As the world moves into 2024, it is becoming increasingly clear that we are in the midst of a generational change of economic and geopolitical conditions. Following World War II, the global economic developmental processes pushed in the direction of economic integration. While there were wars and two rival systems during the Cold War, the Western system began decreasing trading barriers and moving toward free trade blocks. With the end of the Cold War, this movement expanded into the formerly communist parts of the world and became what we know today as globalization, a process which focused on economic efficiency above all else. Supply chains became globalized as production of goods was moved to the lowest cost countries.
This global economic system is now going through one of those transition periods that occasionally occur in history. With the pandemic showing the downside of global supply chains, some nationalist leaders, often speaking for those perceived to be losers in the globalization process, are advocating policies that would degrade the globalized economic system to which firms have become accustomed. In addition, interest rates are higher than they have been in a couple of decades as central banks try to bring down inflation unleashed by certain responses to the COVID-19 pandemic.
The fact is that many companies that currently exist are built for the world as it existed in 2019. Interest rates had been low since the financial crisis of 2008, and the globalized economy was functioning adequately. In the world as it exists
today, there are several factors that a pump company will need to consider as it prepares a strategic plan to navigate
this world.
1. Interest rates will likely stay relatively high for an extended period.
For those companies needing to obtain funding in the capital markets, the cost of doing so is going to be higher and the terms more strenuous than has been the case in the past. Some market watchers might have thought the rise in interest rates was going to be a temporary thing and that rates would start to come down.
What seems to have been forgotten is that interest rates in 2019 were historically low, a fact that made obtaining capital or refinancing debt an attractive proposition. A return to the historical average would still mean a higher cost of capital than what was available pre-pandemic. The idea that rates will come down quickly to 2019 levels owes much to wishful thinking. For those planning capital spending budgets over the next five years, the assumption of relatively high interest rates would appear to be prudent.
2. Political-economic risk is now elevated.
For the Western world over the last 50 years or so, the political-economic conditions were relatively stable. While political parties would promise sweeping change while fighting to win elections, most of the changes were done at the margins.
Companies, especially those that did business internationally, were able to enjoy a fairly stable and predictable economic system. That stability is not something that can be completely counted on any longer. The fact is, there are now real constituencies for fundamental changes to the rules of the game.
Many of the people and political parties that are now electable in various Western countries would never have come within 100 miles of political power 20 years ago. The fact they are now politically relevant is an indicator of some serious dissatisfaction within relevant segments of the population, segments that are serious about changes. Being highly attuned to the politics of certain countries with which one is doing business is now even more of an imperative than in prior decades.
3. Supply chains will need to be restructured and shortened.
In a global system that is unstable, having a secure source of supply is likely to mean a source closer to home. Early in his career, one of the authors of this article was an international freight forwarder who dealt with just-in-time logistical systems (systems in which a company, rather than holding inventory of inputs, arranges to have its inputs shipped to the factory to arrive “just in time” to be put into production).
Some of these systems were fairly complex, with multiple potential points of failure. The author observed several
failures in his brief career—failures that were difficult and expensive to correct. A
just-in-time system needs a stable environment to function properly. An unstable global system can make a globalized just-in-time system more challenging to operate and even
untenable in certain circumstances. Building some margin for error into and/or shortening supply chains is a trend that is likely to continue.
For the pump industry, as with many industries, a realization that the changes
of the last couple years are likely to be longer lasting than previously assumed is going to be a prudent starting point for strategic planning. Organizations that were built for a 2019 world would do well to begin the process of looking at needed changes to operate in a world that is far more unstable and uncertain. As with anything, the company that can adapt the quickest to this changed world is one that will find itself with a competitive advantage going forward.
The View From Europe
Economics
The general view is that 2023 started well from a sales standpoint but seemed to weaken a bit at the end. The overall
view on purely economic issues from questioned industry experts is that 2024 will be slightly worse than 2023 but not disastrously so. In 2025, it is thought the overall economic outlook for the industry will begin to improve.
Europump’s economic advisors have a somewhat different outlook. They believe 2024 will be slightly better than 2023, and the situation will improve significantly in 2025 and 2026. Their position is that market growth in Europe, however, will significantly lag behind the rest of the world.
Geopolitical issues
The overwhelming opinion of people questioned for this article is that issues related to geopolitical uncertainty are far greater than at any other time in anyone’s experience. One person stated from his perspective the situation now has never been more unstable since the upheavals that took place in Europe in the 1930s. Specific issues mentioned by individuals include:
- continuing war in Ukraine
- Israel and Hamas conflict expanding to affect much of the Middle East
- Israel and U.S. conflict with Iran
- China either invading Taiwan or starting something else to divert attention from their internal problems
- Russia reacting to Finland (and eventually Sweden) joining NATO
How much these issues affect the economic situation is hard to say, but the uncertainty must have a negative effect on investment decisions.
One individual particularly mentioned the continuing lack of clear definition on the Build America, Buy American regulations is causing him concern, as his company is uncertain of what will eventually be required to remain in the U.S. pump market.
Regulatory environment
As always, some of Europump’s efforts in the standards area continue to relate to energy savings; however, this year there have been some significant additional issues that are causing concern on the part of pump manufacturers.
The first of these is the push to either ban or significantly reduce the use of any PFAS containing materials in Europe or in products that are used in Europe. This is not only a pump issue but will, if passed in its entirety, have a devastating effect on the entire European economy. Europump has established a working group that has published a position paper detailing the negative effects of a complete or significant PFAS ban. Europump has also joined with numerous industries and industrial associations in putting together and submitting public comments regarding
this issue.
The second major concern relates to what is known in Europe as the “Green Deal.” The European Green Deal was approved in 2020. It is a set of policy initiatives by the European Commission with the primary goal of making the European Union climate neutral by 2050. The plan is to review each existing law on its climate merits and also introduce new legislation on the circular economy, product environmental footprint,
building renovation, biodiversity, farming and innovation. These goals are extremely ambitious.
This is expected to lead to what has been called a tsunami of regulations. Presently there are around 45 single recommendations to achieve these goals that must be turned into regulations. The scopes of many of these regulations overlap one another. Worse, many conflict with one another. For example, designing a product to be robust, modifiable and recyclable to achieve circular economy goals can be at odds with minimizing the carbon footprint of the product. In the whole process, there has generally been a poor dialogue with stakeholders and little consideration of
free market effects.
In partial response to this, Europump has in place working groups in the following areas:
- circular economy
- product category rules
- (environmental footprint)
- drinking water
- digitization
- digital passport
- greenhouse gases
- PFAS
Nevertheless, the scope of implementation and how overlapping requirement and conflicts will be resolved remains unknown and is of significant concern to not only the pump industry, but the entire European industrial sector. It will take years to see how this whole issue eventually plays out.