What Companies Have to Gain from Understanding and Mitigating Geopolitical Risk
Geopolitical tension refers to the strained and complex relationships between nations or geopolitical entities characterized by disputes, conflicts, rivalries, and power struggles. The tensions arise from different political, economic, ideological, territorial, and strategic interests among countries or regions.
Geopolitical tensions can manifest through diplomatic disagreements, economic sanctions, military posturing, territorial disputes, and other conflict tactics. They often have far-reaching implications for global stability, trade, security, and international relations. They can significantly impact the geopolitical landscape and influence the behavior of nations in the international arena.
The Business Impact of Geopolitical Tension
Geopolitical tension can have significant business impacts, affecting various industries and companies in the regions involved. Some potential business impacts from geopolitical tension include:
- Disrupted Supply Chains: Geopolitical tensions can lead to trade barriers, sanctions, or import/export restrictions, disrupting supply chains. Companies heavily reliant on materials or components from regions affected by tension may face delays, increased costs, or scarcity of resources.
- Market Volatility: Heightened geopolitical tensions can result in market volatility, affecting stock prices, exchange rates, and investor confidence. Uncertainty about the future can lead to fluctuations in financial markets, impacting businesses' access to capital and funding.
- Investment and Business Climate: Geopolitical tensions can create an unfavorable investment climate, deter foreign direct investment, and affect business expansion plans. Companies may be hesitant to invest in regions with high instability risk.
- Regulatory Changes: Geopolitical tensions may prompt governments to implement new regulations or alter existing ones, affecting business operations. Companies may need to adapt to changes in compliance requirements or face new trade restrictions.
- Intellectual Property Concerns: Companies may face increased risks of intellectual property theft or cyberattacks during geopolitical tension. State-sponsored cyber espionage and cyberwarfare can threaten business data and proprietary information.
- Contractual and Legal Challenges: Ongoing geopolitical tensions may lead to contract disputes or challenges enforcing agreements across borders. Legal systems may be impacted, making resolution more complex and time-consuming.
- Impact on Consumer Behavior: Geopolitical tensions can influence consumer sentiment and behavior. Boycotts, shifts in consumer preferences, or reduced consumer spending in certain regions may affect businesses' revenue and market presence.
- Human Resources and Talent Mobility: Geopolitical tension can impact workforce mobility, immigration policies, and visa regulations. Companies may face challenges in recruiting or relocating talent from affected regions.
- Operational Risks: Companies operating in regions with geopolitical tension may face higher operational risks, including political instability, civil unrest, or security threats to personnel and facilities.
Example — In the last five years, Apple invested at least $275B in China—now they want out
“It would take about eight years to move just 10% of Apple’s production capacity out of China, where roughly 98% of the company’s iPhones have been made” — Bloomberg Intelligence
2018
In 2016, Apple CEO Tim Cook was personally involved in closing a significant deal with the Chinese government. Apple also promised to “invest ‘many billions of dollars more’ in China” as part of this deal. For example by:
- Helping manufacturers develop ‘the most advanced manufacturing technologies’ and training them on the new technologies.
- Use more Chinese components, work with software firms and universities, and invest in tech companies.
2023
Apple's stock price from January 2018 to January 2023
During the Spring of 2023, Apple’s stock price lost almost 30% of its value due to increasing problems in China and escalating tensions between China and the United States. Problems where, for example:
- Covid-19-related riots at Chinese factories producing Apple products
- Apple supplier and Chinese semiconductor chip manufacturer YMTC was blacklisted by the United States government, which argued it was “a national security threat”.
Proactivity Can Turn Geopolitical Tension Into an Advantage
Ensuring proactivity, a company can turn geopolitical tension into a business opportunity.
- Diversifying Supply Chains and Markets: Proactive companies use geopolitical tension as a signal to diversify their supply chains and explore new markets. Reducing reliance on high-risk regions and expanding to stable markets enhance resilience and ensure a steady flow of resources and customers.
- Identifying Emerging Opportunities: Proactive companies keenly observe geopolitical shifts to identify emerging opportunities. They can leverage geopolitical changes to enter new sectors, forge strategic partnerships, or expand into untapped regions, gaining a first-mover advantage.
- Scenario Planning and Risk Assessments: Proactivity encourages long-term planning and investment strategies. Instead of reacting to immediate geopolitical challenges, companies can make informed decisions that align with their long-term goals, ensuring sustained growth and resilience. Also, proactive companies regularly conduct scenario planning and risk assessments to identify potential geopolitical risks and devise appropriate responses. These exercises help companies be better prepared to handle various outcomes.
- Public Affairs and Strategic Alliances: Proactive companies form strategic alliances and collaborations with partners in diverse regions and engage in advocacy and diplomacy efforts to influence policymakers and promote dialogue to reduce geopolitical tension. These efforts can offer access to local expertise, networks, and markets, enabling businesses to navigate geopolitical complexities more effectively. By being actively involved in diplomatic initiatives, businesses can contribute to stabilising the geopolitical environment and safeguarding their interests.
- Crisis Management and Contingency Planning: Proactivity involves developing robust crisis management and contingency plans. In the face of geopolitical tension, companies with well-prepared strategies can navigate uncertainties more effectively, mitigating potential disruptions and protecting their business interests.
By adopting a proactive approach, companies will benefit from understanding geopolitical tension and turning potential challenges into strategic advantages. Embracing uncertainty, staying ahead of geopolitical shifts, and effectively managing risks position businesses to thrive amid dynamic global conditions and gain a competitive edge in uncertain times.
