Geopolitical Risks and the Supply Chain

Stephen DeAngelis

August 25, 2021

Supply chain risk managers often feel like long-tailed cats in a room full of rocking chairs — everywhere they look a new risk appears. Port delays, pandemics, climate events, factory fires, cyber breaches, and work stoppages are only a few of the risks they must confront. Risks that don’t get as much play, but could be even more significant, are geopolitical risks. Journalist Janina Conboye (@JaninaConboye) notes, “Geopolitical events shape the environment in which businesses operate and in recent years the world has looked an increasingly uncertain place.”[1] Mike Rosenberg, a professor at the Iese Business School in Spain, insists understanding geopolitical risks is essential for supply chain managers. He told Conboye, “Most supply chain managers underestimate the risks that are present.” The most important geopolitical risks are those between the United States and China.

 

Boston Consulting Group (BCG) analysts report, “In terms of supply, decades of trade and investment have fostered a high degree of interdependency between the US and China in many industrial sectors, not only for certain finished goods but also for key intermediate goods and raw materials. Trade tensions therefore affect not only what companies can sell in China or the US but also what they can export from either country to the rest of the world.”[2] And those tensions remain high. At a high-level meeting in July, U.S. and Chinese diplomats underscored sharp differences the two countries perceive. Journalists Ken Moritsugu (@kmorit) and Ng Han Guan report, “China issued a long list of demands and complaints, accusing the U.S. of trying to contain and suppress China’s development, while America brought up its concerns about human rights and other issues, and urged cooperation on matters including climate change, Iran and North Korea.”[3] Risk managers may think such concerns are above their paygrade; however, ignoring geopolitical risks isn’t really an option.

 

Supply Chains and Geopolitics

 

A couple of years ago, “Resilience360 released the results of a customer survey launched to assess the impact of the U.S.-China trade war for companies with global manufacturing networks. Among other findings, the results revealed that two-thirds (66%) of the nearly 300 customer respondents had been impacted by the business disruptions and significant operational challenges presented to them by the U.S.-China trade war.”[4] Despite a change in U.S. administrations, tensions continue. As Conboye notes, “Relations between the countries deteriorated sharply under Biden’s predecessor, Donald Trump, and the two sides remain at odds over a host of issues including technology, cybersecurity and human rights.” Despite the obvious tensions, the Resilience360 survey found “25.3 percent of respondents cited that they had not planned any contingency plans to mitigate the risks posed by the trade war. In particular, 47.6 percent of respondents from the engineering & manufacturing and 40 percent of automotive and mobility sectors declared that they had no contingency plans at all despite being industries heavily targeted in the trade war.”

 

The Knowledge@Wharton staff asserts, “Companies are facing heightened political risks across the globe, but the majority of them are underprepared, reactive, and lacking confidence in their ability to navigate those risks successfully. Geopolitical risks are the biggest, especially with COVID-19 disrupting supply chains, the rise of nationalization and protectionism, the hardening of U.S.-China trade tensions, and increasing confrontations with authoritarian regimes that provoke cycles of sanctions and retaliatory actions.”[5] There are, however, steps supply chain managers can take to mitigate the adverse effects of geopolitical risks.

 

Addressing Geopolitical Risks

 

A study released by the Wharton Political Risk Lab, entitled Geostrategy in Practice 2021, identifies five steps companies can take to manage their political risks more proactively and strategically. They are:

 

  1. Identify and collect quantitative political risk indicators.
  2. Develop or acquire the ability to assess the business impact of political risk.
  3. Integrate political risk into enterprise-wide processes.
  4. Engage the board and C-suite to incorporate political risk into strategic planning.
  5. Set up a cross-functional geostrategic committee.

 

The Knowledge@Wharton staff notes, “The study was based on a survey of more than a thousand C-level executives, a quarter of whom were CEOs. Half of the respondents represented corporations with more than $5 billion in revenue. Survey respondents were based roughly equally across the Americas; Europe, the Middle East and Africa; and Asia-Pacific. The study covered seven industries — advanced manufacturing and mobility; consumer products; energy and resources; financial services; health sciences and wellness; real estate, hospitality and construction; and technology, media and telecommunications.” The first two steps recommended by Wharton analysts involve data and its analysis. Mike Landry, the supply chain service line leader at Genpact, observes, “Data has always been at the center of the supply chain and helps leaders make decisions.”[6] Landry believes leveraging data and digital twin technology are excellent ways to confront geopolitical risks. He explains:

 

Today’s supply chains have growing complexities with an international network of suppliers and service markets. … Add in the variability of demand, and a supply chain is pushed back on its heels, reacting to demand variability. One uniquely positioned solution is called a ‘digital twin’. A digital twin is a model of the supply chain. The foundation is a transparent supply chain strategy, comprised of rules on how to absorb and refine costs, or pass through to customers downstream. A digital twin uses the multi-tier supply chain data to rely upon predictive outcomes and sensory response. Uncertainties such as pending tariffs can be run through ‘what if’ scenarios to understand the service, cost, and risk implications of changes, decisions and unexpected market conditions. These examples are not intended to be definitive outcomes; alternatively, they allow internal and external supply chain groups the opportunity to setup a plan of action which mitigates service risk while optimizing the collective cost. Organizations must learn the discipline of using ‘what if’ scenarios for their analysis and guide the implementation of both short term and long-term strategies and events.”

 

Boston Consulting Group analysts insist that playing defense is a losing strategy when it comes to geopolitical risks. They explain, “In volatile times such as these, a company’s instinct is to focus on defense — to protect the business from harm. Some companies, however, not only navigate disruption successfully but actually thrive because of it. … The value of being able to anticipate, synthesize, and harness risk for potential gain has never been greater. Global geopolitical risk and economic uncertainty have increased dramatically over the past decade, according to leading indices. What’s more, the COVID-19 pandemic has brought geopolitical risk factors into sharp relief. The ability to proactively navigate turbulence can mean the difference between prospering through a crisis or falling victim.”[7]

 

Like Landry, BCG analysts believe leveraging data to detect early signs of trouble and then gaming strategies is a winning formula. They explain, “The most successful opportunists carefully monitor any situation that may, at first glance, appear to be a threat. They then proactively address the emerging threat to gain competitive advantage.” The BCG analysts, like the Wharton analysts, recommend a few steps companies can take to deal with geopolitical risks. They are:

 

  • Integrate geopolitical signals and risk assessment into strategic-planning processes and define actionable strategies to both protect the business and take advantage of emerging opportunities.
  • Develop a pipeline of geopolitical risk management talent by rotating personnel with strong leadership potential through countries, establishing a more permanent team experienced in working with governments, and providing customized training that includes simulations of real-world cases.
  • Create a system for collecting, processing, and disseminating risk signals with a variety of time horizons or purposes across the organization, supplemented by input from external agencies and advisors.
  • Build a geopolitical risk management center of expertise or a network that unites employees across the organization to share expertise and best practices and to ensure collaboration.
  • Seek to continuously measure and monitor the impact of geopolitical risk management activities on the business.

 

As you can see, the two groups of analysts offer very similar suggestions. The BCG analysts conclude, “While there is no universal formula for success, building robust geopolitical risk management organizations and processes is key to begin navigating an uncertain world.”

 

Concluding Thoughts

 

Journalist John Paul Hampstead (@JPHampstead) writes, “The trade relationship between the United States and China — the world’s two largest economies — is breaking down. … Geopolitical risk is back, and companies with global supply chains are forced to consider the impact that economic, ideological and military conflict between states may have on their operations. Now more than ever, it is vital for organizations to leverage technology to map out their supply chains, understand their exposure and pivot away from risk and toward new opportunities.”[8] BCG analysts suggest rather than steering away from risk to find opportunities look for opportunities in those risks. They conclude, “‘In every risk there is also an opportunity’ is a well-worn adage. Yet few companies consistently act on it. In a global business environment characterized both by hypercompetition and intensifying geopolitical headwinds, it is no longer enough for companies with global footprints to only react defensively. Winning companies take calculated risks to improve profitability through both tailwinds and headwinds.”

 

Footnotes
[1] Janina Conboye, “Why geopolitics is finding a place on the business school map,” Financial Times, 3 December 2017.
[2] Raj Varadarajan, Antonio Varas, Marc Gilbert, Michael McAdoo, Fang Ruan, and Gary Wang, “What’s at Stake If the US and China Really Decouple,” Boston Consulting Group, 20 October 2020.
[3] Ken Moritsugu and Ng Han Guan, “US, China hold high-level talks, highlighting differences,” AP, 26 July 2021.
[4] Globe Newswire, “Resilience360 Research Reveals 66% of Global Manufacturing Customers Have Been Impacted by the U.S.-China Trade War,” Yahoo Finance, 3 December 2019.
[5] Staff, “How Companies Can Navigate Political Risks Successfully,” Knowledge@Wharton, 8 June 2021.
[6] Mike Landry, “Worried about trade wars’ impact on your supply chain? Here are three ways to manage risks.” Global Trade Magazine, 31 October 2019.
[7] Clint Follette, Marc Gilbert, Ilshat Kharisov, Michael McAdoo, and Pattabi Seshadri, “Turning Geopolitical Risk into Strategic Advantage,” Boston Consulting Group, 30 March 2021.
[8] John Paul Hampstead, “The return of geopolitical risk,” FreightWaves, 3 July 2019.