Western multinationals have avoided geopolitics for years in favour of pursuing profits, but strained international relations are spurring corporations to pick sides with their capital. Is the era of globalisation finally over?
In the wake of the Ukraine war and strained US-China relations, the world is witnessing a significant shift from the era of globalisation and geopolitical moderation that characterised the post-Cold War period. This shift is leading to the emergence of competing defence and economic blocs – a fractured world – which in turn is forcing CEOs to relook at strategies to navigate these disruptions and build a resilient organisation.
Hard evidence is now emerging that all the discussions of strained international relations and more than a decade of warnings over the end of an era of globalisation are finally spurring corporations to pick sides with their capital. Western multinationals that for years have avoided geopolitics in favour of pursuing profits in less mature markets are increasingly building the factories of the future in like-minded nations.
European Central Bank President Christine Lagarde declared earlier this year that “we are witnessing a fragmentation of the global economy into competing blocs, with each bloc trying to pull as much of the rest of the world closer to its respective strategic interests and shared values.”
A reorganising world
As the world’s leaders gather in New York this week for the annual United Nations General Assembly, a Bloomberg Economics analysis of UN foreign-direct investment data points to a world reorganising into rival – though still linked – blocs that reflect UN votes on Russia’s invasion of Ukraine. Of the $1.2 trillion in greenfield FDI invested in 2022, close to $180 billion shifted across geopolitical blocs from countries that declined to condemn Russia’s invasion to those that did, the analysis found.
BlackRock Investment Institute sees US-China relations on a negative trajectory. A series of visits by senior US officials to China shows leaders are seeking to put a floor under the relationship. Any thaw is likely to be fragile and subject to events and actions of both sides. The risk of accidental or intentional escalation is high, in our view. Taiwan remains the biggest flashpoint. We believe the US Congress and some presidential candidates will keep pressing for increased support for and closer relations with Taiwan, raising tensions. We do not see military action in the near term but see the risk increasing over time. China has demonstrated a willingness to pressure Taiwan, presenting risks for investors. An important milestone will be the Taiwan presidential elections in January 2024.
Countries that are multi-aligned and possess valuable resources and supply chain inputs are poised to gain increased power and influence. Their unique position of aligning with multiple blocs is anticipated to reshape global economic and energy ties.
Historically, geopolitical events have had only a transient impact on markets and economies. However, a comprehensive analysis of 68 risk events since 1962 reveals a change in this trend. As highlighted in the 2023 midyear outlook, geopolitics now plays a continuous role in influencing markets, with more prolonged effects. The vulnerability of economic growth to geopolitical shocks is more pronounced than ever.
The BlackRock Geopolitical Risk Indicator, which monitors market sensitivity to geopolitical risks, currently hovers around its historical average. Given the myriad of risks looming, there is a growing belief that markets might be underestimating the potential repercussions of geopolitical events.
Supply chain dislocation is one of the biggest challenges CEOs need to prepare for in a geopolitically fractured world. They need to be prepared for future crises and adopt the following steps to create a resilient organisation:
- Create a world-class sensing and risk-monitoring operation: CEOs should invest in risk intelligence and strategic foresight by forming a team of procurement super-forecasters equipped with AI-powered sensing technology. This operation should monitor both direct and indirect suppliers in the supply chain, considering various risk categories such as operational, financial, reputational, structural, disasters, geopolitical, fiscal, and industry risks. Key risk indicators (KRIs) linked to specific data points should be used to plot risks on a matrix based on detectability and impact.
- Simplify the product portfolio: In order to reduce costs and streamline operations, CEOs should scale back product portfolios. This involves eliminating certain product lines and simplifying the design, specifications, raw materials, components, and packaging of remaining products.
- De-risk the supply chain: CEOs should take actions to mitigate risks in the supply chain, including sourcing raw materials, manufacturing products, and delivering to customers. This may involve reviewing the make-or-buy strategy, investing in digital technologies like 3D printing, and considering reshoring, near-shoring, or regionalisation to reduce supply chain vulnerabilities. Taking control of critical raw materials and components is also recommended.