggins. She’s been in New York speaking with executives in private equity.

Kaye Wiggins
So myself and my colleague Antoine Gara interviewed Chip Kaye from Warburg Pincus and basically he’s like an example of the type of figure who has spent most of his career operating in a world where all of the underlying conditions were broadly operating in his favour. All of the stars were aligned for his industry for maximising economic growth, you know? So the thing that really stood out to me from our conversation was he said that for people like him, for investors — he’s a private equity investor — questions of geopolitics have basically been on the fringe of the way that they think about things ever since the fall of the Berlin Wall, really. It’s not been something that has occupied anywhere near as much of their time and their thinking as it has recently. And basically what he’s saying now is that he and everyone around him and everyone in his industry is having to operate in conditions that pretty much no one has ever seen before.

Jess Smith
So, Kaye, what were the conditions that have been so beneficial for investors over the last three decades?

Kaye Wiggins
So basically, private equity primarily uses a lot of debt in its investments. So that is massively benefited from a long era now of very low interest rates. That’s been the biggest tailwind. But also underneath that, there are all sorts of other conditions that have made life relatively straightforward for private equity investors. Global growth has been pretty solid. There’s been a relative absence of the major geopolitical conflicts that we’ve seen more recently with Russia’s invasion of Ukraine. All of the backdrop has enabled them to just focus on investing and focus on financials and focus on profit maximisation.

Jess Smith
So now we have higher interest rates, high inflation, more geopolitical concerns. How is this actually changing the way executives do business?

Kaye Wiggins
Yeah, of course. I mean, I think one of the big things has to do with supply chains. Myself and my colleague Antoine interviewed Jon Gray from Blackstone recently, and he basically said, you know, companies are moving production much closer to their customers. People are thinking much, much more differently about how they want to organise their operations, whether that is cases of people buying companies that are within their supply chain. So they’ve got more control of their own supply chain now. Whether it’s just think rethinking about where products are made, you know, whether it’s rethinking where your employees are located. All of these things that are just having to adapt to a world in which there are more hurdles than people are used to having to deal with.

Jess Smith
Are there any naysayers out there? You know, people who say once the war is over, things could go back to the way they were. You know, any counter arguments?

Kaye Wiggins
Yeah. I mean, I think it’s important to note that globalisation has had its challenges before now, right? So it’s not as if people have suddenly woken up and said, oh my goodness, this is proving difficult, you know. I mean, Brexit, for example, is hardly a win for globalisation, right? And likewise the kind of America first policy under Donald Trump. So some of the naysayers are saying, hang on a minute, you know, you’re only just realising this now? Like there’s been quite a backlash against globalisation for some time. And I guess the other point is that you could argue global trade will continue. Don’t take this too far, right? Let’s not call the (inaudible) end of a world of global trade. It’s just the end of the type of global trade that most people have got used to over three decades or more.

Jess Smith
Kaye Wiggins is the FT’s private capital correspondent. Thanks, Kaye.

Kaye Wiggins
Thanks.

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Jess Smith
There is a place where private equity seems to be finding safety and opportunity. That’s Japan. A country famous for resisting mergers and acquisitions and deals with outside investors could soon see its biggest-ever global private equity deal. Firms are bidding for the Japanese industrial icon, Toshiba. May 30th is the deadline for any more potential bidders to step up.

Stephen Givens
This deal will be in the range, I expect, of 18, 20 billion dollars, if not more.

Jess Smith
That’s Stephen Givens. He’s a corporate lawyer based in Tokyo, and he also writes a column for Nikkei Asia.

Stephen Givens
Well, Toshiba is an important strategic asset for Japan, and in particular, it is the supplier of equipment for Japan’s nuclear power plants. It has an important role still in cleaning up the mess at Fukushima. And it also has a semiconductor business. Japan does not want to fall into the hands of China or some other place like that. And so Meti will have approval authority over the final buyer.

Jess Smith
Meti being the Ministry of Economy, Trade and Industry. So the government will have a role in this. But can you talk about what a Toshiba sale would mean for Japan’s corporate culture?

Stephen Givens
Well, in Japan, M&A changes and corporate control have historically been near taboo. There’s this quaint Japanese notion that corporations are living organisms, organic villages of people and human relationships that are not meant to be sold, like meet the highest bidder. But in the last five years, anti-M&A taboos have weakened considerably. Industrial conglomerates like Hitachi and Toshiba itself have begun to spin off and divest non-core divisions and subsidiaries. Private equity funds like Bain and KKR have been on the buying end of these spin-offs and divestitures.

Jess Smith
So the Toshiba bidders that we know of so far include big US private equity players like KKR and Bain. Just out of curiosity, do you see any frontrunners right now?

Stephen Givens
I think most likely the winning bid will come from a well-known US private equity firm that has a track record in Japan. Bain is the leading candidate and has received the endorsement of Effissimo, Toshiba’s largest shareholder. KKR and Blackstone have announced they’ll be making a joint bid. So I think that it’s likely that it’s going to be a well-known name.

Jess Smith
That’s Stephen Givens. He’s a corporate lawyer based in Tokyo, and he’s a columnist for Nikkei Asia.

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Before we go, virtual clubbing was a thing during the pandemic. People would strap on headsets and send their avatars out to online parties to socialise or even buy things like sneakers. You might think it would disappear now that people can party in person, but the technologies that companies developed for online socialising during the pandemic could now help industries position themselves for the metaverse. Things like super high-quality avatars, hyper-real graphics and immersive audio. It’s already working for some Korean entertainment companies. Some posted record earnings last year, even with the loss of live performances.

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You can read more on all these stories at FT.com. This has been your daily FT News Briefing. Make sure you check back tomorrow for the latest business news.

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This transcript has been automatically generated. If by any chance there is an error please send the details for a correction to: typo@ft.com. We will do our best to make the amendment as soon as possible.