The Russia-Ukraine war is stretching into its second year and China is increasingly asserting its claims to independently govern Taiwan, further complicating strained relations with the United States. As the supply chain and world order continues to shift, it is essential for companies with global operations to prepare for potential risks and to understand how best to mitigate the disruption of business operations.
These conflicts are part of a broader reordering of global alliances. As a more fractured world order emerges, so do several newer power centers who are eager to stake their claims. Disruptions to the dynamic business ecosystems established over decades are making it increasingly challenging to deliver goods.
Decades of offshoring to lower cost labor centers have left many companies reliant upon Chinese manufacturing. China represented 29% of global manufacturing output in 2019.1 Taiwan, meanwhile, produces nearly two-thirds of the global supply of microchips that power everything from computers to cars, and more than 90% of the most advanced chips.2 Those vital inputs could be suddenly taken offline in the event of a military conflict, just as Russia's invasion of Ukraine has hindered the flow of oil and grain to much of the world.
“The conversation we often have with businesses is that, when you're thinking about concentration risk in the region, what does it mean to have a lot of exposure to any one country out there from a supply chain perspective.” said Shailesh Kumar, head of the Global Specialty Insights Center at The Hartford.
Preparing Your Business for Geopolitical Risks
The changing world order is prompting companies to rethink their risk exposure in an interconnected global economy. Companies should be proactive at taking steps to prepare for potential risks and understand how best to mitigate the disruption to their operations.
It is important to understand current production flows by mapping the supply chain and analyzing the impact on the balance sheet of every location you operate. A deep understanding of critical flows and choke points enables companies to assess their suppliers, identify backup sources and create contingency plans in the event they lose a critical supplier.
As businesses look to diversify their supply chains and expand production to new countries, it is essential to pay attention to a country's regulatory environment, labor costs and supporting infrastructure.
“The regulatory environment is critical to understanding the financial and regulatory issues of the country you're operating in, including the insurance laws,” says Alfred Bergbauer, head of multinational at The Hartford.
Another consideration is the availability and cost of labor. Europe, for example, has an aging population and high labor costs. On the other hand, India, the world's most populous country, has low labor costs. While population and costs must be factored in, working conditions are also important. To avoid an inadvertent controversy, evaluate whether there are known or suspected cases of human rights violations in that region or country.
To successfully operate in multiple countries, businesses need to stay on top of geopolitical developments that could disrupt their operations, such as potential riots, labor strikes, military conflicts or economic issues. Staying informed can help businesses create contingency plans before a country reaches crisis.
New Opportunities for Trade Flow
The pandemic-era shutdowns focused attention on the need for supply chain resilience. Since then, demand imbalances have eased, and shipping costs have dropped to pre-pandemic levels. That creates new opportunities for companies as they look to mitigate risk and increase resilience.
Around the globe, businesses are methodically shifting their operations in ways that will reshape commerce for decades to come. In addition to supply considerations, such as labor costs and infrastructure, businesses can align their production with new market opportunities. India, for example, is not just the most populous country, it is also the fastest-growing economy with a rising middle class and a booming manufacturing industry. India is rolling out manufacturing incentives as it looks to take a portion of the manufacturing share from China by increasing exports to $2 trillion annually by 2030.4
There have also been emerging opportunities to onshore production, renew domestic manufacturing, and locate plants closer to end customers. New plants for chips, batteries and electric vehicles are opening at a rapid pace across the southern and midwestern U.S. In fact, 96% of companies are evaluating reshoring or have already done so.5 Additionally, the 30-year-old North American Free Trade Agreement (NAFTA) is also reemerging as U.S. companies shift manufacturing to Mexico and Canada, amid a broader "friend-shoring" trend.
As countries compete for influence on the global stage over the coming decades, companies will be more exposed to risks and threats to their business operations. However, with strategic planning and vigilance, businesses can spot new opportunities and mitigate potential fallout amid the rapidly evolving world order.
1 “China Is the World's Manufacturing Superpower,” Statista, May 2021
2 “Strengthening The Global Semiconductor Supply Chain In An Uncertain Era,” Boston Consulting Group, April 2021
3 “Carbon Boarder Adjustment Mechanism,” European Commission, July 2023
4 “India Seeks $2 Trillion Exports by 2030 in Supply Chain Push,” Bloomberg, March 2023
5 “America Is Ready for Reshoring. Are You?,” Kearney, July 2023
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