2018 in EMEA: Why MNCs can’t afford to assume more of the same

From a macroeconomic point of view, 2018 will look a lot like 2017 for heads of EMEA running businesses in the region. The growth in key markets will stabilize or even improve marginally. Oil prices will only tick up minimally compared with this year’s averages. Currency volatility will be less acute than during 2014-2016, providing companies with some relief. Political uncertainty is unlikely to be substantially greater than what’s normal for this region. However, this should not make MNCs’ EMEA teams complacent. If anything, this environment puts other challenges MNCs face in much sharper relief.

First, it’s unclear whether this kind of relative stability and solid (if not spectacular) growth can last much further beyond the next year or so:

  • China will have to balance the need for a soft landing with the urgency to implement critical reforms that remove severe imbalances in its economy. It may pull it off, but the risks are huge – at FSG we’ve been assessing the risk of a hard landing in China at 35%. 2018-2019 will be the years when the country has to face its challenges head on as postponing action becomes no longer feasible.
  • The US, while enjoying solid growth, looks unlikely to benefit from a significant economic boost from President Trump’s economic program, which is coming increasingly under pressure. The country is also in the 9th year since its last recession; at this point a cyclical slowdown becomes more likely as time passes.
  • The eurozone, while enjoying solid growth this year, still has unresolved issues in its banking sector and significant public debt. Whether it can sustain growth in the face of a stronger euro and slower exports, growth remains to be seen.

Add to that geopolitical risks, such as the situation with North Korea, and you get plenty of significant factors that could disrupt the current stable trajectory. This is why companies make contingency plans, of course, but it also emphasizes the importance of making the most of 2018 in terms of performance and also creating buffers in the business as it heads into deeper uncertainty and elevated risk in 2019 and beyond.

These challenges only increase the urgency of change that MNCs will need to execute during 2018. While the macro environment may not be changing, MNCs’ EMEA customers are. We’re observing rising price sensitivity, customers demanding more tailored solutions, rising competition, as well as a range of factors that are putting pressure on MNCs’ cost structures, from tariffs to tax increases and localization requirements. The combination of macro, customer, and internal pressures will become a considerable challenge for MNCs in 2018.

Leading companies we work with are already re-thinking the economics of their EMEA emerging markets businesses, looking for sustainable cost efficiencies that don’t hurt growth potential, such as optimizing how they are managing distributors and the structures of their routes to market. They are investing in their people, setting higher expectations and rotating in seasoned team members from other regions such as APAC or LATAM to bring fresh practices and ideas for addressing challenges such as acute price competition. And they are re-thinking their overall value propositions to better adapt to changing needs, preferences, and purchasing power of customers that have been reshaped by changing conditions over the past two-three years and are now becoming much more significant. So while EMEA executives may spend less time in 2018 worrying about currency volatility or geopolitical risk, they will need to spend a lot more attention on adjusting their business to the way in which these macro conditions have reshaped the business environment and the opportunities and risks they have created for their businesses.

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