Adaptability is crucial in navigating today’s unpredictable global economy, which can experience economic chaos through market volatility, political instability, natural disasters, or unexpected pandemics. In this week’s episode, Karl Maier, author of Surfing Economic Chaos, shares his expertise on seizing opportunities amidst such chaos. With over 25 years of experience in managing and advising lower middle-market companies, Karl offers profit improvement workshops and CEO peer advisory roundtable groups.
Topics discussed this week:
- Changes and trends in the industry
- Military prowess versus economic prowess and intellectual prowess to maintain competitiveness
- International Trade five-star model
- Energy as a global hot topic
- The shift in International Trade today
- Global changes with the repatriation of manufacturing in various countries, and less reliance on imports
- Economic chaos today
- How does the economic chaos affect the chemical companies?
- Understanding the current economic scenarios and putting strategies in place around them
- Focusing on the peak profits and opportunities
Join us in this episode as Karl and Victoria talk about the book Surfing Economic Chaos and the economic challenges and the current trends in the chemical industry today.
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Surfing Economic Chaos with Karl Maier
Welcome back to The Chemical Show. This week I am speaking with Karl Maier. Karl is a Profit Improvement Consultant in Abunden and the author of a new book, Surfing Economic Chaos. In addition to 25 years spent starting, managing, and advising middle market companies, Karl speaks to companies and groups about seizing opportunities offered by the economic chaos in the economy. And that is what we’re going to be talking about today. Karl, welcome to The Chemical Show.
I’m excited to be here.
Glad to have you here. What’s your origin story? What got you interested in this whole space of, managing, advising, and thinking about economic chaos?
I started being interested in business when I was a kid. One time we went on a trip and heard stories about my grandfather and some of the people that he’d done some business with. And it got me interested in the whole idea of business and what makes one successful, and I started reading The Wall Street Journal in high school. And the next thing you know is at college studying economics.
You’ve got this new book that has just launched. What led you to write your book Surfing Economic Chaos?
That’s a great question. What it really was is that I’ve seen some trends that are really transforming the way the world’s working. It’s something that I found not just fascinating, but I felt like it was so important. I really felt we had to share it with more people, and had to make more people aware of it. Because it is such a big change and a big opportunity if you can take advantage of those changes. So I felt that it was worth taking the time to write the book.
What are those changes that you see going on?
There are two really big trends that are multi-decade type trends, and one is the aging of the population. We’ve all heard plenty of news stories about that. We’re seeing the baby boomers moving into retirement. It’s not just the United States. It’s in Europe, Japan, China, and most of the developed and developing world. So that’s one trend. Since the end of the Cold War 30 years ago, the US, in both trade and military policy, has slowly been moving away from providing free military protection to the world from saying it’s okay to have all the manufacturing. So that’s also a long-term trend. These are government policies that take years to put into place and play out over many years as well. Those are the two trends that I really see impacting the world dramatically.
You mentioned militarization and just the shifting view of how the military is used to protect other countries and stuff. I actually just listened to something earlier today. That was on the news or something like a government expert, whatever that is, was really talking about how we need to shift our way of thinking in terms of military prowess versus economic prowess and intellectual prowess to maintain competitiveness.
I think that’s a great point. I think it’s important to take a different view of the world and really step back and reevaluate what you know. Some of the things that I learned in school decades ago have changed dramatically. The world keeps moving ahead, and we’re all busy. It’s hard to keep up with all the stuff, but I think now, and then it’s important to really step back and say how have things changed?
I know that in your book, you talk about a five-star model, and use that to help explain or maybe understand international trade. Can you explain that model and what it entails?
Absolutely! There are a number of things that are important to run a society and economy, especially in the industrial economy. It doesn’t have to be the most advanced economy. Think about the United States, what it might have looked like 100 years ago. There were some cars and there were some plastics and electricity but it wasn’t all the high-tech phones and gadgets that we have now. But in order to maintain an industrial economy like that, you need food. In the United States, we’ve got the Midwest and California which are abundant food production areas. But most parts of the world don’t have fertile soil and all of the things that they need to produce food to feed their population.
You also need the population itself. You need enough young people to drive consumption and do the lower-level work as well as a smaller group of people to effectively do the higher-end work and save. So you have investment capital, so you need a balance in your population. Those are the first two stars. You need to be able to both protect your borders, but also to protect your trade. If you’re going to have ships, which is where most international trade happens, you have to be able to protect those ships. And the US has been taking care of that for the last 70 years. But that’s starting to evolve. And you need materials. You need raw materials, steel, alumina, a number of basic commodities so that you can make buildings and roads and all of the things we need. And then there’s one more. We need energy. You can’t forget energy. I’m here in Texas.
Surfing Economic Chaos: It's important to take a different view o f the world really to step back and reevaluate what you know. The world keeps moving ahead, and we're all busy. It's hard to keep up with all the stuff, and then it's important to really step back and say how have things changed.
Especially in today’s markets where energy is really a hot topic globally.
Energy is fundamental to driving, electricity, all our gadgets, cars, transportation, and everything. All of that requires these five different pieces. Again, there are very few countries that just have all five of those resources within their borders. In the modern world, most countries, like China, Japan, or Germany, depend on international trade in order to get energy, raw materials, and all those different pieces so that they can have an industrial economy. If the US stops protecting trade and stops, providing the background that allows all this, that means countries that have been able to trade for three or four of those stars are now in trouble.
And they are very likely to move back to a non-industrial type of world where they’re more like a colony or just exporting raw materials. And so that’s a very fundamental shift. It’s something of the last 70 years, we’ve just taken for granted. Yes, the US is going to protect global trade, which we did wonderfully. But we’re at the point where we no longer have the Soviet Union that gave us the reason to protect global trade, which is the reason to have a security agreement. So that’s a little bit about the five-star model.
In your book, it seems to imply that maybe it falls within some of the trends that we’re starting to see today. One that international trade is either I don’t know if it’s lessening, or if it’s really just changing. The nature of international trade is changing. So security is one piece of it. Before the US, it was the British and others that were protecting the seas and protecting trading lines. So we could assume that there’s a gap in protection, somebody is filling it. But do you see a shift in international trade? Is it weakening? Is it shifting? What do you see going on from an international trade perspective?
I definitely see it shifting. If you look at a graph of the volume of international trade of the last 70 years, you wouldn’t see it steadily increasing until about 10 years ago.. We’re really starting to level off. So that in and of itself is a big change. Why is that happening?
When you talk about that, is that a bilateral trade? I think there’s this concern that a lot of our trading is one way as opposed to equal going back and forth. Is that what you’re seeing? Or, is it more that there’s just a plateauing of international trade? What do you look at when you look at that?
When I’m looking at that chart, it’s just all movement of goods and somebody’s shipping product and somebody else’s shipping money. So that’s a very basic view of international trade. To your point about bilateral trade, part of the deal after World War 2 was that we’re going to open our market that’s going to allow all these countries to ship products here and allow them to rebuild their economy. That worked out well and really helped us win the Cold War. At this point, as we’re all aware, we’ve shipped a lot of our manufacturing overseas. But over the last decade, the US has started to pull it back. And there are several forces driving that.
One is legal. The US has started to legislate the there’s domestic content requirements, or a number of different products at this point, including cars, microchips, and also for the green energy product. So there are a number of areas that have protectionists just from our laws. The other is just the economics of cheap labor. China had really cheap labor 20 years ago, but as their population is aged dramatically, with the one-child policy, their supply of labor, particularly young cheap labor, has shrunk dramatically. And at this point, it’s the cheaper day, US Mexico, for labor than China. And so that it makes more and more economic sense to bring manufacturing back to the US. And you’ve got the pandemic that has kind of accelerated that trend as well, with all the logistic nightmares. So those are some of the reasons that I see trade, really dramatically changing.We're in a transition period. The world is going to operate very differently. Click To Tweet
This is true globally. I know you’ve taken a bit of a US-centric point of view within your book. But would you see these changes globally with the repatriation of manufacturing in various countries, and less reliance on imports? Is that true globally? Or, does this seem to hit some pockets more than others?
There are definitely some countries that are going to be impacted more dramatically than others. The US is probably the least exposed to world trade as a percent of our total economy. We’re a huge economy, and wealthy with over 300 million people. And so even with all the imports we bring in from China, it is still a very small percentage of our total economy. Two-thirds of what consumers buy our services. So that starts to give you some sense of how small a piece the Chinese input ports are. And we see a lot of them in Walmart. But if you look at the whole economy, we’re not as nearly as dependent on international trade, as, for example, China. That is a really fundamental part of China’s economy. And for many other countries, it’s a very large part of their economy as well. So there are different perspectives.
Maybe let’s talk about that a little bit. I know that you’ve used these five-star ratings, and applied it to several countries, including the United States, China, and some of the European countries. One of the things that I think is interesting is you assess China as having zero stars in your model. Yet, China’s a significant global player. We know there is a tremendous amount of manufacturing going on. Lots of imports and exports, but also a lot of investment so that they can use their natural resources there. So they’re heavily investing in coal to coal gasification, so coal to whatever in order to for energy for chemical feedstocks, etc. How do you reconcile this kind of this point of view with China having zero stars on this model?
When I apply that model to countries, I’m not looking at them 10 years ago, or 20 years ago, I’m looking at them to seeing, what their future looks like as the world changes. What are things going to look like for that country? In a world where China can depend on the safe transport of raw materials into the country, where they import the vast majority of their raw materials that they use in manufacturing, they rely on safe transport to import over 85%. Now, it’s probably over 80% of their energy needs. They also rely on imports from far away for many of the raw materials and technologies to produce the agricultural output that feeds their population.
So in a world where they can trade freely and safely, and they don’t have to protect their trade ships for five and seven and 11,000 miles from their border, things are pretty good. And they are a world our full-world players in that environment. But in an environment where they have to protect their own ships, traveling all the way to the Middle East or to Russia to get energy, to South America or Australia to get raw materials or agricultural inputs, like fertilizer. That’s a much different situation. That is what I’m looking at. When I say if you change the assumptions, what happens to these countries?
It’s interesting. What other countries do you assess as having few stars? And in kind of a worrisome position from that perspective?
One of the countries that I think is going to be heavily impacted is Germany.
Yes! We’re seeing that already from an energy perspective, in particular.
Right! They’re not in a situation to provide their own energy, they have a difficult time accessing energy from other sources. They’re not in a situation where they have a lot of sunshine, or even win for green energy. So energy is a huge problem for them, but also raw materials. So many of their raw materials, whether it’s natural gas as an input for their chemical industry and plastics industry, or other raw materials, they’re just not in a position to get that like they have been, which has been able to drive their industrial base. So I see that as a real challenge for Germany.
We’re in economic chaos. Chaos is a strong word. But given the changes in the inflation that we’re definitely seeing, shifting energy flows, if you will. I think we know that with the Russia-Ukraine war. That’s definitely impacted Europe in particular, in terms of their ability to get natural gas and other energy. And also, as you say, it has affected China. We’ve seen a shifting of where the product flows and the energy flows are going in an aging workforce, which is contributing to inflation. So you would say we’re in chaos? Are we in chaos? Or, are there still a few more triggers to be watching for?
I see things are in the process of playing out. We’re in a transition period. Ten years ago, we were still living very much in the Cold War-type era. In the Cold War, it ended, but so many of the things had continued to operate in the same way. Five or ten years from now, I really believe the world is going to operate very differently. And so I think different countries, different places, different industries even are going to see different degrees of chaos. I think the US is going to see less chaos than many other parts of the world. I think Brazil, the Middle East, Far East, are all going to see a lot of chaos.
Surfing Economic Chaos:
How American Businesses Can Prosper Despite Globalization’s Collapse
How much of this do you see as being driven by regulation? Particularly, I think about a lot of the net zero, greenhouse gas, and carbon reduction goals and policies that are being put in place around the globe. So the UN is working on policies, but individual countries have enacted a lot of policies. How much of this do you see as being policy-driven, as opposed to some other factor?
I think policies can be very important. Good policies can improve the world we live in. I don’t think that we can go to a pure kind of Adam Smith, free trade, everything can just take care of itself. I think that’s a little over-simplified. But on the other hand, I don’t think regulation solves every problem. For some of the regulations, you’re talking about around green energy, I think there’s certainly been some good things and speeding up in the markets for some of these products. That’s, that’s excellent. But you don’t change the economics by making a policy.
You can change the economics at the margin, but you can’t change the fundamental economics of digging stuff out of the ground. We have technical limitations about how much stuff we can dig out of the ground, and making a battery or photovoltaics. For solar panels, take a whole bunch of different things out of the ground. And right now, they come from all over the world. That’s complicated. And we need a whole lot more of those materials than we’ve ever produced in order to reach these, like the California level for, five and ten years from now. So just because you say, here’s the policy, doesn’t mean it’s going to work.
Yes! I think it’s a good point. You just said that there are some striking changes in discussions going on as it relates to policy and the impact of greenhouse gas emissions, for instance, on their farmers, which farming is a big part of their economy, and a lot of its around exporting. And to meet some of their targets, they actually maybe have to shut down some of those farmers and farming businesses. That’s one aspect of it and then when we look at the metals and other resources needed for so-called green energy, whether it be for wind or whether it be for semiconductors, etc. There are some investments going on.
Again, the products are limited. We need to figure out how to source it. So I think there are a few different factors that are going to be at play related to green energy and just this green economy that starts making that change happen.
I’m gonna pivot here. So it’s fine to say we’re in a state of economic chaos. My question then is, so what? How does this affect chemical companies? And what can companies be doing to respond to this? Because at the end of the day, I am a firm believer that through innovation and ingenuity, and sometimes it seems like sheer willpower, we find solutions to this. We’ve gotten to success in our global economies or individual economies, individual countries, or companies rather have gotten to the success that they have through innovation, ingenuity, and people with a lot of willpower. But when we think about companies today, what can they be doing to adapt and respond to this economic chaos?
The chaos in the United States is at a level that I think it’s very susceptible to looking for options and looking for solutions moving forward. If you’re trying to grow soybeans in Brazil, and all of the fertilizer sources have disappeared, try to replace that at scale. That’s quite a problem. I’m not quite as optimistic there. But if you’re in the United States and you’re running a chemical company, depending on where in the kind of ecosystem you are, you might have seen some significant supply chain disruptions. With your raw materials, you can’t get the quantities you’re expecting. Maybe you’ve substituted other products or other sources, and you’ve had to make adjustments that might have impacted your pricing or delivery, even your product mix. So that’s part of the chaos that I’m talking about. It is the collapse of the international financial system. But if you’re running that business, that’s an important level of chaos.
You’ve got general inflation. You’ve got supply chain issues and supply chain disruptions, and you’re probably facing higher labor costs, labor shortages, perhaps. So all that requires a little bit of work to overcome. Knowing that those are not just transitory things that just happened because of the pandemic, and they’re all going away, to me, that’s an important first step in planning your future. What is the world going to look like in a year from now or five years from now, as I make my business plans, where to put my investment? That’s the first step. And so if we recognize labor shortages are here because of demographics and that’s going to cause inflation, I can plan for that. We take the tools, financial analysis, and production planning, and we think about what’s happening to the supply chain. Again, these are all things that business people can plan for. And if you’re thinking ahead, then it becomes an opportunity.
It’s scenario planning. So understanding what those economic scenarios may be. We’ve lived through some of them, particularly in the last couple of years, through the pandemic, and then some. Then putting strategies in place around that. Right. So whether it be for manufacturing, labor, or your marketing, sales, and customer supply chain stuff, it’s putting new strategies in place around that.
You can take big-picture macro approaches, and how do I change my business model? Where do I see opportunities in the market? And you can take more of a bottom-up type approach and say, where am I really making money in my business? How can I focus on doing more of that? How can I fix areas that are less productive? So there are a number of strategies out there.The chaos in the United States is at a level that I think it's very susceptible to looking for options and looking for solutions moving forward. Click To Tweet
Do you have any examples of companies that have done this successfully, either in the past through other chaotic periods, or even today?
I’ve been working with a small-ish chemical company that got a number of product lines. And they have really experienced a lot of disruption in the raw materials. We’ve worked together to really analyze which products for which customers dug into the details of their costs, understood the profitability, and helped identify which customer product combinations are really where they’re making their money. And we’d go look for more of those. For the ones that aren’t, there are all sorts of discussions in terms of pricing, marketing, or changing products that go into that. But from that, we’ve been able to significantly increase their bottom line, like in the neighborhood of 2% or 3% of sales. So it’s a reasonably large percentage.
So it’s really kind of focusing in on where the peak profits, and the opportunities that are going after more of those and then fixing the others. It’s interesting.
So what should people be looking for? If we’re looking for some indicators over the next six or twelve months that say, some of these economic chaos points are going to be playing out? What should people be looking for?
For example, in every major port in the United States, there’s a crane system that’s designed to unload container ships. All of the cranes that are currently installed were made in China. There’s some discussion about whether the software in those cranes ends up sending data back to the Chinese company or not. I don’t know. But I would think that, at some point, a US company might decide to go into that market and start making those types of cranes. Just to take that as a parallel.
As you’re doing your scenario planning and saying, you mentioned, I believe it’s the boron example, this is a commodity that’s being currently imported from some far-away place that potentially is at risk. Why don’t we find ways to source that closer to home or processing? Those are the types of opportunities that I think you can look for on the macro level and say, okay, where are we sourcing everything from? And not just the first level, but where’s it really coming from? Okay, we’re buying it from a company in LA, but where are they getting it from? And that’s an opportunity to really find some ways to say, we can go into this and we can become a significant player in this market.
So basically looking for opportunities, as we maybe shift our global reliance on each other.
Yes! If you know where shifts are likely to happen, that might help you focus on particular opportunities.
Awesome! This has been an interesting conversation. I think there’s a lot of food for thought. It certainly seems like we’ve been experiencing some economic chaos. But I think your assessment of how this plays out regionally is interesting. I think it’s something still to watch for, and its implications on not just the chemical industry, but other industries. So Karl, if people want to get in touch with you, or if they want to find your book, how can they do that?
Awesome! It’s very great. In fact, it will have access to the book linked up to the blog page that goes along with this episode, so people can look for it there as well. Karl, thank you for joining us today. I’ve enjoyed speaking with you and I know our Chemical Show audience is going to enjoy hearing what you had to say. So I appreciate your time today.
My pleasure, Victoria. Thank you.
Thank you, everyone, for listening to The Chemical Show. Keep listening, watching, and following, and we’ll talk to you again next week.
About Karl Maier:
Karl Maier is the author of Surfing Economic Chaos. He speaks to companies and groups about seizing opportunities offered by the economic chaos in the economy. He has over 25 years of experience starting, managing, and advising lower middle-market companies.
He received his B.A. in Economics and MBA concentrating in Information System from Rice University in Houston, Texas. Karl offers profit improvement workshops and CEO peer advisory roundtable groups.
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