Four questions corporate executives must answer before deglobalization

Yet cross-border trade of goods and services has already declined since 2011. Growing nationalism has been one driver. Additionally, lower salary differentials between developed economies and emerging economies have reduced overseas product shipments—shipments that are increasingly criticized in light of climate change.

With buzzwords, such as decoupling, resilience, and corporate regionalization surfacing in corporate boardrooms, executives are called to reimagine corporate processes and structures accordingly.

One option for restructuring is to establish several corporate headquarters in the world’s key economic regions. Among other things, companies expect to gain more independence from geopolitical upheavals, faster decision-making processes in their respective regions, as well as greater market proximity and customer orientation.

The Wilo Group, a German manufacturer of pumps and pump systems for the building services, water management and industrial sectors, has adopted this approach. The company generates nearly €1.7 billion in sales and operates in more than 50 countries. Its corporate headquarters in Germany was complemented last year by two regional headquarters in China and the US. The CEO, Oliver Hermes, believes that the world is increasingly dividing into three geopolitical “tectonic plates.” Wilo Group customer needs are drifting apart in the three large economic areas of Europe, the Americas, and Asia. So too customer requirements in Wilo’s markets are also drifting apart in these large economic areas. This affects, e.g., the possibilities to provide customer-fit solutions, because there are increasing cultural and legal differences between these regions on this topic. Accordingly, Wilo has transferred more responsibility for product development – formerly centered in Germany – to the new regional headquarters. Production capacities were also expanded there, and the establishment of regional supplier networks was accelerated. Moreover, the regional headquarters were given financial leeway to make regional investment decisions independently. This reduces the necessity of cross-continental money transfers, which government regulations have made more complicated in recent years.

Numerous other companies are also establishing regional headquarters, which, at first glance, suggests increasing decentralization and regionalization of their structures, processes, and resources. But this is only one piece of the puzzle. For companies with international operations, a more differentiated analysis is therefore needed to readjust the balance between regionalization and globalization. Executives must thus examine and answer four key questions:

Where are your value creation processes carried out?

Many companies have created jobs in the very marketplaces where they wanted to sell their products, sometimes in response to political pressure. Accordingly, local jobs were created in production, sometimes also for product development, and, increasingly, there has been cooperation with local suppliers in procurement. In other functional areas, however, there is a different picture: The rise of e-commerce, for example, has meant that some sales activities no longer take place in the customer’s country. Similarly, trends in repair and maintenance show less regionalization. For complex plants and industrial products particularly, modern technologies, such as remote control and virtual reality, are increasingly being used, requiring less value creation on site.

Where are decisions being made about the execution of these activities?

If a production facility only manufactures regionally specific products, local control of production is a sound choice. Wilo, for example, follows a strict “region-for-region” approach. Under this approach, Wilo consistently pursues the goal of serving regional or local customer needs with regionally or locally manufactured products. The organization is geared accordingly to permit as much decentralization as possible and as much centralization as necessary. Empowering the regions means they can make decisions for their local markets in alignment with the Group’s global strategy.

However, the more the products have identical components across countries, the better central control can compensate for regional demand fluctuations. A prerequisite for this is central documentation of existing resources and requirements. Companies are increasingly using IT systems for this task and, on this basis, intervene centrally in development, production, and procurement processes. Moreover, because the potential of Big Data can be best exploited if data formats are standardized across companies, regional business units are increasingly restricted in which IT systems they may use. In Western companies, but less so in Chinese companies, centralized control is also increased by compliance policies that were created in the expectation of managing identical applications in all countries.

Where should the relevant decision-makers be located?

All decision-makers do not have to be in just one country or stationed in a country’s corporate headquarters. Rather, they can be dispersed in countries around the globe. Leaders at Schneider Electric, the French multinational energy and automation company, were formerly located in France. Now, Schneider has central management board positions abroad, for example, in Hong Kong.

What nationality should the central decision-makers have?

In the past, many Western companies have worked to strengthen regional diversity at their management levels, often with only moderate success. However, if current geopolitical developments lead to more bloc formation, past efforts are likely to be questioned. This does not automatically mean less regional diversity in management, but perhaps only a reorganization.

Overall, the establishment of regional headquarters is a measure worth considering adapting a corporate organization to current geopolitical developments. However, precise adjustments are required, particularly when deciding where activities are to be carried out and who controls them. Companies must remain flexible and cannot rely on stable structures.