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Risks on the Horizon
The risks that have been lurking behind operational complexity and vulnerability in the TMT sector have grown significantly in recent years with the spread of geopolitical instability and increasing uncertainty, this has been recently accelerated further by the COVID-19 pandemic. As geopolitical risks increase, new organisational shortcomings are exposed as well as old ones being aggravated.
Our research in preparation for the publishing of our 2021 WTW TMT Futures Report – Risks on the Horizon1 (You can access the full report here), identified, among many, the following sentiments:
“Supply chains are complicated and changing them isn’t easy. You have to start with improving supply chain visibility. If you can map the risks, you can plan for the potential disruption. If you can plan, you can better manage and therefore mitigate the risks. Procurement teams and risk management need to work jointly to better identify and mitigate supply chain risks. Procurement naturally will focus on costs and efficiencies, while the risk manager would think about geopolitical turbulence, location, third party risk, and so on. It’s vital to get the risk manager involved”.
Frederick Gentile, Director of Risk Engagement, Willis Towers Watson GB Retail and Emerging and Strategic Risk Solutions
“Supply chains are complicated and changing them isn’t easy. You have to start with improving supply chain visibility. If you can map the risks, you can plan for the potential disruption.”
Frederick Gentile | Director of Risk Engagement
Over the coming weeks we are also going to publish related blogs on the following themes: Regulation and Legal Risk; Business Model and Strategy Pressures; Global Talent and Skills Race and Digitalisation and Technological Advances. This first blog is going to concentrate on the impact emerging and strategic risks on operational complexity and vulnerability.
Whilst in the past, TMT companies have been able to treat geopolitical risks as an afterthought, today, the sector is a focus for government regulators worldwide. As we mentioned in our 2021 Managing the New Political Risks in the Technology Sector, technology has become a factor in the ongoing trade dispute between the US and China2. This trend continues as we enter 20223 and COVID-19 should have been a wake-up call for businesses and prompted them to consider acting to improve their resilience to future risks. It is now time to prepare for the impact that geopolitics will have (and is already having) on operational complexity and vulnerability.
For many TMT executives, operational continuity risks are often seen as connected with supply chain disruption and this tension is exacerbated by the disruptive force geopolitical friction plays. Growing resistance to free trade agreements increases this tension and illustrates that geopolitical risk is a long-term exposure as countries are jostling for competitive advantage.
Trade disputes have revealed an overconcentration of suppliers in certain geographies. Recent trade disputes have brought into sharp focus the dependence of technology companies on single country manufacturing facilities. Added to these is the element named ‘grey zone aggression’ whereby nation states leverage trade embargos, transit routes and even refugee movements to coerce other countries or to create anxiety in society.
China’s suspension of certain imports from Australia in 2020 and Belarus’s alleged routing of migrants to Lithuania are two examples. The vulnerabilities exposed by the pandemic and the increasing threat of geopolitical risk, accelerated the desire to bring production to home ground, with lawmakers in both the US and Germany raising the prospect of reshoring.4
In our report on Managing the New Political Risks in the Technology Sector (You can access the full report here), the panel of TMT executives we interviewed identified “US-China conflict” as the top risk facing the sector. Many TMT companies have large asset footprints in China and developed these globalised business models at a time when political risk was at a historic low and US-China relation at a historic high. Today, companies are struggling with difficult strategic decisions about whether to realign their global operations to match new geopolitical realities and seeking risk management tools and insurance solutions to help address the disparity.
Supply chain concentration is one element in such thinking about globalisation versus localisation. Globalisation with supply chain concentration comes with cost-and-delivery advantages but exposes companies to risks that are now increasingly apparent. Companies are now moving towards a multi-site production and multi-source procurement strategy. As outlined in the Financial Times4 this move can be illustrated by Samsung’s reaction to Japan’s 2011 earthquake and tsunami which highlighted their overreliance on the Japanese group Mitsui for technology, so they reached out to South Korea’s Illjin Materials, who recently celebrated their first shipment of a new product to Samsung: copper foils. This ‘multi-site production and multi-source procurement strategy’ allowed Samsung to continue operations during Covid-19 without disruption.5
Geopolitical stresses are now prompting many companies to look for alternative solutions; beyond multi-site production; bringing production closer to home; or insuring concentrations of exposure that could be impacted by geopolitical tension. Reshoring trends are getting a boost from political leaders in the U.S., Europe and elsewhere who are looking into financial and regulatory incentives to increase domestic production of vital high-tech components. Alert to this trend certain US technology firms are now considering expanding chip-manufacturing capabilities in the US.
The rise of protectionism and nationalism, coupled with the widening divide between Eastern trading powers and the West, is shaking the foundations of globalisation. Ideological disconnections paired with technology decoupling are increasingly hard to navigate. Some Western governments are increasingly willing to stoke geopolitical rivalries. President Joe Biden has told Americans “they shouldn’t have to rely on a foreign country, especially one that doesn’t share our interests or values”.6 This rise of economic nationalism has the potential to fuel tit-for-tat retaliation in which states target the businesses of their geopolitical rivals.
TMT executives need to ensure they are looking through a different lens; at the risk landscape that is facing technology companies which is continuing to evolve with political turmoil adding to the challenges facing most companies globally. WTW would advise business leaders worried about the future to take action to manage risk more proactively today. The high level of uncertainty in and changes to their global operating environment means that increased agility and a heightened awareness of risks will be key to success.
1 https://willistowerswatson.turtl.co/story/wtw-technology-media-and-telecommunications-futures-report-risks-on-the-horizon-2021-gated/page/2/1
2 https://www.willistowerswatson.com/en-GB/Insights/2021/02/managing-the-new-political-risks-in-the-technology-sector
3 https://www.ey.com/en_uk/geostrategy/ceo-geopolitics-risk-technology-strategy
4 https://www.ft.com/content/6458318f-deb8-48c4-8d79-d73acb3401e3
5 https://www.ft.com/content/c8644714-2bc0-4dad-80ec-5c0282aea76e
6 https://www.whitehouse.gov/briefing-room/speeches-remarks/2021/02/24/remarks-by-president-biden-at-signing-of-an-executive-order-on-supply-chains/
