As we move into 2020, there are some geopolitical macro factors that will impact the United States as well as some upcoming regulatory factors specific to Europe of which the pump industry should take note. Although ongoing geopolitical challenges will remain present, there are a couple of items we can expect some clarity on, such as the China trade dispute and Brexit.
Additionally, Mexico will need to be given more consideration by companies in their strategic global economic analysis than has likely so far been the case, as factors there are deteriorating. On the European front, upcoming changes in regulations related to carbon footprint, new motors and drinking water will be of some importance to U.S. pump companies exporting into the European Union.
The global trading system is in the midst of a generational paradigm shift. For those firms that had become used to the relative stability of the global economic environment with its “free trade” consensus that has existed more or less over the last 30 years, certain assumptions will need to be revised. Although rhetoric asserting that the U.S. is becoming isolationistic is overheated, the era of unchallenged free trade consensus is likely over.
The global economic and financial infrastructure that was put in place after World War II is being challenged, as those who feel left out of the benefits of globalization are finding their political voice. This is also happening in Europe and other places as political movements are gaining traction for the first time in decades. However unhealthy this development may seem to some, it is not going away as long as the underlying sources fueling its ascent are not mitigated in some way.
That being said, despite fears of isolationism, a massive retreat from the global trading system similar to what we saw in the 1930s is unlikely to happen under any government in the U.S. or in Europe. Modern connectivity and the ease of travel that exists today renders such a policy path highly impractical.
This also goes for large influential economies like those in France, Germany, Britain or even Italy, which are too interconnected to engage in an isolationistic policy structure today.
Despite this, we can expect that the trend of easing trade restrictions that has occurred over the last 25 or 30 years is likely to be reversed to some extent. Companies with exposure to factors such as these should be prepared to modify their strategic assumptions.
Although the results of the British election are not known at the time of this writing, one gets the sense that Brexit will be clarified no matter the ultimate result. Brexit has dominated the conversation in Britain for nearly four years, and it appears that the political system is not going to be able to really move forward until something is decided. A country cannot exist and thrive in permanent limbo, which is what the British political class has largely been in since the Brexit vote in 2016.
Although it is theoretically possible that the election results could produce a government that would repudiate Brexit in its entirety or that would call for another referendum hoping to get a different result, this would likely drag out the uncertainty on Brexit further still. Whatever the British public and establishment may want, allowing the saga to drag on does not seem to be desired by anyone. As a result, we can reasonably expect to know the ultimate result sometime before the end of 2020.
The trade negotiations with China are ongoing and a deal may be agreed upon, but it is likely that the Chinese government is hoping for a change of U.S. administration in 2021. While one might suppose that this would cause the Chinese to stall negotiations and take a “wait and see” approach, the fact remains that China needs a deal probably more than the U.S. does.
While another administration might likely be more friendly to China, waiting and hoping that there is a new administration before agreeing to anything might not be the best strategy. Stalling negotiations means that the tariffs stay in place for another 13 months at least. That China is willing to negotiate is an indication that they are feeling the pain of the tariffs right now. However, there is nothing to preclude them from signing an agreement now, and then trying to renegotiate that agreement with the next administration in 2021.
If the Chinese wait out U.S. President Donald Trump, they may risk that the deal he is willing to offer in 2021 might not be as good as the one he is willing to sign today. Trying to guesstimate what Trump will be willing to do 14 months from now is not something that even someone with a functioning crystal ball should attempt. Consequently, look for the Chinese to accept some sort of trade deal before the next election.
While it may seem surprising to include Mexico in an article about global factors potentially impacting the pump industry, the situation in Mexico has become serious enough that companies should be giving some thought as to what is happening there.
From the U.S. business perspective, apart from the immigration issue, Mexico has been largely ignored. Many have viewed Mexico as if what happens in its economy and political system is largely irrelevant to the U.S. economy. However, according to a 2018 article in Fortune magazine, Mexico is the third largest trading partner of the U.S., after China and Canada. Although the North American Free Trade Agreement (NAFTA) was sold in 1994 in part as something that would raise up Mexico’s economy to a developed/near-developed status (and reduce illegal immigration), that has clearly not happened.
In order to have a functioning free trade area, the member states need to be at similar levels of economic development and similar levels of institutional integrity. Mexico was never at the same level as Canada and the U.S. in quality of political-economic institutions, and the gap appears to have grown.
Today, Mexico may be on the verge of becoming a failed state. Recently, cartel gunmen won a pitched battle against the Mexican Army in one city, and parts of northern Mexico are effectively outside control of the federal government. And this is not a recent phenomenon. While we cannot predict that Mexico will become a failed state in 2020, one cannot have a failed state on one’s border without some major spillover effects. The collapse or near collapse of the third-largest trading partner with the U.S. will have effects, the magnitude of which are unclear at this time.
Just as one cannot ignore China when discussing global factors that might impact the U.S., one can no longer afford to ignore Mexico. Companies should begin to take what is happening in Mexico into account as they strategically analyze how the global economic environment will impact their business.
European Regulations & Issues
In addition to geopolitical factors, there are some upcoming pump industry specific issues regarding energy savings and environmental factors in Europe: carbon footprint, materials in contact with drinking water, an EU database on substances and motor regulation.
Product Environmental Footprint (Carbon Footprint)
At the last Europump Technical Commission meeting in October, participants were informed that the transition period for implementing carbon footprint requirements has started and full implementation of requirements will take place in 2021. However, the required methodology is not in place and policy has not yet been defined, which will almost certainly delay implementation beyond 2021. Currently, the European pump industry is in the “wait and see” mode.
Materials in Contact With Drinking Water
After a long negotiation period, it appears that many EU countries are approaching consensus on drinking water requirements for the entire trading block. In the not too distant future there will be a single requirement for the entire EU, rather than the present chaotic situation where each country has their own requirements. This will simplify life for those who export products into the EU that come in contact with drinking water.
Specifically to note in this area is that any new directive will reduce the amount of lead in drinking water from 10 micrograms/liter (µg/l) to 5 µg/l for water coming out of the tap. Based on past experience though, the final directive is likely at least three years away.
Future EU Database on Substances
This is a new item on the horizon, with a goal of assisting waste handlers and recyclers that deal with hazardous substances by knowing exactly what is in each item that they receive.
There will be a candidate list of substances of very high concern (SVHC) that must be listed by the manufacturer if it has a concentration of above 0.1 percent by weight in each component of the product. According to the current schedule, this work should be completed by 2021. The following will be required for each component:
- product, component identification
- name, concentration range and location
- any other information on the safe handling of the article
The implementation of this has far-reaching consequences as it will be difficult to do and must be updated every six months. This regulation is being opposed by virtually all manufacturing trade organizations due to it being unworkable as currently defined. The level of opposition indicates that the current implementation schedule will not be met. At this point, the industry is in the “wait and see” mode.
New Motor Regulation
The long-awaited EU motor regulation (EU) 2019/1781 on EcoDesign requirements for electric motors and variable speed drives came into effect on Oct. 31, 2019. Increased efficiency levels for certain motors and drives will be required starting July 1, 2021. Additional requirements will come into effect on July 1, 2023. It is important that manufacturers understand the requirements for motors and drives that will be imported to the EU. The new regulations continue to exclude motors that are designed to be operated in a fully submerged condition, which is good news for submersible pump manufacturers.
While it is difficult to make specific predictions over the course of a year, there doesn’t seem to be a global recession on the horizon. The general consensus from the pump industry in Europe is that pump sales should be slightly higher in 2020 than in 2019. A couple of ongoing issues—Brexit and China—are likely to reach resolution, even if one cannot say for certain what that will look like.
Apart from these factors, the global political-economic perspective is likely to continue to remain unsettled for the foreseeable future. Conversations with pump industry representatives in Europe indicate some general level of uneasiness with local political instability and general lessening of support for free trade among Europe’s populations.
As noted, the world is going through a paradigm shift, as it occasionally has done throughout history. The West developed institutions after WWII, and then expanded that system to cover many of the former communist countries after the collapse of the Soviet Union. The assumptions that have undergirded this system are now being challenged, and those who are doing the challenging are having some electoral success. Although how and in what magnitude this will impact the existing system is currently unknown, it is certain to have some significant impact. In situations like these, the cause and effect and general historical trend is often clearly visible only in hindsight.
Some pump manufacturers feel that concerns with climate change can lead to opportunity. More than one industry representative has expressed the opinion that “100-year flooding events now seem to be happening on a yearly basis” and that having pumps to handle these events is now a necessity.
With the geopolitical uncertainty and issues facing U.S. companies in general, the value of having a strategically flexible organization that can modify and execute its strategy quickly as political and regulatory conditions change will be incalculable. Many companies need to start reviewing the assumptions behind their strategic plans and business models with more frequency.