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00:00So given what your survey is saying, Christine Lagarde is right.
00:04Trade will never be the same again.
00:06There is a big rethink going on.
00:08Is that the right way of thinking about this and how long does that take?
00:11I think trade has changed already.
00:1365% of clients we've spoken to have already seen costs go up.
00:17So that's happening today.
00:19And a third of them are dealing with supply chain challenges and logistical bottlenecks.
00:23That said, no one expects the world to go back to where it's going to be.
00:27Everyone we've spoken to is planning to reshape the supply chains, look at new markets or
00:31change their business model.
00:32Now trade doesn't change overnight.
00:34Supply chains have built up over decades.
00:36They've been built up to minimise costs and you can argue they've done that incredibly
00:39effectively.
00:41Now they need to become resilient and they need to actually be able to move based on geopolitical
00:46concerns and that's a big concern for companies.
00:49So you're saying you're already seeing effects.
00:51How far into this process though are we?
00:52We're trying to work out when we see the effects of the tariffs.
00:55How long does this process start to take to unfold and have a meaningful impact into
00:59the data?
01:00What guidance can you give us there?
01:01You'll see it today in prices.
01:03So 65% of companies feeling an increase in price, you either pass it on to the consumer
01:07or you pass it on to your supplier or aid set the margins.
01:09We saw it in the PMI data yesterday.
01:10So we've seen that today.
01:11But most companies are on wait and watch.
01:14You would not make a strategic move until you know where the tariffs are going to settle.
01:17So while you're hoping for a quick resolution, most companies are preparing for prolonged uncertainty.
01:21So I think we won't see fundamental strategic changes for another quarter or two until we
01:26see a resolution of where the trade boundaries are set.
01:28Vivek, picking up on that point about passing through those costs, is it too early to get
01:34a glance into how that's happening?
01:36How companies are divvying that up between the consumers versus taking it on themselves?
01:40Is there a lesson to be learned yet?
01:42It depends on the sectors.
01:43So sectors with a short production cycle, like tech, consumer healthcare, we're seeing
01:48that today.
01:49Sectors with longer production cycles, like energy utilities or heavy industrials, is going
01:55to take longer.
01:56So it depends industry by industry.
01:58What we're also seeing is a huge variance across geographies.
02:01So we're seeing new trade corridors emerge.
02:04India is trading a lot more with Europe and with the US, ASEAN companies with China.
02:11So we're going to see new trade flows emerge and new corridors emerge as a consequence,
02:14but companies have to become much more agile.
02:17How quickly can we see that reframing or those new channels opening up?
02:22I mean, what I'm really asking is how quickly can that actually start to offset some of the
02:26other drags that they're seeing when, for example, China can no longer export to the
02:29US and so on?
02:31So this year, I think you will start seeing new trade corridors being formed this year.
02:35I don't think you'll see supply chains fundamentally reshaping, but you'll see demand behavior
02:39changing this year.
02:41Supply behavior will take another year or two to happen.
02:44And the sectors where that's most pronounced?
02:46Tech, healthcare and consumer.
02:48That's where we're seeing a lot of it.
02:50Services trade, no one talks about, has been exempt from tariffs.
02:53But interestingly, services trade can move a lot quicker.
02:56It's a lot more agile.
02:57So we see companies also evolving and changing their business models to introduce services
03:01components because it's much tougher to tariff a service than a good.
03:06How much of the COVID era playbook has prepared us for this moment?
03:10Not at all, I would say.
03:12So what COVID taught you is about blockages in supply chain and finding alternative suppliers.
03:17It didn't force you to look at new demand markets.
03:20So COVID helped you with supply management.
03:22It didn't help you with changing demand.
03:24So where do I base my production facility, whether it's closer to the consumer or closer to home?
03:28This is a completely new playbook.
03:30And which is why I think companies need to be much more agile, but also get partners to help
03:33them with that.
03:34So that friend-shoring argument that came after COVID or even in the first Trump policy
03:38where the tariff story was happening, where if you're Hasbro, for example, and you want
03:43to sell toys in America, you build your production facilities in Mexico.
03:46That argument slowed down during the Biden administration.
03:49Are you seeing more momentum and more move from some of the folks you're speaking to?
03:54So you look at the hard data, supply chains actually got longer rather than shorter.
03:59So instead of producing in the last seven years, you do moving production closer to home.
04:06But effectively, it ends up being the assembly that's moving closer to home as opposed to
04:09the underlying materials.
04:11So that will have to change.
04:12And I think that's where the next five, 10 years, we will see new supply chains.
04:16We will see new opportunities for companies who seize that.
04:18How does that work though exactly?
04:20Because I mean, look, not every raw material is available everywhere.
04:24So is that, are we shooting for an inevitability, I'm going to say this right, that isn't even
04:30possible here?
04:31It depends by industry.
04:34I mean, I don't think you can fundamentally reshape what the world of trade looks like.
04:39But what you can do is decouple.
04:41So companies are looking at China for China, US for US, and you can have new trade corridors
04:46emerge.
04:47But the underlying raw materials, I agree, but I think the manufacturing can move.
04:50We talked to some of the shippers the other day.
04:52Can we talk to Maersk, we talked to Maersk, we talked to Hapag-Lloyd, both were painting
04:55a really positive picture about what they've seen post, what was it, two weeks ago, the
05:00China Monday deal, the Monday deal that we got on China and the announcement.
05:07How big an impact has that had?
05:10Is that sustainable?
05:11What are you seeing in your data right now?
05:13Give us a cold face experience of what's going on.
05:15So we saw front loading before the April announcements.
05:18We saw a huge amount of blank sales to cancel shipments in the few weeks after that.
05:22Yeah.
05:23The trade agreements mean we've seen a spike in the first few weeks of May.
05:25Yeah.
05:26So companies are building up inventory on a really short-term basis.
05:29So does that just delay the effect?
05:31That delays the effect.
05:32Right.
05:33So it kicks the can down the road.
05:34So till we end up with, it's realistic to assume 10% is going to be the new baseline.
05:39Yeah.
05:40So when do we get a clean number?
05:43When do we, assuming we, the stability.
05:46Your guess is as good as ours.
05:47Okay.
05:48Fair enough.
05:49I mean, something that caught my eye as well is that this confidence story that despite all
05:53of this disruption, businesses still have this confidence.
05:56I want to ask, what is behind that optimism and is it overconfidence or is this a sort of
06:01genuine story about resilience?
06:03So what trade does is it meets a consumer demand.
06:06Consumer demand is not weakening, whether it's in the US, arguably China, you're seeing
06:10a pickup in consumer demand and that's what's driving business confidence.
06:14But also I think businesses have realized there is a lot of value to expansion into new markets.
06:19UK companies have typically looked at Europe, looking at markets like India and ASEAN.
06:23So there are new growth opportunities and that confidence has been the highest in Indian
06:26companies, companies in the Middle East.
06:28This is where we're seeing underlying demand and new trade coming in.
06:31What are you telling your clients that you work with in terms of ensuring that possibility?
06:37If we're waiting for the actual trade developments to take place over five, ten years time, how
06:43do you trade that?
06:44How do you prepare for that in the interim?
06:46Your strategic plans can no longer be linear.
06:48You have to prepare for different scenarios.
06:50So agility becomes really, really important.
06:52How do you do that?
06:54Give us an example of the solutions you provide.
06:56So what we do is we help you mitigate the risks with finding new buyers, expanding into
07:01a new market, finding new supply chains.
07:03So in this case, you do three things.
07:05The first is you break up your demand into your home market and markets which are core
07:09and not core.
07:10The second is you look at where you can expand activities.
07:13And the third is you partner.
07:15So you have to form partnerships to hedge against different scenarios.
07:18The big scenario here though isn't that are we heading into a world where the US consumes
07:23less.
07:24So Donald Trump the other day was talking about children buying fewer dollars.
07:27You can have, what was it, one or two as opposed to 30.
07:31This is the story that we're heading into, which is a US consumer that has got very used
07:35to cheap stuff.
07:37And you wonder whether or not that cheap stuff is going to be there.
07:39And how do you kind of break that addiction to cheap stuff?
07:43Is it by changing the dollar narrative?
07:45Is it by tariffs?
07:47And you wonder ultimately kind of how quickly this works its way through into the system.
07:52But there is this kind of, the US has been this kind of dump consumer for the rest of
07:58the world for really a long time.
07:59But it's a question of price sensitivity, isn't it?
08:01It's because, I mean, this week we've heard from, I'll give you the Nike example because
08:05I'm a little obsessed with the story.
08:07They put out a conversation in the earnings or the analyst call somewhere where they said that
08:11the trainers or sneakers that are worth or sell for about $100, they're going to go
08:16up by $5 at most.
08:19But only if they are selling at the moment for over $100.
08:22But as a consumer, I'm thinking that doesn't make that much of a difference to me, from
08:25a $100 pair of shoes to a $105 pair of shoes.
08:28And it's that line that's unclear of where that red line is in terms of changing, okay,
08:33well, at $105, I might not change it, but at $150, I might reconsider what I'm buying.
08:38And we haven't found that red line yet.
08:40I mean, are companies finding that red, because it speaks to your point when you're talking
08:44about tech, for example, and some of those sort of higher cost sectors, are companies
08:48sort of finally finding those thresholds?
08:52Finding demand elasticity is the biggest challenge for companies.
08:55And if consumption were to go down, that's economic slowdown.
08:57So I'm not sure that's the outcome that's intended, and hopefully that's not the outcome
09:01we see.
09:02But isn't that what Trump's talking about?
09:03That ultimately when he talks about the consumer consuming less cheap stuff, and that seems
09:06to be the kind of the message, the underlying message that is coming out.
09:10Or is it switching to different products?
09:13So is it either reducing consumption, which is not necessarily a good outcome for the economy,
09:16or is it switching to a different product set?
09:18And what would you, how do you read it?
09:21And so I think it's the latter that's being expected, because switch to American made products
09:25is obviously the expectation.
09:27And I'm not sure how possible that is for the entire suite of products that you've got.
09:31Okay.
09:32You mentioned that this strategy changes sector by sector.
09:36Which sector has it the hardest, and which sector has it the easiest?
09:40I think services sectors have it the easiest right now.
09:43Because by definition, if you're on a tech services sector, your products travel across
09:46borders, have not been impacted by tariffs, and that's where we're seeing the most.
09:51Short term consumer goods are probably which are going to get hit the hardest.
09:54You have built up inventory over the short term, but consumers tend to be quite price sensitive
09:59in that space.
10:00You wonder whether the dollar is the cheapest way of doing this.
10:02Just reduce the value of the dollar, and that makes everything more expensive in America.
10:06Yeah.
10:07I mean, that's one obvious way.
10:08One of the strategies.
10:09Yeah.
10:10I mean, what do you think is the thing that we're most commonly misunderstanding or missing
10:16about the China story when it comes to this whole reshaping of supply chains and
10:20tariffs?
10:21China supplies a little over 30% of the what we eat, wear, and consume.
10:27That's unlikely to change anytime soon.
10:29I think that that supply will find new homes potentially.
10:33But our reliance as a global economy on Chinese manufacturing is unlikely to change fundamentally
10:38anytime soon.
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