07 June 2016

A sea change in trade

Today trade is increasingly about services – which are more likely to be transmitted over the internet than across the ocean.

Stuart Tait

Global Head of Trade and Receivables Finance, HSBC

At the start of the 20th century a steamship laden with crates epitomised international trade. Today trade is increasingly about services – which are more likely to be transmitted over the internet than across the ocean.

Services – the sale and delivery of intangible products to consumers – comprise "the largest and most dynamic component" of economies around the world, according to the World Trade Organization. The sector represents about 60 per cent of world GDP and about ‎80 per cent of GDP in some developed markets, and is growing fast in large emerging markets such as China.

Trade in services includes everything from the tourism industry and financial services to the outsourcing of data processing. And the rise of the internet and other technologies is revolutionising how existing companies operate and encouraging new types of service-led businesses.

Nowhere is this change more obvious than in the media and entertainment industries. Over the past decade music and film companies have been forced to move away from selling CDs and DVDs to focus on digital downloads and streamed content. Sales of printed newspapers have dwindled as smartphones and tablet computers have encouraged readers to switch to online formats.

The internet is fundamentally changing the way companies sell and distribute their products. In some cases it is forcing businesses to diversify and to find different ways to make money. Computer software companies, for example, have moved from delivering their software on a disk to housing it in the cloud so that it can be downloaded on demand. Meanwhile, mobile phone manufacturers are moving their business model away from the sale of handsets and increasingly focusing on offering higher-margin software services.

Delivering services over the internet allows companies to reach a much wider audience than was possible in the past – and more quickly. That trend is set to continue given the rapid pace of internet adoption – 3.2 billion people used the internet at the end of 2015 compared with just 400 million people in 2000.

The internet is spawning new types of service companies. Twenty years ago social media companies didn’t exist. Now they are among the most recognisable brands in the world, with many growing from nothing to global, multibillion dollar companies in a matter of years.

As mobile and cloud-based technologies become ubiquitous, products are able to connect together. The expansion of the "internet of everything" has benefits for manufacturers and consumers. Smart energy readers in the home, for example, make it easier for people to reduce their heating bills. Manufacturing companies, meanwhile, are using the internet to complement their products with additional services, which can offer higher margins. Air conditioning unit manufacturers are selling internet-enabled climate control services, for example, while aero engine-makers are providing scheduled fleet maintenance and diagnostics services using smart connected technology.

In the future the line between the manufacturing and services sectors could grow increasingly blurred, according to HSBC’s recent Trade Winds report, which examines the trends shaping the future of global trade and business.

Advances in technology are changing how and where products are built, for example. 3D printing technology is now being used to startling effect. Technicians have designed a prosthetic limb and sent the designs via email to be downloaded and built using a 3D printer. In fact this ability to send designs globally and manufacture locally paves the way for mass-customisation of products across a range of industries.

Shifting towards a services-led model has the capacity to make businesses run more efficiently. However, there are challenges to overcome. With so much data being transferred around the globe via the internet, how companies use, store and protect information has become an increasingly important topic of public debate.

At the same time, the importance of services to the global economy is increasingly recognised by governments and regulators, with trade in services featuring prominently in recent international trade negotiations. Goods will continue to be shipped, driven and flown around the world but technological innovation is helping to expand the number of service-led businesses and changing the way we buy and consume. We are entering a new era of trade. It’s time for business to spot the opportunities, adapt and prepare for the future.

Shifting towards a services-led model has the capacity to make businesses run more efficiently

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