METALS SERVICE CENTER INSTITUTE (MSCI) EVENT, Carlsbad, CA – FEBRUARY 16, 2012

INTRODUCTION BY BOB WEIDNER:

It is now my pleasure to welcome back to MSCI a friend of ours, although this is

his first Carbon Conference, but he is certainly not a stranger to our community as he

has addressed the Specialty Metals Group as well as the Aluminum audience in previous

years - Jeff Garten is a distinguished professor in the practice of international trade,

finance and business at the Yale School of Management and he was named to that

position in 2005. During the previous decade at Yale’s business school, he was the dean

and under his leadership it created many improvements, new programs and he grew

their endowment. Prior to Yale, Dr. Garten was the undersecretary of commerce for

international trade in the first Clinton administration, where he focused on promoting

American business interests in Japan, Europe, and many emerging markets like China,

India and Brazil. He was deeply involved in the conclusion of the Uruguay round of

trade negotiations and in helping the United States and China negotiate Beijing’s entry

into the WTO. 1979-1992 he worked on Wall Street as Managing Director of several

firms. From 1973-1978 he served on the White House Council on international

economic policy in the Nixon administration and on the policy planning staffs of

Secretary of State Henry Kissinger and Secretary of State Cyrus Vance in the Ford and

Carter administrations, respectively. He is the author of several publications; he holds a

bachelor’s degree from Dartmouth College and received his doctorate from the School

1

of Advanced International Studies at Johns Hopkins University, where he specialized in

international economics and international organizations. He has also served our country

with distinction as a Lieutenant in the 82nd Airborne Division, a captain in the United

States Army Special Forces and has served as a military advisor to the Royal Thai Army.

One of the things those that have heard Jeff speak before will attest that the

perspective he brings on what’s happening on the world around us and while we may

not be thinking of how it impacts our businesses today, whether we’re a mill or a service

center, I think the lens through which he looks at the future for all of us in the western

world in manufacturing and certainly the metals supply chain, is both going to be

insightful, provocative, and thought-provoking to all of you. Please join me in

welcoming Dr. Jeffrey Garten. Jeff, welcome back.

* * *

New World Order

By

Jeffrey E. Garten

Thanks a million, Bob. When I was in the Clinton administration, we used to sit

around and ask the question, “When is the best time to speak to an audience?” And

some of us would prefer to do it at breakfast. Everybody was up and it was the

beginning of the day. And some preferred to do it at the end of the day when

2

everybody was relaxed and had dinner, a drink, and was laid back. Lunch was okay, too,

but the worst was after lunch. And I find myself thinking about exactly how to do that

because I want to talk to you about some very serious things, but I also recognize that if

I were sitting where you were, especially after such an energetic interesting

presentation that we just heard, you may not be in the mood for some really serious

stuff. So I’m going to do my best. I also start with a sense of some intimidation by this

audience because whenever I have addressed one of Bob’s groups, I have found out that

I am talking to a group of people who not only knows their industry inside and out -- as

you would think -- but who has been very thoughtful about the context of that industry.

Moreover, I know -- just from talking to some of you here earlier today and from things

that I’ve read -- that the steel industry is really at the forefront of businesses that are

constantly reinventing themselves. So to the extent I can make a contribution to your

thinking, and it would be with the thoughts of someone who has been in lots of

different professions and in different places. After all, my time in Wall Street was spent

not only in the US but in Japan and in Europe, and in Latin America, and I’ve been in four

presidential administrations, and I’ve spent a lot of time at Yale where it’s kind of a

crossroads of people with lots of different ideas. I’d like to think that that’s some

contribution because we are living in a very unique period. Anyone who says that they

know what’s going on, anyone who feels that they can really predict what the world is

going to be like six months from now, let alone five years from now, you’d really have to

3

take it with a grain of salt. So I’m bringing a perspective that may or may not overlap

with yours, but it’s a perspective born of a lot of different perspectives that I have had

the fortune to have.

I know that this industry is extremely diverse as well and that a lot of the things

that I might say might be relevant to one part of it and not necessarily to the other. But

I do think that everybody in this room has a few things in common and I just want to be

explicit about that, because that’s part of my framework. You’re all in a highly, I would

say hypercompetitive, situation. You’re all strongly influenced by global trends. If you

didn’t take a step outside the US you would still be influenced by the competitive forces.

There is not one person in this room who would like merely to react to competition; you

want to be out in front of it. You want to set the bar for innovation -- whether or not

you can, that’s another story -- but certainly that’s your aspiration. And finally, for

everybody here, talent and technology and organization is at the center of what you

think about all the time. So I feel like I am talking to a group that has some great

commonality, even if the details of your business are a little different.

And to simplify things, I hope to make only one point this afternoon. And that

point goes like this – the world is changing at warp speed. The thing about these

changes is that there are many, many changes and they’re all happening simultaneously.

It’s too complex for me to understand or for anyone in this room to understand. The

best you can do, and this itself is a very tall order, is 1) to develop a framework for

4

thinking about change; two, to ask yourself the question, if I have that framework, how

do I operationalize it? How do I go from the idea or the recognition of what I think is

happening to the everyday decisions of running a business? And three, how do I get the

talent and the technology and how do I design the organization to respond?

What I want to do today is to talk about three different things.

The first is I want to talk about some key pressures that I believe we’re all under

right now. I think I have to do that because if I skip just to the longer term, it will feel

very theoretical and disconnected.

But the heart of what I want to talk about is five trends which I think are going to

rock your world in a way that you can hardly anticipate.

And then finally, I’d like to link that to what I think are some of the implications

for your business

Current Pressures.

So let’s start with the present. I’m not going to dwell on this, but I want to tell

you what I think the framework is for right now and let’s say the next 18 months. We

are living in the wake of a financial debacle and a great recession. Until a month ago,

virtually all reputable projections about how the world economy is faring were being

revised downward almost every six months. That is, the sense that we were recovering,

and when I say we, I’m talking about the whole world, recovering from the financial

5

crisis and the recession, that sense was “yes we are, but at an increasingly slower and

slower rate.” And there was a lot of talk about a double digit global recession. Some of

that negativity has been reduced by new optimism about the US which I’ll come back to,

but if you take this whole situation, there is somewhat disparate trends within it. For

example there’s quite robust growth in emerging markets, particularly in Asia, although

you’re beginning to see a number of problems that are occurring with these countries

that make you think some of the prospects are likely to have been hyped. That’s one

trend. But in Europe it’s near recession, bordering on recession, accentuated by a

horrendous debt crisis that as I will say later is going to be with us for at least a decade.

And then we come to the US where without doubt there have been some really

positive stirrings over the last couple of months. You can see it in the numbers; you can

see it in developments like unemployment statistics; you can see it in some projections

for GDP. But I think anyone really looking at that situation really has to be very sober

about it. Because whatever’s happening is not a result of any fundamental change in

the underpinnings of the economy. We’ve really done nothing from a policy perspective

to insure that so many of the jobs that have been lost can come back because the

ground has shifted in terms of the requirements, what kind of requirements those jobs

will need. There’s been nothing done about building the infrastructure of the country

which every year falls further and further behind what it should be. There’s been

nothing done about education and there’s been nothing done about the fiscal situation.

6

And so whatever you want to think about the current where we are right now -- and I

hope like everyone else this is the beginning of some kind of turnaround – my guess is

it’s going to be fairly modest. In addition, there is no scenario for the United States to

grow in a robust way without being able to export far more than anything that has been

contemplated. And how we do that in the face of a Europe which is likely to be in

recession and Asia where the growth rate is healthy, but not what it was over the last

couple of years, that’s a really big question.

My own view is that in the next few years, just sticking with the short-term, we

have huge risks to the downside. I’m not predicting a calamity, but I think that the

prospects for a very lackluster global economy punctuated by a lot of different crises, is

very likely. Here are some of the things that I worry about:

First, I worry about a financial system that does not regain its footing. As Bob

said at the outset, we will be digesting a spate of regulation that is enormous by any

standards. Regardless of whether you feel that legislation is justified or not, it was done

very quickly, it’s massive, and it’s inconsistent both within the US and as other countries

enact similar legislation, it’s inconsistent globally. So the financial system which we

relied on to pump out money, to take risks -- maybe too much risk at one point -- but

nevertheless we need a financial system to do that. That is a big question mark.

7

A second reason I worry is that I’m willing to take bets that there will be a Greek

default. Sometime in the next 18 months, I predict that we will see a declaration of one

kind or another that a huge amount of the Greek debt just has to be written off. There

is no arithmetic solution to the problem that they’re wrestling with because the

numbers can’t work unless the economy itself is restructured for growth. It can’t just be

austerity. And there is no restructuring like that in sight.

A third reason I worry is that I think we’re going to see some significant setbacks

in China. And I go to China a couple of times a year; I teach a course on China in the

global economy. What China has done over the last 30 years has been nothing short of

miraculous, but no country can defy gravity forever. And there are an enormous

number of pressures built up in that system. And the big problem in my view is that it is

an authoritarian centralized government attempting to run an economy which is big,

complex, increasingly tied to other economies and you just can’t do it that way. There

has to be more decentralization, there has to be more market oriented orientation, no

matter how good the Chinese government is, and it may be very, very good, no one can

run an economy that is big and complex and is so tightly controlled from the center.

And fourth, I worry about a major geopolitical event. Now you can worry about it

or not worry about it, you can predict it or not predict it, but the one thing we have seen

over the last ten years is an increasing number of events that have been like putting a

wrench in a wheel where people were saying was once every 50 years, is now suddenly

8

much more frequent. And whether you call it geopolitical or whether it’s a natural

disaster, or whether it’s a manmade disaster, we can go through the litany of things that

will happen. But we’re very close to a few of them now. We’re so close that it’s not

even going to be a surprise. We’re close to a war with Iran; I’m not saying it’s going to

happen, but we could wake up tomorrow and we could find out that Iran has been

bombed and that the Straits of Hormuz have been closed. And the impact of oil prices

and the cascading of that around the world would be quite dramatic and have major

economic consequences. We’re only a hair’s width away from a very significant cyber-

attack. I believe the capability exists, but it won’t take all that much to paralyze the

energy grid or the financial grid. If one cyber-attack closed the New York Stock

Exchange, the reverberations, the financial reverberations, the undermining of

confidence would be so great, that all of the predictions that everybody is making would

have to be thrown out of the window.

I worry about these things not only because I think they may happen, but

because of something bigger. And that is that the context in the international

community is one of enormous weariness of fighting additional crises. This financial

crisis that we’ve had or let’s call them sub-crises like the crisis in Japan with the tsunami

and the radiation, or the crisis in Europe which is just every single day, this has taken all

the air out of the balloon of the people who normally would be the ones we look to to

get to take charge. And I’m afraid that two years ago when I spoke at one of these

9

conferences, I could say that there is more and more attention, more and more interest

internationally, in fighting crises. I wouldn’t say that right now. Instead, I would say

that everyone’s tired and they’re more interested in their own country than any notion

of international cooperation. So we’ve got a really big problem in terms of the

mechanism, the will to fight, the capability to fight, and the international perspective.

And one area where that is true for sure which wouldn’t have been true in the past, is in

the financial arena. All the central banks, which are the real firefighters, have basically

expended all the real ammunition that they have – they can’t make interest rates any

lower in the States, can’t make it any lower in the EU, Japan just said it was lowering

interest rates to a little above zero. Same is going to happen in China. So we’re in a very

difficult position in a world of recurrent crises and whether the ones I pointed to happen

or another one comes from left field, the mechanism to deal with it, in my view, has

been substantially weakened.

Now I can give you another scenario -- a more positive scenario. I don’t think it’s

likely, but let me give you a positive scenario for the US. We have our election and at

the end of this year, a few things are going to happen no matter what. The Bush tax cuts

are going to expire. The sequestering of half a trillion dollars because of the failed

budget agreement comes into effect. And it would take an active, positive vote of

congress to prevent these things from happening. And maybe we just have such gridlock

that in fact the congress won’t act at all. And overnight, we would find that our fiscal

10

problems have almost disappeared. Without the Bush tax cuts and with the

sequestering, we’re in a totally different position, not because anyone had the courage

to take steps, but because the dysfunction made it so we couldn’t do anything. And the

natural expiration of these deadlines takes hold. And at the very same time, the

business community takes heart, well we got our fiscal stuff under control and there is a

massive amount of cash as everybody knows, on the balance sheets of corporate

America, and suddenly there’s a feeling that this is a good time to invest. You know

investment as a percentage of GDP in the US hasn’t been this low in 60 years. So there

is a tremendous pent-up possibility of an investment boom in the United States

corporate leg. There’s a scenario and since the US is so very keyed to the world

economy, you could see this having a reverberating effect everywhere.

Another thing that could happen is that Europe, for reasons I can’t describe,

really gets its act together, doesn’t let Greece fall, puts up more money, and they really

get serious about having a political and financial union and its clear that this crisis has

mobilized them to a level of action that no one ever thought. That too would have a

real catalytic effect.

I still think all the risks are on the downside, but I guess the point I’m making here

is that there are some very big possible swings and that whatever you think the

situation is now in the next 18 months could change very dramatically.

11

The Longer Term

But the thing I really want to emphasize is the variables over the longer term.

When I say longer term, I’m going to say 5 to 10 years. I know that a lot of you think

about these trends, but I do want to put it in a very dramatic context. And that is this:

that we are, in my view, in a period of extraordinary transformational change. There are

only two periods in history that I can think of, at least in the last three-four hundred

years, where we have been in this kind of situation.

The first is the industrial revolution – the 17th and 18th and 19th century – when

the world went from being predominantly agrarian and Europe and the US entered an

era of manufacturing, large-scale manufacturing. Everything changed. Everything

changed.

The second period was right after World War II, when the US was the only

country still standing and over the next 20 years, we saw the regeneration of Europe

and the regeneration of Japan.

Some people have labeled this phenomenon of transformational change as a

supercycle. And in a supercycle you have new engines of growth; you have new sources

of technology, investment patterns change; you have new sources of demand where

you used to think demand is coming from it doesn’t come from anymore, but it’s going

to come from somewhere else; you have competition that is so massive that it is

12

incredibly disruptive; you have new business models and you have a new mindset

among executives.

And I’m saying that all of this characterizes the world that we’re living in now.

This is also a world of new geopolitical dimensions. We’re used to living as we all

know as either during the Cold War where you had two major powers or even after that,

one uni-power, the United States, and very, very quickly we’re moving to a world that is

multi-political. Now this isn’t just something for political scientists. This changes the

entire global economy because all economic arrangements are a reflection of power

arrangements. And no one quite knows what will this world economy look like when

you have 5 or 6 countries who at a minimum have veto power, but more than that, can

exert a tremendous amount of influence. The one thing that seems pretty obvious – it’s

not going to look like the global economy that we have known, which has been single-

handedly driven by the United States. This is now a world of serious and multiple new

economic competitors. I’ll come back to this, but the rise of emerging market

economies is presenting the specter of new competition from every source, from

countries and certainly from companies. For a while, I wrote a column for

BusinessWeek and I remember interviewing Jack Welch on the day that he retired and I

asked, “What would you advise your successor about the thing he should worry about

most?” He replied, “Companies whose names he can’t pronounce and names he can’t

13

spell.” And what he meant really was companies coming from emerging markets that

we know very little about.

We’re living in a world of new business models. I suspect that most of the people

in this room feel that they have a pretty good handle on how to operate in the global

economy, but ten years from now I am quite sure that the business model that you will

be using will be radically different from the one that you’re using now. Maybe it will be

a little bit like the one that IBM has been experimenting with, where the company has

taken measures to bust itself up so that the headquarters of every different division is in

a different country, thereby making themselves the essence of a global enterprise.

We’re living in a world with a changing role of business and government. Now

it’s very nice to say that in normal times there’s a private sector and there’s a

government. We know exactly where the line should be. And it’s also very nice to say,

very logical to say, government has really overstepped its bounds or business has failed

to self-regulate and therefore made government come in. I don’t care how you describe

it, this is the point: that we’re living in a world which no one would have foreseen ten

years ago in which government is reasserting its influence and whether you like it or not,

it is going to be an all invasive presence in everything you do. And some of you may

think it’s already there, but you haven’t seen anything yet. And this isn’t just the

American government, the world is moving for better or worse, I’d say for worse, in that

14

direction and nobody can stop that. The issue is how do you deal with it? How do you

play in that game? How do you win in that game?

We’re living in a world where today’s skills are going to very quickly be

outmoded. I’ve got to be careful about this because I shouldn’t say outmoded, but

you’re going to need skills in addition to the ones you have now. I happen to believe – I

wrote a book about this – there are certain qualities about leadership for example that

are time immemorial. But it doesn’t mean that’s enough. And in the internet age, we’re

going to need a whole new way of thinking about everything from who is the customer

to crisis communications and it’s going to require a lot of skills, skills that were never

envisioned, hardly envisioned – I’m in business school and we’re wrestling with what are

these skills? All we know is that they’re coming.

And we’re living in a world where risk is greatly enhanced. We have huge

political risk; this isn’t the kind of risk – we used to say political risk was when a

government took over a company, that’s what the classic definition of political risk is.

But we’re talking about something else; we’re talking about the risk of policies that shift

and they shift the ground underneath you and you don’t understand why and you didn’t

see it coming.

We’re living with enormous economic volatility. When you have a world

economy which is shifting, where the gravity is shifting, you have the volatility that

15

we’re seeing in markets is not something that is going to end in 2012 or 2013, we’re

going to be living with it for a long time.

We’re living in a world with risk to supply chains. Heck, we just spend the last 20

years building global supply chains, really honing down how they work. Now it’s very

clear that all kinds of disruptions can occur and the very notion of what is an effective

efficient supply change has to be rethought. And we’re living in a world where

everything is connected in ways that we can’t quite comprehend, but once those

connections start to break, it’s like dominoes and exhibit A and B and C is the last

financial crisis which took even most of the financial experts by surprise as to how

subprime mortgages in the US, which constituted a very small part, not of the US

market, but the US housing market -- how could that have come within a hair of

bringing down the entire global financial system?

And we’re living in a world of – and here’s the positive part – of massive new

opportunities. A world in which old industries are being transformed and in many cases

you are right in the middle of that, but other industries such as the automobile industry

or the energy industry, where new industries are emerging that we never could have

thought about, whether it’s the combination of information technology and biology or

nanotechnology – these are going to be massive industries.

16

We’re living in a world of new centers of business and vitality and I’ll come to this

in a second, but I have in mind the massive urbanization that’s going on around the

world and the cities that are growing so fast and new cities that are emerging that

represent enormous business opportunities – absolutely enormous. And all of you have

an opportunity to outdo your competition in thinking and acting on all the trends that

are happening.

So here are five trends that I think are really worth focusing on – they’re not the

only five, but these five give you a sense, I think, of the transformational change that I’m

talking about.

First, not surprisingly, is the rise of emerging markets and the way that the center

of economic gravity in the world is shifting. You know today emerging markets together

account for over 50% of the global GDP. As an engine of demand, it will no longer be

the US which is the key engine, it will be emerging markets which of course has fantastic

implications for how you think about the economic geography of your business. These

markets are growing at three times the pace of the rich industrial countries and if

projections are worth anything, that’s likely to hold up. These emerging markets also

are developing a middle class which is growing very fast and increasingly and very

robust. Just to give you a number, in the last 30 years, the middle class of emerging

markets; the new middle class has been about 1 billion people. We’ve added 1 billion

people who, with their own purchasing power in their own country, we would consider

17

middle class. Well a billion people is almost 3 times the population of the US. In the

next 30 years, that figure, that increment, that growth, the delta, will be 3 billion. So by

historical standards, never in history have so many new consumers with purchasing

power arisen in such a short period of time.

The emerging markets are as I briefly mentioned, also the locus of hyper-

urbanization. Today 180,000 people moved from the countryside to the city in

emerging markets. You’re probably wondering how did I know that number? Did I

calculate it when I woke up? Well I’ll give you the same number tomorrow because I’m

just averaging in every single day between now and the year 2050, 180,000 people in

emerging markets are moving to the city. This also is unprecedented in history and you

say well what does this mean? What does hyper-urbanization mean? Well it means

that at least 6 New York Cities are going to be created every year. Now it won’t be

necessarily stand alone, some of that’s going to be incremental growth of the Shanghai’s

and Sao Paolo’s, but there are going to be a lot of cities that don’t even exist right now

that by the end of this decade are going to have a few million people. And if you don’t

believe it, just go to China or India and ask people where this is happening.

So in my view this is not only a massive business opportunity, but it’s in these

very tight knit urban areas that we’re going to see a huge burst of innovation because

how do you... a lot of them don’t have the legacy problems; this is where the new

communication systems, the new environmental systems, the new way of treating

18

water, this is where they’re going to be devised. So in some ways you have no choice if

you want to be really competitive, you have no choice but to understand what’s going

on in the more dynamic of these urban centers.

And a final dimension of emerging market story is what I call emerging

multinationals. Now I’ve been talking about this for a couple of years and almost no

sense in talking about it anymore because it’s become so commonplace, but the

number of companies that are coming from emerging markets with the most technology

and the most cutting edge management – I know they’re coming to Yale and hiring

everybody that we’ve got – the number of these companies (and capital is not even an

issue for them and they have a global mindset), this competition is going to be beyond

hyper. And in many cases they have support from their governments of one sort or

another. So this is the new competition. This is a toughie because how you deal with

these behemoths that are coming so fast, with such resources, and such appetites and

such energy, big big challenge.

The second big trend I want to mention is what I call deleveraging in the US,

Europe and Japan. I think everybody knows what this is, but stemming from the

borrowing, huge borrowing of governments over the last couple of decades, big social

requirements, easy credit and then the financial collapse, what has been left in the wake

are a lot of governments that simply have to get rid of a huge amount of debt. We’re

talking “huge”. This is going to be a ten year process and this is going to be very, very

19

painful. We think we’ve seen it in the US, but in fact nothing has happened here yet; it’s

been all talk. But it is happening in Europe and it will have to happen in Japan and here

are some of the implications. We’re in for a decade of very slow growth in the US,

Europe and Japan. The good news about the US notwithstanding – let’s put it in

perspective. If you take the last ten years in the United States, the average growth,

annual average real growth, let’s take in account of inflation, has been under 2%. There

has never been a ten year period since the Great Depression where we have grown so

slow. So when we say things are good, we’re measuring it by a very, very anemic

standard. And when you see what’s going on in Europe if they grow at all, it’s going to

astound everyone. And Japan’s debt and its aging population make all this other stuff

look easy. So the deleveraging is going to be very painful, it’s going to produce slow

growth, it’s going to keep unemployment high, it’s going to retard government

investment and the big question is whether private sector investment will take its place.

Right now there’s no evidence that that’s going to happen, but it very well may. And of

course all the safety social nets that we know – the retirement systems, the social

security and health care – we’re seeing a bit of that now. All of that is going to be pulled

up by its roots over the next decade as a result of the pressure on governments.

The third big trend is what I would call “global resource nationalism”. You guys

live this all the time and I just want to refer to it quickly, but I think the major concept

here is how interconnected the resource story is with everything else. We have rising

20

demand in emerging markets like China and India, pressure on supplies, pressure on

prices, but it can go the other way too. If I’m right that China will stumble, all the

commodity prices are going to come down. And a good surrogate for all this in my view

is Brazil which is basically one big leveraged bet on the Chinese economy. And so if

China does well and Brazil does well, and Brazil pulls up a lot of other countries in Latin

America, you’ve got a virtuous circle on the upside. But it can happen on the downside

as well. The only way to deal with surging demand for resources over time is through

massive investment. And I think it’s possible, but we’re going to need trillions of dollars

of new investment in the natural resource industries. We’re going to need the

application of a lot of cutting edge technology. If we don’t, we have a much different

global macro situation.

And on top of this, this resource situation has coincided or maybe it has been

responsible for resource nationalism. At a time when everyone has been talking about

globalization – in fact, what we’re seeing is countries more jealously guarding their

natural resources, looking to back resource champions in their own country.

I think that this is a very serious issue in terms of the international global trade in

finance situation and my fourth point that I think we’re headed for some very new and

disruptive patterns in international trade and finance.

21

In the trade arena, it wasn’t so long ago we talked about global trade

negotiations. This is very quickly morphing into bilateral deals and regional trade on a

much more regional basis.

Two areas of the world which I think are going to be very big which no one would

have said just a few years ago, one is Eurasia – all those countries that the Soviet Union

let go including in addition to Turkey, and that only brings us back 2000 years to where

that was the center, that’s where the Silk Roads were, that’s where most global trade

took place. And another place is Africa. Both of these very much a function of

enormous natural resources.

I also think in the trade area where are on the cusp of what I would call

enormous amount of trade disputes. The intellectual property issue is about to really

heat up; I think American companies are fed up and European companies too, with the

cavalier treatment of intellectual property in other parts of the world. And I predict that

this is going to become extremely serious and we depend more and more on industries

where intellectual property is the key asset. I also think that we’re seeing the last days

of peaceful negotiations with China on trade. And I don’t think it’s the currency; the

currency may have been important but I think there are much bigger issues that we

have to get at with China and one is intellectual property, but the other is China’s style

of industrial policy, where they demand that American companies or western

companies surrender technology as a price for investing in a country. This is totally

22

against everything that we have wanted to see in the trading system and maybe this is

the shape of the new system, I don’t know, but before the US agrees to that, there’s

going to be a huge amount of friction.

And finally, there is a trend here which I can only call the economics and politics

of the new communications technology. Whether you talk about the Arab Spring or

whether you talk about the mining of Big Data, or whether you talk about the way

customers can give you feedback, there is no aspect of the business world that is going

to be left untouched by the revolution in technology. And there’s a big temptation to

say well, we know that, we’ve already seen it, we all have our i-Pads, we’re learning how

to do new things with it. But the problem with that attitude is that it assumes that we’re

20, 30, 40 percent into this revolution. I say we’re 2%. It is historically unprecedented

that the entire world could possibly be looking at the same set of information at the

same time. It can’t happen today, but over the next ten years it will. What does this

mean for international politics? How quickly can political movements jump across

borders? What does it mean for an industry when all of the customers can basically use

the same information base? How does the power actually shift? I don’t know how

these things are going to end up, but I know for sure what the questions are. Are you

sufficiently concerned about these trends? Have you gone through the exercise of

testing all the assumptions underneath your business model? Have you stress tested it?

23

Are you confident that you have the right advice? Or are you just assuming that you

pretty well know where the world is going and that will be enough.

Implication for Companies

And that brings me to what I think is the real implication for your companies.

You need to have strategic insight by which I mean you need to recognize and

understand the trends. That’s the easy part. It’s a little harder to apply that recognition

to the entire ecosystem in which you’re operating, to your competitors, to your

customers, to your own employees. Do you have a robust strategic planning process?

Can you envision all the contingencies even if they’re only 1 or 2% probability and more

important, do you have a plan to mitigate in case one of those contingencies actually

takes place? Is your strategic planning too rigid? After all in a world where everything is

so uncertain, how do you even look ahead? Andy Grove, who ran Intel for a long time,

had a great saying which I think about all the time. At that time, the integrated circuit

business, computer electronics, was moving very, very fast, changing every day. So his

motto was, “Engage, then strategize.” The idea being that swimming without being in

the pool is worthless in a time when the water keeps changing. So a strategic planning

process that is very flexible, but nevertheless deals with long-term strategy is absolutely

key.

24

More questions. Are you riveted with the agility of your workforce? Are these

people capable of turning on a dime? Can they experiment and then admit very quickly

that the experiment didn’t work? Or if it does, scale it up? And how are you actually

testing to make sure you have those kind of people at the top?

Does your company have a global mindset? You know there are a lot of

international companies that call themselves international or global, but they don’t have

a global mindset. They don’t have people at the top who have real experience

operating on the global stage. They don’t have people whose context is one of

enormous cultural sensitivity. They don’t think about organizing their global operations

with the same intensity as they used to think about just organizing their company in

whatever country it came from. If they’re American, they don’t think about government

in the way that most other countries do. You know, we are rightfully concerned about

the intrusion of government into the marketplace, but for most countries in the world,

this is not new.

Whether you’re in Latin America or Asia or Europe, the role the government has

played is absolutely enormous. So if you’re going to have a global mindset, you’re going

to somehow come to grips with the centrality of public policy and how it’s made and

how it changes and how you influence it and how you think about both the risks and the

opportunities.

25

These are just some of the things that I think are very, very key to operating in

the world today.

Concluding Thoughts

I’d like to end with one very optimistic note and that’s this: for the last couple of

years I have been working on a book. I had tentatively titled it “From Silk to Silicon” and

it’s a book about the history of globalization of the last thousand years. And every

chapter is just about one person, one person who did something absolutely

phenomenal to change the world. One of the characters, just to give you an example, is

somebody called Prince Henry the Navigator. He lived in the 14th and 15th century. He’s

the person who built the ships and basically created a laboratory for navigators all over

the world and with his ships and his navigational equipment, the European sailors left

Portugal, rounded the coast of Africa and went to Asia, and they went to the new world,

they went to the Americas. But it never would have happened – at least it wouldn’t

have happened right then – had this one person not been so entrepreneurial and

capitalized on what was an enormous crisis. And that crisis was that there had been a

Silk Road going from Asia to Europe and you could go over land, but the Silk Road had

disintegrated over lots of civil wars and suddenly Europeans couldn’t get to Asia. And

he figured out a way around it. Or, there’s a guy named Cyrus Field who couldn’t figure

out why you could have a telegraph going from San Francisco to New York but not from

New York to London and over 15 years created the transatlantic telegraph. If you think

26

the internet was a big deal, this was ten times bigger, because before that cable, the

news from Europe to the US traveled no faster than it did in the time of Julius Caesar.

I look at ten different people who did something really amazing and I found that

here’s one of the things that they had in common. In every case, they lived in times just

like ours. If you go back and you read the history of their era, it was mass confusion, it

was chaos, a huge number of things were going wrong. But they took advantage of an

opportunity that others didn’t see. They capitalized on change. They put things

together that are not normally put together.

I am quite sure that in the disruptive transformational global economy that we’re

living in, there are going to be people like this and there are going to be companies like

this. The circumstances, the historical circumstances, are here. The only issue in my

mind is WHO is going to have the foresight and the courage to take advantage of it.

Thank you very much.

Well there’s two ways to answer this. One is what should that global view be? And the

other is how do you get it? So I’m going to take the second because I don’t know the

answer to the first. I recognize that this is actually a very profound question, but my

underlying assumption is that everybody in business ought to have a global view. Now

the global view will vary by what you do. But the only way you can get it is by hiring the

right people. And I believe maybe because I’ve been in the education area for a while,

27

that the best talent in this country is interested in the way the world works. They may

end up working on something that is much smaller, but in terms of how their minds

work and their intellectual capacity and the things that energize them, they’re going to

have a global view. This is the kid that spent 3 summers working in Asia. Or somebody

who took 2 years between high school and college and held a job in a foreign company.

And I think you have to have people like that who will bombard you with whatever ideas

could work. I don’t know what could work, but I know this – you have to be exposed to

them because otherwise you won’t be able to innovate. You know, how many

industries in the US once said they have nothing to do with a global economy? And then

10 years later they were gone? The competition that we’re going to face is absolutely

ruthless from emerging markets and so at a minimum you need the people around you

who are going to say have we thought about this? Have we thought about that? Look

what these guys are doing; here’s how they do it in Brazil or here’s how they do it in

Japan. So I think in this particular case, it’s a question of getting talent and encouraging

that talent to open up the windows so that you are quite sure that you are thinking

about everything you could possibly think about – as I said, not just to react to what

your competition is doing, but to be out in front of it and to set the pace.

Several questions on energy, Jeff, but in general, your view for global energy demand

over the next decade and your thoughts on which industries may perhaps either benefit

28

or be disadvantaged given how you see the demand for global energy over the next ten

year period?

Well first thing is I know that sustainability is a really big issue among a lot of you; I

didn’t mention it because bringing coals to Newcastle [?] but that’s certainly one of the

megatrends. But I do think that we are going to be, if you look at the mix of fuels it will

be 80% conventional fuels for the next 20 years. So I don’t happen to believe that the

alternative fuels are going to play that big a role. And in that context I think the United

States, I think we’re in the process of a very dramatic turning of the corner. Not

because of any great policy initiatives, but because of the technological ability to get the

shale. And so I think we will become much less dependent on foreign sources. This will

free up a lot of supplies and it doesn’t mean that the price is not going to continue to go

up because the demand from Asia is basically insatiable; it just means it won’t go up the

way it would have had we not had the shale opportunity. So I don’t see energy… I see

the energy situation as being very easy to accommodate and that energy prices are not

going to be enormously disruptive unless there’s a geopolitical event which I feel is

going to happen. It’s going to happen in the Middle East – whether it’s Iran or the way

the ball bounces from the Arab Spring, I think it would be an absolute miracle if there

was not a big event in Iran or Saudi Arabia and therefore we’re going to have some big

spikes.

29

So let’s close on that note with one final question to that very point. If you could frame

for us the bookends of potential scenarios. If there is a major geopolitical event with

Iran, worst possible implications as to how the world deals with that and closing on a

high note, your thoughts on how the world in terms of a best case scenario would

potentially deal with a potentially major event.

Can I pick the event?

No, Iran. We’re staying focused with Iran.

Well I think nobody actually knows what would happen if there was an attack on Iran.

Worst case, for a month or two, maybe a little longer, the price of oil would really spike.

And then I think the Straits of Hormuz, we would open it. However, the second order

reverberation would probably be Iranian agents creating havoc in different parts of the

world. I think there’s no way that they would not attempt to retaliate. And I say “they”

it’s kind of murky because they have a lot of surrogates. That’s worst case.

Best case is that there is a huge internal debate in Iran and that there is actually a new

regime comes into power and says they can’t live in this kind of world where they are so

isolated. And they actually take the military action to heart and there’s a negotiation

and in much shorter order than we think, Iran is back in good graces, they pledge not to

have nuclear weapons, and there is a groundswell of support to help them rebuild and

do whatever they need to do to tap other resources. That’s the best case.

30

If you want me to describe probability, that’s a little harder, but I would say the worst

case has more chance than the best case because it’s very possible that in going after

Iran we will inadvertently have fortified their will to persevere on the nuclear stuff and

this could go on for a long time.

Please join me in thanking Dr. Garten. As always my friend, thank you very much.

31