GLOBALIZATION OF SERVICES A GAME-CHANGING DECADE TABLE OF CONTENTS INTRODUCTION 3 1 SERVICE GLOBALIZatION: AN ONGOING REVOLUTION 5 1.1 Service globalization is everywhere… except in the statistics 5 1.2 Explosive growth for trade in services in the next decade 7 1.3 A new vision of the market: all services are exportable 9 2 THE NEW RULES OF THE MARKET: TOWARD A NETWORK ECONOMY 11 2.1 We are moving toward a global service network economy 11 2.2 The network economy creates substantial risks and opportunities 13 3 RISKS AND OPPORTUNITIES FOR LEADING SERVICE COUNTRIES 16 3.1 Services have strong growth potential 16 4 CHALLENGES FOR CORPORatE EXECUTIVES 19 4.1 Reinforce and enrich relations with local customers 19 4.2 Industrialize operations to prepare for international deployment 19 CONCLUSION: A NEW GROWTH MODEL IS NEEDED 21 BIBLIOGRAPHY 22 INTRODUCTION Services appear to represent just 20 percent of global service segments, such as banking and IT services, are commerce, yet at the same time, they account for precursors in establishing global delivery models. In over 50 percent of economic activity (up to 70 percent the B2C arena, media and entertainment are now being in developed countries). Some attempt to justify forced to reinvent themselves under the pressure from this discrepancy has been made by reasoning that players with global distribution platforms (Google, the industrial sector alone is able to innovate, create Amazon, Apple, Booking, Expedia). employment and generate wealth. The implication is that services are “sheltered” from global competition To cope with these changes, Western countries possess as a result of their local and fragmented nature as valuable assets, given the expansion of the tertiary sector well as their low capital intensity. Official statistics in their economies (mature domestic markets, centers tend to support these preconceptions, because the of excellence, qualified labor). Service globalization is international flow of services is difficult to track due to thus a unique opportunity for these countries to export their intangible nature1. their know-how, reduce their trade deficits, and shift the global trade balance in their favor. The potential markets Service trade volume could potentially be twice that are immense and the corresponding compensation may indicated by official estimates. In addition, there can be very rewarding. That said, the window of opportunity be no doubt that service globalization is growing fast will be brief – ten years by our estimate – because the (8.7 percent per year from 2011 to 2022), driven by major emerging nations (China, India, South Africa) will three major game-changing shifts: business model soon position themselves on these markets to support digitalization, growth of demand in emerging countries, the growth of their internal consumption. and deregulation of national markets. In this context, a new vision of this service market is required, based on a For executives, service globalization signifies the better understanding of service exportation processes. To lowering of market entry barriers, which will open the develop this understanding, it is important to differentiate way to new growth areas while increasing vulnerability between “global services” and “local services”. The former to competition. There are several steps to prepare for includes media, IT services, and professional services, all this new world.First, secure domestic market share of which can be easily exported since they are delivered and strengthen the major drivers which differentiate remotely. In contrast, “local services,” such as hotels, national players from new foreign entrants, i.e. local maintenance services, and energy distribution, all require customer knowledge and relationships. Second, develop different rationales to go global: franchise networks, a global development strategy founded upon a new global CRM platforms, know-how, brand licensing, etc. vision of the service portfolio. Third, establish a network of global production and distribution platforms to pool Service globalization is a revolution as remarkable as investments and industrialize processes in order to initiate that which struck the industrial sector in 1973, and is a new type of international deployment, based not upon expected to drive an intangible economy structured complex and costly local facilities, but instead intangible around global service networks. Several professional economic opportunities. 1G . Vialle, B. Despujol, G. Thibault, Services: The Stakes of French Competitive Standing in 2025, Oliver Wyman, Paris, 2011 Copyright © 2013 Oliver Wyman 3 “Services are intangible economic activities designed to satisfy KEY customer needs completely, by making available intellectual, FIGURES human or technical resources” AN ONGOING REVOLUTION NEW RULES EXECUTIVE CHALLENGES +30% 50% 10 YEARS of service trade growth of service jobs can be relocated before emerging countries in the next decade overtake the global service market 14% 20%X2 of revenues generated of the value created of market consolidation through digital channels by services can flow (eat or be eaten) by 2022 (x2) to global decision centers €40 TN 80% +30% of GDP in services generated of revenues captured of CAPEX required in emerging countries in by global platforms to build global platforms the next decade (x4) in some markets * Financial services, government administration, non-profit organizations and social security, which correspond to very specific rationales, are excluded from the scope of this study Copyright © 2013 Oliver Wyman 4 1. SERVICE GLOBALIZatION: AN ONGOING REVOLUTION Official statistics largely underestimate the reality E XHIBIT 1: GLOBAL TRADE OF GOODS AND SERVICES of global service trade, as over 60 percent of $ BN service transactions are not officially recorded. 20 000 CAGR1980-2010 Service globalization has indeed already started Agriculture and will accelerate in the coming decade (30 +5,0% percent increase in volume), driven by the strong growth of digital (x2), demand in emerging Explosive growth of countries (x4), as well as the progressive lowering global trade since 10 000 China joined the of national entry barriers. A new vision of the WTO (2000) Goods service market is needed, where, contrary to +6,9% popular belief, 100 percent of services can be exported and nearly 50 percent of service-related Services jobs can be relocated. +7,7% 0 1980 1990 2000 2010 1.1. SERVICE GLOBALIZatION Sources: International trade statistics, WTO and Oliver Wyman analysis; CEPII, IS EVERYWHERE… EXCEPT IN CHELEM-balance of payments database THE StatISTICS Upon initial analysis, services would appear to represent This vision does not accurately reflect reality. Just by a low share of global trade, i.e. 20 percent, in contrast observing the influence of US consumption models to 72 percent for industry (Exhibit 1). This situation is in our daily lives (movies and TV series, fast food, generally justified by the “local” nature of services, which internet aggregators), it is easy to realize that service cannot be industrialized due to their low added value. globalization is already everywhere… except in statistics. HOW TO DEFINE SERVICE EXPORTS? The World Trade Organization (WTO) has identified four service exportation models: A parent company A service crosses A consumer crosses creates a subsidiary A company sends a border (e.g. delivery a border to receive in a foreign country expatriates abroad of a technical study, a service (e.g. tourism) to deliver a service to deliver a service purchase of air tickets) (e.g. restaurant) (e.g. consulting) Statistics usually consider only the first two models to be exports, while most service trade is delivered according to the third model. Copyright © 2013 Oliver Wyman 5 Official statistics hugely underestimate the reality of the • E-commerce is not captured by statistics service trade (Exhibit 2). While the inflow and outflow E-commerce revenues are particularly difficult of goods are recorded by customs, the intangible to track, especially for purchases made through transactions of the service sector are intrinsically harder platforms hosted in tax havens, while others go to track. To build statistical databases, government completely unrecorded. This is true, for example, departments and other regulators essentially use for mobile telecommunication operators revenues declarative documents provided by companies. generated through roaming agreements. Therefore, several sources of error must be integrated: • Industrial services are recorded as products • Intra-company services are largely overlooked Industrial companies export a growing share of The World Trade Organization (WTO) currently services as part of their products (operating services, estimates that 26 percent of services are exchanged maintenance, etc.), in order to expand their value among company subsidiaries, compared to 30 proposition, retain customers and smooth their percent for goods. For services, this is likely an revenues. For example, services represent up to 20 underestimation, since they are hardly impossible to percent of revenues for Alstom and 25 percent for quantify accurately. For example, what is the value of GE Aviation. Services have even become the core documents, studies, ideas and know-how exchanged business for some manufacturers (IBM, Otis, Apple) every day by email or phone among the various whose original market has become commoditized. subsidiaries and divisions of a single company? The Yet, the