Back in March 2005, I was sitting in my office one nice morning grinding out a letter to a difficult client. I stopped to take a phone call and then noticed an update on my on-line news. WPP Holdings of London had purchased Grey Advertising. While publicly traded, Grey was largely considered to be the last of the great independent players. Financial analysts would often joke that their shares traded by appointment only as senior management controlled a huge amount of the stock’s float. The sale to WPP struck me as a watershed moment. Now, four holding companies, Omnicom, WPP, Interpublic and Publicas appeared to control the advertising world. Sure enough, the next time the data was published, those four mega-shops or holding companies controlled more than have of global advertising billing. Today, it hovers around 57-60%. Globalization has now hit our industry and there is no turning back.
To read the business press, you would think that Globalization is a new process. Yet some economic historians place its origins in 1492 when Columbus landed in the Western Hemisphere. Others argue that there was international trade between Europe and the Far East hundreds of years before that (re-read "The Adventures of Marco Polo" and you will see that they are correct).
Today, however, Globalization is beginning to gallop. Just what is it? Essentially, it is driven by two factors:
1) Comparative advantage
2) Economic specialization
Comparative advantage is the simple concept that some countries or effective elements within that country can do something faster, better or more cost effectively than those in any other place.
Specialization usually means that you are so good at something that you are a leader in that field. Computer programmers are expensive in the U.S. Go to India and there are thousands who speak English and work for a fraction of the cost of their U.S. counterparts. Much of Asia has an abundance of skilled and unskilled manufacturing labor. Taiwan has great heavy industrial foundries and first-rate semiconductor manufacturing facilities. So, those places keep growing.
Globalization, in brief, takes advantage of whoever can do something the best. Capital has always moved where the returns are the largest. Globalization has saved businesses and consumers trillions Vis a Vis the old model where technology and trade were largely restricted within a single nation.
At the same time, increased Globalization has caused problems. Certain industries in the U.S. face chronic unemployment and several million workers have been displaced.
Why has Globalization grown in recent decades? We have identified five reasons:
1) The growth of free trade—over the last 25 years, countries across the globe have lowered many barriers and/or tariffs on imports or exports. The most famous and far reaching was China, which continues to move away from its communistic model. China and some of its Asian neighbors have flooded the world with cheap goods due to their low wage for local labor.
2) Outsourcing—many UK and US firms have saved billions by shifting production facilities to Mexico, China, or Malaysia, Indonesia, and increasingly, Vietnam. Service companies have tended to migrate to India. If you have a problem with an appliance, the odds are good that a peppy and very well educated service rep based in Bangalore province in India will try to help you. Both manufacturing and service workers in the developing countries accept lower wages than American or British workers. The controversy beyond lost jobs at home is that many say working conditions are poor especially in the industrial sector.
3) Containerization—I bet that you did not think of this one! Most goods are now transported across the globe in standard sized containers. This has tended to speed up delivery times; eases customs issues, and, of course, cuts costs.
4) The Internet—as things blew up in the dot.com boom in early 2000, many start-ups went bust. However, the billions spent on international fiber-optic networks were not all wasted. The networks remained in place and brought inexpensive connections to a few billion people. Some small and savvy marketers took advantage of this. Many business units exist now in a very narrow niche space. The Internet allows them to advertise GLOBALLY to the several thousand people who are prospects for the service. With the old model, you could never afford to advertise because even if you could come close to identifying your prospects you could never pay the freight to reach the majority of them. Not so any longer!
5) Legal Agreements—increasingly, but not always, more countries are recognizing patents from other nations. The same is true of intellectual property. This can stimulate trade significantly.
So, there have been big gains for people across the globe. The BRIC (Brazil, Russia, India, China) countries have seen exports boom although Russia’s are largely tied to energy and other natural resources.
Does Globalization have any critics? You bet! I greatly admire Nobel Laureate Joseph Stiglitz. His analysis of the 2008 financial crisis is the best and most lucid that I have seen. He, a bit surprisingly, is not a big fan of Globalization. Reading some of his work and tracking down interviews on the topic, he has three big issues with Globalization:
1) Culture—in past posts, we have identified that American Pop Culture travels well. Stiglitz agrees but argues cogently that as Western brands become more dominant, indigenous cultures lose some of their identity. Is this a bad thing or simply progress? We remain on the fence on that one.
2) Inequality—yes, Globalism is creating wealth but it is not shared evenly. Across the world, inequality levels are getting higher (see Media Realism, The Gini Coefficient and the Future, January, 2010). Also, many of the poor remain desperately so in 3rd world countries even as their countries expand. There will always be inequality in a free market environment. His point is that it appears to be getting more extreme as Globalization expands.
3) Human Rights—most glaringly in apparel but it other industries as well, it seems that big multi-nationals use sweatshops staffed with young people (and some children) who work for peanuts in horrible and unsafe conditions.
Others argue that, while it is imperfect, many are better off. Each year, some 30 million Asians join the middle class; 20 million in China alone. Tom Friedman in his book THE WORLD IS FLAT argued that no two countries with a McDonald’s have ever been to war. His thesis is that if you build up economic links, hostilities will not break out very easily (Russia did invade former satellite Georgia in 2008 but I give Tom a pass on that one).
So where does this leave us in advertising? The dynamic global growth over the next few decades will come from Asia, Latin America, and perhaps a few nations in the Middle East. The big Mega-Agencies are beautifully positioned no matter which countries come out on top. Long term, I feel that China will face big problems due to weak demography. Other Pacific Rim nations are very young in terms of average age and have robust futures.
Increasingly, U.S. brands will focus their advertising dollars on their overseas growth and stay in maintenance mode in the US and Europe. This will harm the middle-sized ad agencies in the US but really help the major holding companies.
Undoubtedly, some nationalistic pride will raise its head and there will be more major local agencies emerging in the BRIC countries and other explosive growth areas. Nevertheless, the mega-shops are in a good spot with their financial resources, management depth and decades of experience. And, they will find a way to buy some of the stronger local shops.
A few people have expressed concern about working at one of the giants. I stressed resources and the great experience that you can obtain by a stint with one of them. But, as one young friend asked, “where do I go?” To put it in perspective, when I started at Ayer in the early 1970’s, Marshalk and Marsteller, both fair sized shops, were in the same building. People could sneak to an interview simply by taking a different elevator bank. Now, if you work for a major, can you shift easily within the agency family? Some one can look up your precise compensation and, if you do not get the new job, will your supervisor be notified or will your shop’s HR department? You may be stuck somewhere for a while but people will know that you are disgruntled. This may not be a major issue but more than one person has asked me about it.
On balance, I see Globalization as a positive despite some imbalances that will occur that are part of the fabric of any evolving market situation. British financial writer Edmund Conway describes Globalization as “the adrenaline of capitalism.” A great definition!
If you would like to contact Don Cole directly, you may reach him at email@example.com