The path ahead for multinationals in the era of deglobalization

Significant changes have occurred in the global political and economic structure under the COVID-19 pandemic and geopolitical tensions. Countries have imposed sanctions on each other in the name of political and economic security. The global supply chain, industrial chain, and value chain system established in the past decades has been dealt a heavy blow. Currently, the chaos caused by the pandemic has not yet ended, and the Russia-Ukraine conflict has plunged the world into another critical situation. Multinational corporations have taken the initiative to or been forced to adopt corresponding response strategies in this deglobalized era.

The cloud of deglobalization looms large

The United States, the champion of globalization over the past four decades, has shown prominent isolationist and protectionist characteristics in recent years in its foreign political and economic policies. These US policy adjustments have weakened the process of globalization and induced policy countermeasures among different camps and interest groups. The statistics published by the US Department of Commerce show that the US goods and services deficit in 2021 was $859.1 billion, an increase of 27 percent over the previous year, accounting for nearly 4 percent of GDP and a record amount.

Since 2016, Donald Trump's election as US president, Brexit, and the China-US trade tensions are all warning signs of a globalized system that is increasingly difficult to sustain. The COVID-19 pandemic and the impact of the Russia-Ukraine crisis have exacerbated the existing stresses and further display the vulnerability of national economies to unexpected economic turbulence, weakening the consensus on globalization. As of April 11, Yale University statistics indicate that more than 600 multinational corporations have divested from Russia or ceased operations.

These deglobalization forces "could have profound and unpredictable effects," according to Laurence Boone, chief economist at the Organization for Economic Cooperation and Development. Under this new trend toward regionalism, the economic security constructed by the global supply chain, industrial chain, and value chain has suffered drastic impacts. Undoubtedly, the current global political and economic landscape is in a new and unprecedented adjustment period, and the uncertainty brought by economic decoupling is the first to hit multinational corporations.

However, it also creates opportunities for countries that have the absorptive capacity to attract and accommodate firms in search of new markets and economic opportunities.

Multinational corporations' strategies in the context of deglobalization

As the conflict between Russia and Ukraine continues to intensify, the confrontation between Western countries and Russia has extended from the national level to the corporate level. British Petroleum announced on February 27 that it would give up as much as 19.75 percent of its stake in Rosneft, a Russian integrated energy company, which accounts for about half of BP's oil and gas reserves and a third of its production. The withdrawal could cost it $25 billion. In addition, dozens of energy companies, including Statoil, Shell, ExxonMobil, and others, have ceased operations in Russia or announced plans to abandon their Russian operations.

As early as after the financial crisis in 2008, multinational corporations, represented by Citibank, began to respond to operational risks arising from inconsistent regulatory measures in various countries by shrinking and selling their businesses. Since 2008, Citibank has sold off its retail and related businesses in Germany, Turkey, Brazil, Egypt, and a dozen other countries. In March 2022, Citi has agreed to sell its Indian retail banking sector to Axis Bank, India's third-largest private bank, for about $1.6 billion. It's the latest step in the streamlining of Citi's business by CEO Jane Fraser, who wants to exit retail banking in 13 countries to focus on more lucrative institutional and wealth management businesses.

Citi is not the only bank responding to the challenges of deglobalization by shrinking and selling its businesses. HSBC has also embarked on a massive global asset slimming program since 2011 to respond to the trend of deglobalization. HSBC's strategy to shift to Asia includes the sale of properties in Turkey and Brazil and increased investments in Asian regions such as the Pearl River Delta region of Guangdong, China, and Southeast Asia. HSBC's decision to re-emphasize the role of Asia in its growth strategy would definitely strengthen its leading position in Asia, since Asia has always been the bank's largest source of earnings among its five regional markets. According to the 2021 financial report, HSBC's pre-tax profit in the Asian market was $12.24 billion, accounting for 64.8 percent of the group's total profit.

Nevertheless, HSBC is still regarded as a British bank. Since 1992, when HSBC acquired Midland Bank, one of the four largest local banks in the UK, and after completing various integrations in 1993, the century-old HSBC officially moved its headquarters from Hong Kong to the UK, with its senior management and operation team based in London. HSBC is currently listed on the London, Hong Kong, New York, and Paris exchanges. Its top 10 shareholders include Ping An Insurance, BlackRock, Bank of New York Mellon, Vanguard, and other global asset management companies. Due to HSBC's multinational corporation attributes, it also has to be subject to both British regulations and US long-arm jurisdiction. It has become caught in a complex game of big countries because of its focus on the Asia-Pacific, especially the business of Chinese mainland and Hong Kong.

This unique structure of misaligned markets, operating teams, and territorial regulation has laid the seeds for the HSBC Group to face tax and regulatory cost increases and be stuck in the middle of the China-US confrontation. Although HSBC has repeatedly considered spinning off its Hong Kong operations and relocating its headquarters back to Hong Kong since 2015, the wait-and-see approach to the UK financial markets has prevented this plan from materializing. Currently, as Hong Kong's major note-issuing bank, HSBC is being sidelined by both the Chinese and US governments due to a series of issues arising from introducing the National Security Law in Hong Kong. Apparently, the plan that was not implemented in 2015 may be the only way out for the HSBC Group today: to spin off the Asia-Pacific business into a more independent subsidiary listed in Hong Kong, which could solve the misalignment mentioned above.