Trade wars make things more uncertain for CEOs: McKinsey’s Tonby

Vinay Kamath | Updated on June 28, 2019

Oliver Tonby, Chairman of McKinsey Asia.

With energy demand till 2035 set to grow at 4.6% a year, India needs all the energy sources it can get

Oliver Tonby, Chairman of McKinsey Asia, is on a whirlwind visit to Chennai, to review local operations as well as meet with key clients. Tonby is a core leader of McKinsey’s Digital Capability Centre in Singapore, which drives digital transformation of companies in South-East Asia. Since joining McKinsey in 1997, Tonby has worked across multiple industries including energy and materials, private equity and technology. In this wide-ranging interview he talks about the challenges CEOs face, the impact trade wars will have on businesses, the jobs crisis, his core interest area of oil and energy, and what India must do to achieve energy security. Excerpts from the interview:

What will be the biggest challenge for CEOs in the coming years?

What would be on top of a CEO’s mind is the fact that a technology revolution is going on, whether we talk about digital, data analytics, machine learning or industrial IoT, different technologies are affecting everyone and everything. There’s no CEO who is not thinking ‘what do I need to; do I need new business models; do I have an opportunity to be paid differently for my products; what kind of people and skills do I need; how do I drive efficiency improvements in my organisation…’ those are the challenges as well as opportunities CEOs are confronted with.

How will the growth and trade environment impact businesses, in the context of the ongoing US-China trade war?

We have come off 10 fantastic years, but now things are different because of the trade war tensions. Top of a CEO’s mind is how does that affect my business? Many companies are export-oriented or have global or regional footprints, so obviously they are worried about growth. The trade war will take its toll in the short term and affect GDP. In the long term, we will see shifting patterns of trade. Countries have grown their own factory base and have begun to consume more; China is an example. Also, a few years ago labour costs were reasonable in China; now China is five times as costly as Indonesia or Vietnam. So, we’re seeing shifts in the value chains of companies that are moving out of China or setting up new production bases elsewhere. This also benefits India in the longer term.

However, the trade war is inflicting more uncertainty on the CEO. The other challenge is around people, capabilities and skills. It’s very clear that today’s workforce needs different skills but where do I find them? India has the largest number of STEM graduates. There’s more talent in India than most other countries but, even so, that is not enough. We need to re-skill people.

The big concern confronting Indian businesses is the inability to generate jobs due to a variety of factors. How do you see this playing out?

I am a long-term optimist for India. India is the future. The trends are in India’s favour; an increasing consumer population, the skills and availability of people. The IT sector is a point; 50 per cent of IT services are from India. Yes, there is a debate on growth but I hope we now see some post-election uplift and get the investment cycle re-energised. As for the questions whether growth is at 6 or 7 per cent, it’s a fact that almost all countries would give their right hand for that kind of growth. India has been in election mode for a year. In most emerging markets, for a significant time before an election there is a slowdown in investment; that is normal. What is unclear to me is how much of that is macro-economic driven and how much is election-driven.

According to McKinsey Global Institute (MGI)’s report on ‘Digital India: Technology to transform a connected nation’, the potential productivity unlocked by the digital economy could create 60-65 million jobs across almost all sectors by 2025. Digitisation may also automate or eliminate the equivalent of 40-45 million current jobs, necessitating large-scale retraining and redeployment.

It’s important to recognise that there will be net significant job addition. Retraining and redeployment will come with quite a bit of change that will be uncomfortable for the individuals in the middle of that change. Organisations are investing to re-skill workers. McKinsey, too, through our not-for-profit foundation programme, Generation India, is training unemployed youth and, at the end of it they can get a job.

Will oil remain as relevant to the global economy in 10 or 20 years as it is today?

It’s well known that oil is reducing in the overall energy mix in the future. Peak oil has been brought forward relative to what we thought a few years ago, primarily because of electric vehicles and renewable energy. Adoption of electric vehicles has been faster than anticipated. The top demand for oil is within sight, perhaps in the next 10 to 15 years. There’s been a massive change in production in the US, and in Russia. They are multiple big producers of oil, OPEC being a third block. Today, shale oil puts a roof on how high oil prices can go, as it’s easy to ramp up production. It’s difficult to predict oil prices, but if you look at the long-term supply-demand scenario, it could swing between $60-70 a barrel. There will always be a swing factor as the oil industry is always impacted by geo-political factors. Longer term, oil will be a less important part of the mix as renewables and gas keep growing. India has been a wonderful story in renewables.

Is OPEC's heyday behind it? What effect does this have for the rest of the world?

OPEC shocks may not happen. It’s a simple matter of numbers. With the US producing millions of barrels a day (a Reuters report says 12.45 million bpd) and Russia producing a similar number, these are two powerful producing parts of the world we didn’t have 10-15 years ago. So, OPEC power is a little less than what it was; it’s still important as several OPEC countries are lower on the cost curve and it’s still cheaper to produce there, but the relative importance is less than what it was.

How should big oil importing countries such as India prepare to meet their energy security needs over the coming decades? Should they focus on more oil exploration and build strategic oil reserves to cut import dependency or should they put oil on the back-burner and focus instead on future technologies such as electric?

India needs every energy source it can get. Three factors play out: reliability, cost of supply and environmental impact and sustainability. All need to be optimised at the same time. It’s very easy to say that we want cheap, green unlimited energy, but that doesn’t exist. India needs to invest in multiple technologies, especially as energy demand till 2035 is going to grow at 4.6 per cent a year or thereabouts, depending on scenarios.

India is already a significant importer of oil so you need to invest in renewables and gas. Coal use will reduce over time but we also need to figure out how to make coal use greener. Coal is never going to be ‘green’, but getting rid of old technology plants will be a good thing. Whether it’s fans or air-conditioners or cars, driving energy efficiency should be a priority. India should be driving towards a two per cent efficiency improvement every year.

Where is growth for McKinsey coming from?

India is one of the fastest regions for us and we celebrated our 25th anniversary in India in 2017. Our ambition is to be pre-eminent in every country that we are in. We were early into India, we have grown and been able to maintain the pre-eminence. The impact we have for clients, that is the most important thing we do as we deliver the growth and transformation they need. We have also been able to hire some of the best people.

At McKinsey we have been driving our own transformation. Fifty per cent of what we do today did not exist five years ago as we did not have the capabilities. They include tech capabilities: digital, industrial IoT, analytics, machine learning, and so on. Of the 30,000 people globally, 5,000 are in cyber security, in the data analytics and new tech space. We have McKinsey Transformation, where we partner with our clients in their transformation. Earlier, it (McKinsey’s involvement) used to be just three months, and strategy is what we did. Today, 20 odd per cent is strategy while helping our clients drive transformation is the rest. They are anywhere from six to 36-month programmes where we partner to build new businesses. We have helped clients build a whole portfolio of new businesses, we have even seconded CEOs, or helped clients hire the team they need. For us as professionals it is very exciting.

How does McKinsey stay ahead of the curve, where do you get your inspirations?

There are a few things we do; we invest a lot in research and knowledge. Every year we invest millions of dollars on research. We try to look into the future to see the trends that are going to hit us and what they mean for companies. That knowledge is sectoral: the future of energy, banking or mobility. It’s a global view; however, it becomes meaningful for clients if we localise it for them. We pride ourselves on being part of global networks, external networks. Say, you were part of our energy practice, you would be part of a network of 30 CEOs, ministers and academics in the sector, trying to figure out the next big thing. We focus on specialisation and expertise; the days of generalists are gone; that’s how we try to stay ahead.

Published on June 28, 2019

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