Businesses need to try to peer 30 or more years into the future as they make investment decisions. How can they separate long-term trends and opportunities from the rush of the present? Strategist George Friedman, author of The Next 100 Years, says to look at constraints, not possibilities.
Q: In The Next 100 Years you point out that extraordinary unexpected changes actually happen as a matter of course: Londoners in 1900 likely felt that they were securely in the center of the world, someone in Japan or Germany in 1950 would have had a hard time believing those countries would rebuild to become the second and third largest economies by the end of the century, and someone in China in 1970 would have as hard a time imagining the country would become the fourth largest economy by 2007. How do you go about looking into the future to make forecasts?
By looking at constraints, not possibilities. The most interesting aspect of any political or business decision maker is what he can't do, because of political or market decisions. We spend most of our time eliminating the impossible or the improbable. Many policy makers act as if they had an infinite palette to choose from. In fact they have very few choices. For example, when we said that there would be very little change in foreign policy after President Obama took office, it was based on an understanding that whatever he subjectively may have wanted to do, he had very few options, and that he would basically continue President Bush's foreign policy. We forecast, particularly geopolitically, by eliminating the impossible, then looking at what's left.
Q: You predict the rise of countries like Turkey, Mexico, and Poland in coming decades. What do businesses do with this sort of information now?
Companies need to be looking 20 or 30 years into the future for their investments. That will cause them to identify opportunities that most people think are preposterous, but if you look at countries as if they were companies, rising and falling, you want to identify not those who have already reached the top, where the herd is, but those that are beginning to emerge.
The time to have invested in Germany was in 1950. The time to have invested in China was 1975 or 1980. We speak about 30 or 40 years of emergence. That appears to be a very long time, but in 1975 China would have been a very interesting country to invest in. That was 35 years ago.
Q: Do businesses just need to assume that major political upheaval might render their investments completely valueless?
That's always a possibility. In fact, it's common. I mean, one of the things that interests me about business leaders is that they regard political events as black swans, yet if we look at the past century, the exceptional events have been the major definers of the international system. The Great Depression had far more to do with the First World War than it had to do with any decision the Fed made.
It's extremely important to understand two things. Geopolitical events are a constant shaper of the business environment. And these events have a degree of predictability. The only certain erroneous assumption is to think that geopolitical events will not reshape the marketplace dramatically in the course of an investment. It always does.
In the 20th century, 17% of the time, the United States was involved in a major multidivisional war. So far in the 21st century it's been almost 100% of the time. You don’t have the option of pretending that the only issues are business and market issues, because both of them are constantly being shaped and reshaped by political and geopolitical forces. Any investment made right now in the financial community is heavily dependent on the political process. An investment made in the energy industry is heavily dependent on geopolitical processes. So the option of not taking these into account just isn't there.
Q: Is it something you see companies doing well?
No, I think companies are very poor at making these judgments because they tend to focus in on the economics of the deal, without understanding the manner in which economics is reshaped by outside forces. Many companies made substantial investments in Russia in the 1990s without understanding that the situation at that point was the outlier and not the future of Russia. So many of the investments they made were at risk.
The other problem that businesspeople have is their obsession with relationships. Relationships are crucial, but too many businesspeople forget that as things change the people they have the relationships with may no longer be there or may not be important. It’s kind of like building a business in Los Angeles and being shocked when an earthquake comes. Geopolitical upheavals are constant. If you're going to have relationships, you'd better understand the politics of the situation. War and disruption: that's the way the system works, and it's going to affect you.
Q: Are there businesses or whole industries that are notably more sophisticated in their approach to geopolitics?
Energy is one business that I think is pretty smart. I also think that retail that sells overseas is pretty smart. They tend to think in very granular ways. The companies that tend not to be very sophisticated are those that are running after wage differentials. I'm going to set up a factory in China and make a lot of money because I can produce cheaper. They fail to understand how temporary the wage differential is. They fail to understand the politics.
In general, European companies are far more sophisticated in dealing with their foreign investments than American companies. That's not always the case, but it is generally. Americans tend to assume that all reasonable people will behave as someone from Wisconsin might. I'll give you an example that I think is quite telling. I was talking to someone in China, pointing out a case of corruption when a person got a job and hired all his relatives. The person I was talking with said, "That's not corruption. Who should I hire, if not my blood? I cannot think of anything more immoral than the American position that you should hire indifferent to your obligations. What kind of people are you?" That was a very telling moment. An American businessman looks at Chinese practices and immediately assumes they're corrupt, oblivious to the fact that the Chinese look at Americans and think of them as monsters. The Europeans, I think, are more sophisticated, having been imperial monsters themselves.
Q: When a company comes to STRATFOR, what are they seeking?
Well, normally they would like to know everything about a particular subject. We point out they can't afford it, so we help them focus down on what they do know and what they really need to know. Usually they have a tremendous amount of information—they just don't know they have it. From there we identify very clearly the information they must have to make their decisions. Then we try to get that.