All organisations with a global footprint will be aware of geopolitical risk. In the third article examining techniques used in strategic intelligence, Gabrielle Reid and Markus Korhonen discuss how geopolitical risk analysis can help businesses to avoid falling foul of critical vulnerabilities present in their footprint and form a critical component of good governance.
Geopolitical risk is back. The events of 2022 have set the stage for geopolitical uncertainty to intensify and have shone new light on the vulnerabilities that exist in expanded operations, complex supply chains, and the downside risks of global integration. While companies have long sought to leverage cost saving and market access opportunities across the world and have shown some appreciation for the need to navigate diverse jurisdictions within a wide-reaching global footprint, the interplay between global and domestic politics and the impact on the commercial environment is growing.
Global integration is still an advantage and it is unlikely to be entirely rolled back despite signs of nearshoring and ‘friend-shoring’ on the global stage. Global integration offers companies access to a greater market and labour base, while leveraging preferential trade relations between states to secure raw materials, and support services at more competitive prices. US and European manufacturers, for example, continue to leverage more diversified raw materials from China, Ethiopia, Mexico, or Vietnam, among other markets, whereas the burgeoning Business Process Outsourcing (BPO) sector in countries such as India, Philippines, Bangladesh, South Africa and elsewhere offers companies across the world access to high quality and affordable support services. Meanwhile, global supply chains for commodities from wheat to metals can mean far more competitive rates relative to local suppliers.
Identifying the winds of change
The trick to not falling foul, however, is knowing the critical vulnerabilities in your global footprint and anticipating the potential consequences should the global dynamics on which you have tethered your business begin to shift. It is about achieving the balance between leveraging the advantages of maintaining global networks and navigating the fallout from potential global fragmentation.
At present, the world is facing growing sources of geopolitical tensions, such as de-risking efforts between the US and China, Russia’s war in Ukraine, North Korea’s expanding nuclear weapons program, and OPEC+ countries seeking to keep oil prices high. Increasingly, businesses need to understand their geopolitical risk exposure and develop a foreign-policy oriented response. While localised instability has long presented the threat of disruptions within a supply chain, global adversaries have increased their use of sanctions, financial restrictions, and trade embargos not only as rules of promoting international rules-based trade but as a foreign policy tool. This means that businesses are now far more vulnerable to the impacts of global developments that occur thousands of miles away and how governments choose to respond to them. Technological decoupling linked to the growing competition between the US and China, for example, will have real and direct consequences for European companies in China and increase the potential for supply chain reconfigurations, while tit-for-tat sanctions present new and evolving compliance and supply chain disruption risks across the globe. At the same time, political considerations will inevitably be weighed against commercial ones: China remains a key market and a key trading partner for many Western companies. To this end, Siemens CEO Roland Busch recently told the Financial Times that given the importance of the Chinese market, pulling out was “not an option”.
Interconnected: Geopolitical risk and the financial sector
The West’s response to an aggressive Russia has set a strong precedent for the use of financial penalties against geopolitical power plays. This means that banks and other financial service providers are now at the forefront of how countries choose to invoke their foreign policy moves. Today, businesses find themselves needing to maintain a precise understanding of ever-shifting regulatory regimes. Sanctions, financial restrictions, and trade embargoes have also restricted cross-border credit, while at the same time geopolitical uncertainty has dampened investor confidence, impacted domestic market prospects and raised default risks. Growing political risk in an integrated system further presents foreign exchange risks and potential risks in meeting rising local operating costs.
Geopolitical risk management as part of good governance
Amid this increasingly complex global landscape, accounting for geopolitical risk is becoming a priority for boards, as well as other stakeholders. Today, boards need to consider risks not only stemming from a single investment, project, or market, but examine the broader strategic risk landscape. This includes maintaining an understanding of a company’s global footprint and the vulnerabilities within it, their exposure to third party risks as part of a wider supply chain, and how geopolitical winds of change will impact their business resilience. And these winds mean that companies can ill-afford to ignore changing developments. Be it anticipating pending shifts through regular intelligence reporting, or workshopping the various scenarios these shifts could result in, geopolitical risk management is proving to be increasing part of good governance practices.
Next week we'll look at threat assessments in the last article of the series. Catch up with the earlier articles, simply use the form to download the full series.