Talk about global asset management and risk evaluations at #1 networking event for global asset & wealth managers. Mission Grey’s Co-founder and Chairman Jouko Ahvenainen speaks at IMpower incorporating FundForum in Monaco on June 26. The event is the #1 networking event for global asset and wealth managers. It has over 1,400 attendees, over 500 asset and wealth managers and over 400 asset allocators globally. Mr. Ahvenainen focuses especially on global perspective and how the investment landscape is changing at the moment and how technology can also help to better evaluate investment opportunities. The investment and asset management landscape has changed dramatically during the last few years. The Covid time triggered higher inflation in many countries. The war in Ukraine, a growing tension between China and the USA and several other conflicts and political risks have also created totally new risks for global investments and businesses. At the same time, it also means new opportunities. ESG models have also been strongly criticized and their role is reconsidered. Changes can also happen very quickly. It means challenges for many investors, especially institutional investors, that have their investment policies and longer term allocations requirements. Investors should be able to react to changes, but at the same time be able to keep their longer term view. This is not an easy balance act. Mr. Ahvenainen talks about these new needs and also possible ways to evaluate investments in new ways. The technology also enables new ways to evaluate the risks, also utilize almost real time analysis about changes in the investment environment, and build the asset allocation based on the analytical view and also utilize the latest AI tools. Mission Grey offers tools for businesses and investors to understand the global business environment, manage strategic risks, and find opportunities. The tools include automated report generation, analytics and actionable insights to help with use cases like Crisis Management, Scenario Analysis, Market Entry Strategy, Investment Diversification, Strategic Risk Analysis, Regulatory Compliance, Supply Chain Optimization and Policy Formulation. More information about the event can be found here. You can also talk more with Mr. Ahvenainen’s AI Knowledge Twin for further insights. Indexes, reports, and country rankings – yes, they are nice, but how do they actually help in making decisions good for your company? In the end, it is a human being or a group of them bearing the responsibility. Does it make technology unneeded? If so, welcome to the stone age! Well, even back then small human communities warned each other for ”geopolitical risk” by smoke signals and shouting. It was hard to hunt and gather food if wild animals and hostile neighbours threatened without prior warning. Today, we have come quite far from that, but the need to understand global business networks, country risks, and mitigating them has remained. Sure, those networks and risks are much more complex than back then. Today, a small workshop entrepreneur in West Virginia can be very much affected by raw material price volatility in East Asia. Furthermore, this volatility can be caused by many potential variables, such as military operations, environmental disasters, political tensions, or trade policy change – just to mention a few. How to recognize what is relevant, how the interdependencies work, and – most importantly – how to extract the right information to support successful decision-making? This is not something the human brain is able to study that fast. They need help. Country dashboard and Indexes – a fast overview It is important to get the basic information fast. If you need a brief overview of a country where you received an order from or are about to make one, it probably makes sense to check if your contract is likely to be properly enforced by a local court. One can check the level of corruption, potential strikes, political instability… And many other things! If the contract is made for several years, looking at previous (and even more, expected) trends could be beneficial… One may also want to know how the country as a whole is located in the global trade networks. In principle, all of this is very simple. Many decision-makers can study these things from various sources. However, by using the Mission Grey country dashboard you can get the information faster and in an easily understandable manner. Country indexes help you track the level of functioning market economy and institutions, overall economic dependence on authoritarian v. democratic states (very well acknowledging the shades of grey), and political, economic, legal, as well as social stability. The Global Dashboard shows several indexes, among relevant themes around the World. Trade networks revealed.
AI products – going deeper Artificial Intelligence (AI) is the concept of the year. There is a lot of unnecessary hype around AI. However, sometimes it really can make things easier. Let our AI-powered Risk Analysis Assistant elaborate further: Mission Grey offers powerful tools for businesses and investors to navigate the complex global business landscape, particularly in the context of rising geopolitical tensions. The products are designed to help companies make strategic decisions by providing actionable insights. Here are some ways companies can instrumentalize Mission Grey products to support their decision-making: Understanding Geopolitical and Geo-economic Risks: Mission Grey's AI-powered tools analyze data from various sources, including news, trade data, and research, to identify geopolitical and economic risks. This helps businesses stay informed about potential disruptions to their operations and make proactive decisions to mitigate those risks. Identifying Opportunities: By combining and refining data from multiple sources, Mission Grey's products can uncover hidden opportunities for businesses. For example, identifying new markets, investment prospects, or strategic partnerships that align with the company's goals. Strategic Decision-Making: Mission Grey provides actionable intelligence, metrics, and reports to support businesses in their decision-making. This includes insights on global trends, market dynamics, and potential areas for expansion or diversification. Competitive Advantage: In a highly competitive business environment, access to timely and accurate information is crucial. Mission Grey's products enable companies to stay ahead of the curve and make more informed choices, thereby gaining a competitive edge over their peers. Risk Management: Mission Grey's tools can assist companies in identifying and assessing geopolitical risks, which are often difficult to quantify. By integrating these risks into their decision-making process, companies can develop robust risk management strategies and build more resilient businesses. Here are some practical examples and scenarios illustrating the benefits of using Mission Grey products: Scenario 1: Market Entry Decision: A company is considering entering a new market but is unsure about the geopolitical stability of the region. By using Mission Grey's products, they can assess the political, economic, and social landscape of the target market, identify potential risks and opportunities, and make a more informed decision about market entry. Scenario 2: Supply Chain Disruptions: A manufacturer relies on raw materials sourced from multiple countries. With Mission Grey's tools, they can track geopolitical developments that may impact their supply chain and develop contingency plans to minimize disruptions, ensuring a stable supply of raw materials for their production process. Scenario 3: Investment Decisions: An investment firm wants to diversify its portfolio but is concerned about geopolitical risks in certain regions. Mission Grey's products enable them to analyze investment opportunities while considering geopolitical factors. They can identify countries with stable political environments and favorable economic policies, reducing investment risks and making more confident investment decisions. Scenario 4: Crisis Management: A company with global operations wants to be prepared for potential crises. Mission Grey's tools help them to track geopolitical developments and identify early warning signs of potential crises, such as political instability or trade tensions. This allows the company to develop crisis management plans and ensure business continuity. Scenario 5: Brand Reputation: A company wants to ensure that its operations and investments are aligned with its values and brand image. Mission Grey's products provide insights into geopolitical issues, enabling the company to make informed decisions that uphold their values and maintain a positive brand reputation. --- Ok. What if I ask them to identify geopolitical risks and opportunities one should focus on in the next 12 months, and how can Mission Grey's products help navigate them? The answer provides a summary on the expected issues: Russia-NATO Tensions: The conflict between Russia and Ukraine has initiated a humanitarian crisis and impacted capital flows, trade, and commodity markets worldwide. Mission Grey's tools can help businesses to manage the situation, assess the impact on their operations, and make informed decisions to mitigate risks. US-China Strategic Competition: The complex relationship between the US and China involves trade tensions, technological advancements, and military posturing. Mission Grey's products can provide insights into the latest developments, helping businesses navigate potential disruptions in supply chains and economic policies. Energy Security: The conflict in Europe has disrupted energy supplies, and countries are racing to secure affordable energy. Mission Grey's analysis can aid businesses in understanding the energy landscape, including the shift towards renewable energy, and make strategic decisions regarding energy sources and infrastructure. Cyberattacks: Cyber threats are becoming more frequent and severe, targeting critical infrastructure. Mission Grey's tools can help businesses stay informed about the evolving nature of cyber threats and take proactive measures to protect their digital assets and critical systems. Climate Risk: Climate change is causing more frequent and severe weather events, impacting infrastructure and supply chains. Mission Grey's products can assist companies in understanding the physical risks associated with climate change and incorporating climate resilience into their strategies and operations. Global Elections: The upcoming global elections supercycle will generate regulatory and policy uncertainty. Mission Grey's insights can help businesses anticipate potential shifts in economic policies, trade relationships, and investment landscapes, enabling them to adapt their strategies accordingly. Supply Chain Disruptions: The COVID-19 pandemic and the war in Ukraine have highlighted the vulnerabilities in global supply chains. Mission Grey's tools can support businesses in identifying alternative suppliers, diversifying their supply base, and building more resilient supply chains. Economic Slowdown: The global economy is facing challenges, with a potential recession looming in the US and Europe. Mission Grey's analysis can help businesses navigate this turbulent economic landscape by providing insights into market trends, consumer behavior, and investment opportunities. Food Insecurity: The conflict between Russia and Ukraine has disrupted global food supplies, and there is a global fertilizer shortage due to export bans. Mission Grey's products can help businesses track commodity prices, assess their exposure to affected markets, and make informed decisions to secure their supply chains. Geopolitical Swing States: Countries like India, Saudi Arabia, Turkey, South Africa, and Brazil, which are not aligned with any major power bloc, will gain more influence over the international agenda. Mission Grey's tools can help businesses understand the shifting geopolitical landscape and identify opportunities for expansion or strategic partnerships in these regions. Mission Grey's products are designed to provide actionable intelligence, helping businesses navigate these geopolitical complexities and make strategic decisions with confidence. By leveraging Mission Grey's tools, businesses can turn these risks into opportunities and build more resilient and agile organizations. --- What does it mean in practice? Well, let’s see. My question was the following: ” I am about to build an industrial production unit in the EU. Which countries would be the most resilient to potential volatility of energy prices?”. The AI did not let me down, but came up with several proposals based on big data analytics and OSINT: The energy landscape in the EU has been significantly impacted by the conflict between Russia and Ukraine, with Russia leveraging energy as a political weapon. This has resulted in record-high energy prices and volatility in the EU, affecting both households and industries. In this context, building an industrial production unit in the EU exposes your business to potential risks related to energy price volatility. However, there are countries within the EU that may offer more resilience to these fluctuations. Here is an analysis of the factors to consider and a suggestion of countries that could be more resilient to energy price volatility: Factors Affecting Energy Price Volatility in the EU: Dependence on Russian Energy: Russia's invasion of Ukraine has disrupted the flow of natural gas to Western Europe, and the EU has been working to reduce its dependence on Russian fossil fuels. In 2021, the EU imported 83% of its natural gas, with 45% coming from Russia. This overreliance on Russian energy supplies has made the EU vulnerable to price manipulation and supply disruptions. Global Energy Demand: The increase in global energy demand, particularly in Asia, following the COVID-19 pandemic has contributed to tighter supply and higher prices. Renewable Energy Transition: The EU is promoting a shift towards renewable energy sources and away from fossil fuels. This transition includes increasing the use of liquefied natural gas (LNG) and accelerating the development of renewables such as wind, solar, and hydrogen. While this transition is crucial for addressing climate change and reducing the EU's dependence on Russian fossil fuels, it also comes with challenges. The intermittent nature of renewable energy sources can impact supply stability, and the infrastructure for renewable energy may not yet be fully developed in some countries. Economic Conditions: A potential recession could lower natural gas demand and force prices to decline. However, it is expected that volatility and higher prices will persist beyond 2023. Countries with Potential Resilience to Energy Price Volatility: Nordic Countries: Finland, Sweden, and Denmark have shown a strong commitment to renewable energy sources and have experienced significant declines in wholesale electricity prices. Finland and Sweden, in particular, had the lowest quarterly average prices in the third quarter of 2023. Investing in these countries may benefit from their focus on renewable energy and stable electricity prices. France: France has a diverse energy mix, including nuclear power, which can provide a more stable source of energy. Additionally, France has been a major importer of LNG, which has become an important supply source for the EU. Netherlands: The Netherlands is also a significant importer of LNG, contributing to the EU's shift away from Russian pipeline supply. Investing in the Netherlands may provide access to more stable LNG supplies. --- Of course, the final decision is to be made by a human being. We cannot always be right – nor do we claim to be. What we can do is save money, time, and nerves. Wait? Isn’t it just like ChatGPT? Yes and no. Sure, one can write similar questions there. However, our interactive AI agent model is specifically designed for companies to mitigate geopolitical and business environment risks, providing superior answer quality and user experience. Optimizing the risk level – portfolio models In the stock market, Modern Portfolio Theory (MPT) has been used to optimize risk level already for decades. By smart diversification, one can mitigate the odds of a disaster while enjoying the benefits of owning securities. The more knowledge about the markets and companies, the better the portfolio. After all, one should avoid ”putting too many eggs in one basket”; this in not only about relying too much on several companies, but also on a certain sector, region, or cluster. We can create portfolio models to optimize your supply chain with our extensive dataset and expertise. Our models are constantly improving and learn from previous mistakes. We collect the information and you get an action plan – or several, depending on the level of your risk-tolerance – to support your business decisions. The portfolio takes into account geopolitical risk, commodity prices, trade policies, logistic costs, returns of scale, and reliability. The more you tell about yourself, the better the model will be! Of course, you can combine the portfolio with our AI-powered risk analysis assistant, indexes, and other products to get your own, specific plan based on individual company needs. You do not have to rely on expensive consultant companies or your gut feeling anymore – just do it with cost-efficient and convenient Mission Grey! Mission Grey has now launched its first products to manage geopolitical and business environmental risks and opportunities. We want to offer companies and investors the tools to understand risks while doing international business, and also offer actionable insights on how to navigate through those risks while at the same time identifying opportunities and what it means to act on them.
Why now? We all know geopolitical tensions are high. The Russian large-scale invasion of Ukraine, uncertainty around Taiwan, increased complexity of the US-China relations, conflicts in the Middle-East, Africa and much more; all these illustrate the mushrooming uncertainty around us. It has an impact on businesses. Until today, many business leaders have hoped to ignore these issues. However, in 2024 such ignorance is impossible. At the same time, it is very challenging to evaluate these complex global business environments and networks. Companies have to buy components, sell their products, work with partners, manage logistics, and secure financing. There are legal restrictions (e.g. sanctions and embargoes) to be thoroughly understood. There are also more tangible physical risks, e.g. security risks in the logistics networks, as we have seen most recently on the Red Sea and some countries in Africa. It is becoming more important for companies to be able to communicate these risks to their stakeholders, including shareholders, customers and partners, but also make necessary reports to authorities. It is expensive and work-intensive to collect and analyze all this information. At the same time, a lot of information is available. Data analytics and AI tools are developing very rapidly. It is the time to start utilizing the latest technology for better understanding of geopolitical and business environment risks and opportunities. What do we offer? We want to offer the best tools in the world to utilize geopolitical and business environment data, identify relevant information, build and analyze scenarios as well as diversify and manage risks, irrespective of company size. We know it is a huge challenge. We are not ready to offer all of that immediately. What we can offer already today at least are very strong tools to analyze stability in different countries, interdependencies between countries, business environments, and provide actionable recommendations on what to take into account in business decisions. Mission Grey combines the best expertise in geopolitics, business, data science and AI. Our team has strong competence in all those areas. We have been able to pool all that competence and create tools which are easy to use and can help businesses and organizations navigate in this complex global environment. Why use our tools? No business person or company can ignore geopolitics and global network risks. It is too expensive, significant risks may be realized, and stakeholders don’t accept it anymore. We are coming to solve a burning problem. Companies must be able to understand these risks and manage them. Business leaders must also have better insights than they have today. It is not okay to say “I don’t know international politics or a local situation, I just do my business”. Not anymore. Our tools can be used
Today, we have opened a beta version of our product. It is still a limited beta and we do not want to open it to everyone who wants to use it. Not yet. We want to learn from each new user and to support them as well. So, what has changed? Today, you can register and we will contact you when we are ready to take you onboard. Welcome to the new era of managing your business environment risks. Mission Grey Co-founders Jouko Ahvenainen and Pekka Virkki dive into the following topics:
- Transformation of the geopolitical risk management - Understanding global networks & business risks - AI-powered risk management - How big data and AI tools can overcome the main challenges of traditional business consultancy Mission Grey's latest geopolitical briefing is available here. It especially focuses on the situation between Armenia and Azerbaijan, and how that situation is linked to global geopolitical networks.
We encountered similar global networks, when Hamas attacked Israel. And for businesses the big issue is Taiwan. Mission Grey new country Stability Index is available soon. It combines Liberal Democracy Index with economical metrics. We have also developed an interdependency index for it, i.e. indicating how countries are trading with stable versus unstable nations. Companies have also started minimizing their geopolitical risks by preferring some sources, using restrictions, or avoiding others altogether. The US is worried about buying and investing in China. There are sanctions on buying from and selling to Russia. Many countries want to promote friend-shoring to minimize dependencies on countries outside their own allies. However, it is not as simple as that. If we don’t understand the trading networks and global supply channels, these kinds of activities are meaningless and misleading.
Do direct restrictions work? The Economist just wrote that Joe Biden’s China strategy is not working. The US has introduced new policies for trading with China; this started already during Trump’s term. America’s policies include tariffs, export and investment control and especially special measures for sensitive technologies, like AI and microchips. The target is to stop China from developing advanced military technology and also otherwise getting an advantage in the technology area, and on the other hand, limit dependences on Chinese products and production. The Economist also continues how the US recommends that its friends (including Vietnam and India) and allies avoid trading and doing business with China and prefer friend-shoring. This policy can also look like a success at first glance. The US import of low-cost items from China has dropped significantly, and Chinese firms’ investment in the US has dropped from $48 billion to $3.1 billion in six years. Furthermore, when China was the #1 investment target for Americans in Asia, now it is behind India and Vietnam. The reality is much more complex Yet, the reality is much more complex than this, based on The Economist article. For example, the US supply chains have moved to other places, such as India, Mexico and South East Asia. Those places are now more dependent on China than ever. This has actually increased those countries’ economic links to China significantly when they import components from China and then sell products to the US. Many countries are happy to take investments from China and, at the same time, develop exports to the US. This can increase China’s global influence, which is quite the opposite of what American officials think to do. Same issues with Russian sanctions We have also seen similar things with Russian sanctions. The export to Russian allies has increased, and also import from countries that are quite linked to Russia. Here is one example: together with its Western allies, Finland introduced strong sanctions against Russia in 2022. At the same time, its export to Kazakhstan increased by 143%, and 68% of exported goods were items that are on the Russian sanction lists. Is it realistic to think that Finnish companies suddenly had so many more items to export there? Or does this export continue elsewhere? We can find many similar examples in the global trading data. Supply chains are networks We wrote earlier that friend-shoring is not such a simple solution. There are three important things to remember when we think of supply chain strategies:
30 years of globalization When we have lived 30 years through the globalization phase, but it looks like this kind of basic understanding has been forgotten. Strangely, the Cold War situation was simpler to understand and manage. The communist and Western blocks were more isolated, and many third-party countries (e.g. countries with some important natural resources) were usually associated with one of the blocks. Global supply chains However, nowadays, we have a reality with global supply chains related not only to certain physical components but also to competencies, investments and needed services. When managing risks, restricting investments, and exporting to certain countries, we need much more data, understanding, and sophisticated methodology. Mission Grey has published reports that illustrate some examples of dependencies between countries and also how some changes in the trading relationship and political liberties seem to correlate. For example, the links between Australia and China are interesting to analyze further. Australia is a country that has been politically very free but regularly trades with more authoritarian countries. Connecting the geopolitical dots Understanding global networks and managing their associated risks is essential for businesses. In addition, governmental actors and the third sector have much to benefit from network analysis and portfolio management, for example, when planning effective sanctions, regulations, and trade policies. All this just highlights that all parties need better data and tools to analyze global trade, dependencies and risks. And it is not enough to see risks associated with individual countries but really understand networks and analyze the risk portfolios. You can never minimize risk to zero, but it is important to understand what risks you have, where they are and how to build a portfolio so that you can diversify your risk and recover quickly when some risks are realized. Companies need to evaluate and monitor many external factors all the time. They need this data to make decisions and evaluate possible changes in the current business and its environment. Some information is based on internal discussions or ad hoc consultant reports, and some information is from publicly available metrics, reports and indexes. But ad hoc reports are not enough for many purposes, and they also have transparency issues.
Credit ratings, stock market indexes, real estate bubble indexes, ESG (Environmental, Social, and Governance) reports, political freedom indexes, stock analyst reports, consultant reports to evaluate different markets and suppliers and many other reports basically serve the same purpose: how to better understand countries, businesses, and external factors to make better business decisions. However, there are huge differences in the degree of transparency among different reports and indexes, especially in terms of how systematically they are updated and how they track trends. On the other hand, the fact that they are public metrics, indexes and intelligence also means that it’s more difficult for management to simply ignore or discount them in their decision-making processes. If metrics and intelligence are publicly available, the company can’t claim afterward they didn’t know something. Credit ratings, ESG and geopolitical data are good examples of how different sources and models to get information can give very different outcomes. External metrics produce different outcomes Credit ratings are well respected and quite transparent tools to evaluate the risk of lending money to a country, business or individual. No professional lender can ignore them; no one can say they didn’t know a credit rating before making a lending decision. The ratings also help define each loan’s risk and interest rate. There are, of course, many things that could be improved, e.g. having more up-to-date data and how different loans can be bundled to manage risks. But credit ratings are commonly accepted ‘currency’ for the lending market. ESG has become an important metric for many companies and investors, but ESG reports and metrics have many issues. Especially problematic is that ESG has many qualitative components that lead different ESG reports to produce very different results. This also creates opportunities for greenwashing; you just need to find or buy a report that supports your decisions. Geopolitical data. Here, the situation is even worse than with ESG reports. In the last year following the Russian invasion of Ukraine and resulting sanctions, many companies realized they hadn’t evaluated geopolitical risks properly. There is a lot of data and evidence that companies had a lot of information on risks with Russian businesses, but it was often ignored. This illustrates a fundamental difference from credit ratings: many companies and executives claimed they couldn’t have known it was a risk to buy oil and gas from Russia, or to set up operations in Russia. But many of these companies also likely did internal evaluations and bought expensive consulting reports about Russian risks – and as long as those reports remain confidential, it is impossible for us to know how well management was informed about the risks, and whether they just decided to ignore them. Open decision making There are many areas to evaluate in any business, and of course there are many more information sources, indexes and reports out there. But the examples above illustrate the point – some information sources and ratings are more transparent than others, and some give a much clearer basis for decision-making, while others can be misused or hidden. This is a very important aspect of risk management, corporate governance and accountability. Obviously, no company wants to open all its decision-making processes to the public and reveal all the information they have. It is normal for any company to try to get more and better information than its competitors. Executives and management teams also have their own considerations, and some businesses want or need to take more risk than others. But at the same time, it is of value to all parties to have enough respected and sovereign information sources. We can easily understand that the lending market would be very complicated and riskier if there were no credit ratings. This is especially true when we start talking about financial inclusion for emerging markets and unbanked people – you need a credit rating system of some kind before you can develop lending and finance services that will work for such markets. Especially for listed companies, it is very important for the shareholders to have unchallenged information and data that has been used in the decision-making process. Or, if the management wants to challenge this type of information, they must clearly communicate why. Now, it is just too easy to select a consultant or ESG report that is suitable for them, or choose geopolitical facts that support their decisions. ESG and geopolitics need better metrics and tools It has been suggested in many places that ESG must be updated or even split into several metrics. At the same time geopolitical metrics such as political risks, dependencies on certain countries and governments, human rights and freedoms also need their own sovereign reports and indexes. That information is now too fragmented, with too many individual data points and dependences not being evaluated properly. The current state of the world – the rising tension between China and the USA (with many countries caught in the middle), local wars and conflicts and disruptions in global supply chains – make it mandatory to understand these risks better. There is a lot of data and information available in the world nowadays, and businesses must use it. But it requires proper tools and metrics to be able to systematically use data in decision-making. And it is not enough to take a snapshot – it is also fundamental to use data sources that give up-to-date information that can be tracked and followed systematically. This will not only help companies to make better decisions but also give much more visibility of the decisions to all stakeholders, and hold the decision-makers accountable. 3/20/2023 New Report Available: Measuring, Modelling, and Mitigating Risks in Global Business NetworksRead NowMission Grey has published a new report: Measuring, Modelling, and Mitigating Risks in Global Business Networks. You can download it here.
In this report, we present a theoretical model of such analysis and how it can be operationalized in practical business solutions by relying on the Modern Portfolio Theory (MPT). Our goal is to help companies, investors, and public sector decision-makers to 1) avoid disasters, 2) save money, and 3) make profit. We also offer practical examples how we use Liberal Development Index (LIDI) and Liberal Interdependence Index (IDI) to evaluate risks in trade. We also highlight some cases, for example, Ukraine, Australia, China and Delicate countries. To fully instrumentalize the tools already available in the stock market and traditional business intelligence, one must move beyond the division between “geopolitical analysis”, supply chain management, and investment diversification. In the end, it is all the same – ignoring one of the three factors may result in grave disasters or at least significant loss of profit. The US aims to limit China’s development of advanced semiconductors. Huawei and ZTE can no longer sell their equipment in the US. TikTok is under pressure to be banned in the US, and some US states already limit its use. But the reality of high tech, national security, and data is much more complex than stopping individual companies or products. Do these individual activities make sense, or do they divert attention away from more important things?
It is easy to look at an individual company or product and decide to impose restrictions on it. However, the picture becomes quite murky when we think about the development of advanced technologies, global Internet platforms, and ownership of logistic chains. What seems like a simple decision may turn out to be not so effective in practice, and can also be very expensive for the countries involved. Let’s look at some factors that make risk and restriction evaluations complex:
Individual companies in a broader ecosystem To take microchips as a topical example, it is very complex and expensive to develop new microchips. No single country can make them alone. So, if the world is divided into two (or more) blocs that produce microchips separately, this will impact development. Competition can improve microchip development, but when the microchip manufacturing process depends on a network of many players, the impact of blocs will likely be negative. It’s noteworthy that the US restrictions on microchips targeting China don’t only impact the already existing production capability in China – they also have an impact on the foreign companies that have production in China. This is not necessarily accidental, as the US and some other governments would naturally like to see production move elsewhere. Then we have cases like Foxconn’s strikes in China that might be good for the US government, but not so good for Apple. The factors mentioned above, coupled with already high inflation, lead to an increase in prices. The reality is that nowadays, almost all electronic products have microchips. The ultimate question is whether the costs of restricting microchip development are higher than the costs associated with the risks. These are very difficult things to evaluate. TikTok has been a headache for western governments for some years now. It is also expanding its business to e-commerce. But it is doing this with partner companies, such as TalkShopLive and ChannelEngine. This is just one example, but it raises a more general question: how do you evaluate partnerships if governments want to restrict some services or products? Even more complexity Several western companies are getting better at evaluating which Chinese companies they are willing to do business with. They can assess a company’s ownership, management, and relationship with the Chinese government. But how much of this reveals the real risks, when Chinese companies are required under a 2017 law to cooperate with Beijing’s intelligence apparatus? We have also seen what happened in Russia. It didn’t matter with whom you made business in Russia – it was over after February 24. How about countries where China has a lot of ownership and influence? How do we evaluate the risk of operations in those countries, or cooperation with companies from those countries? Then we have countries like Hungary and Turkey that are EU and NATO members respectively, but their position in the blocs is not so stable. Maybe they even want to utilize the situation by picking cherries from cakes of all blocs. And more generally, if, say, a populist party wins power somewhere and decides to ignore western commitments in favor of quick economic wins by making deals with Beijing or Moscow, can western countries do much? What if this populist win happens in the US in 2024? Then we have acquisitions. The UK is looking at the acquisition case of Britain’s biggest semiconductor plant, Newport Wafer Fab, by a Dutch company owned by China’s Wingtech. China’s COSCO is willing to buy a stake in Hamburg port, one of the key logistics hubs in Northern Europe. One can say a majority stake is grounds for blocking it, but what about a minority investment? Is the risk the same? We need proper evaluations, not political posturing Let’s face reality: there are no simple and clear answers to these questions. Each government and business must make its evaluations and decide what they want to do, what risks they want to take, and the costs associated with the risks. Besides, there are issues related to national security, personal freedom, and ethics that are much more important than any normal risks and business calculations. And it is not only about what the US or EU make, but also what China, India, Russia, Brazil, and other important countries are doing. But there is a difference – for the real global powers (e.g. the US, China, and EU), it is hard for anyone to ignore them, and everyone needs to have a solution to work with them somehow. It would be fundamental that each government and actor makes proper analyses and evaluations of those issues and understand the consequences. Simple decisions to ban individual elements can send political signals, and sometimes are an easy way to score political points at home. But do they really bring value? Are they enough? Could they also cause damage? Alternatively, do those individual cases take up too much attention, when we could (and perhaps should) be considering other actions that would actually be much better in the context of the bigger picture? The global business nowadays is a complex network where most nodes are somehow directly or indirectly linked to all other nodes. Therefore, it requires proper analyses and a lot of data to really understand impacts and consequences. Many companies are approaching risk management for their production and supply chains by embracing nearshoring and friend-shoring to move some operations to countries with smaller risks. However, this is not as straightforward a move as it may look. Basic theories about risk management tell us that it is especially important to diversify, and that mathematics matters more than how we perceive risks.
Years ago, while I was studying for my MBA at the University of Texas in Austin, there was a portfolio management course professor who had extensive practical experience with investments in different situations worldwide. He always reminded us: “Don’t try to see which companies are great or bad. Just remember mathematics. You must diversify your portfolio and construct it properly – i.e. the values of the assets you invest should not correlate.” At the time, GE was a very successful company and its CEO Jack Welch was a business celebrity. But our professor warned us that even the best companies fail one day. And many business heroes eventually lose their reputation if they don’t know when to stop. He predicted one day that even GE would have problems. Of course he turned out to be right about GE – and sooner than we had expected. He also said that luck is important in business. Sometimes companies and leaders are lucky; another day their luck can turn sour. The reason he told us this was to make it clear: forget about trying to guess who is doing well, who is lucky, or who has the right timing. Do the math and diversify your investments. Nearshoring vs friend-shoring How is this relevant for supply chains and production locations? As with stock markets, we can of course make some estimates about which locations are safer, where the price level is stable and which ones are reliable. But it is still very hard to really know these things for sure. Things can change. Just think about software companies in Ukraine, businesses caught up in lockdowns in China, or the future risks for Taiwan or the US after the 2024 presidential elections. How much can we really know? Yes, we can make estimates and risk analyses, but that’s not the same as knowing for certain. That’s why it is important to take a systematic approach, not just think about how things look now. Nearshoring and friend-shoring are becoming more popular trends. If these terms are new to you, nearshoring is where a business moves its operations to a nearby country from a greater distance. For example, a US company may do its sourcing or have production in Mexico, while a German company would have them in Poland or Romania. Friend-shoring is where a group of countries with shared values deploy policies that encourage companies to expand manufacturing within that group. The goal is to prevent less-like-minded nations from unfairly leveraging their market position in key raw materials, technologies, or products to disrupt a country’s economy, or the economy of its allies. This is quite a natural development in the current situation where the world is again becoming more divided, and we start to see an emerging ‘cold war’ involving technology businesses. Moving from one risk to another But while friend-shoring sounds pragmatic and safer on paper, it’s important to understand that it doesn’t automatically remove your risks. Friendly countries can still be linked to other countries outside of your friendly network – you must understand those links too. Also, it may be the case that you will need things that your friendly network members cannot supply – e.g. certain materials, energy, or competence. So you cannot just work with friends. Just as no country can produce all things by itself, neither can a friendly network. And of course, history is full of examples where your ally today may be your enemy tomorrow. Friend-shoring is useful and helps to handle several things, but it’s important to see its limits. As an analogy, if you’re looking at your investment portfolio and you see that tech shares are now risky, but banks make better money with higher interest rates, you might think, “Okay, let’s move all the money from tech stocks to bank stocks.” That might be a good move for a time, but it is not really professional risk management or portfolio management. We tend to make educated guesses. But they’re just guesses. The future of supply chain management Supply chains and production locations are only a couple of examples of global dependencies. But similar principles can be applied to other things too – for example, which market you want to sell your products to. Businesses must understand their networks and be able to do professional risk management for them. Professional risk management requires several competencies to understand global risks. A business should understand politics, economics, business, and also mathematics to model all those things systematically. This matters because systematic modeling is often not done properly. Enterprises gather reports, consultants and local experts, and evaluate all that information. But compared to investment portfolio management models, this is a very simplified – even amateurish – approach. COVID, the Ukraine war, and tension between the US and China have reminded all businesses to think about their global risks properly. But many businesses are still in an early phase of doing it systematically and professionally. Consultants and workshops are a good start, but much more systematic models are needed. This also means we need more data analytics, clear metrics, and systematic updates when businesses and situations change (which they do, all the time). I wrote earlier about how network analytics could be used to better understand geopolitics and global supply chain networks. Network analytics can see how risks spread in networks – even when the root cause is further away in the network, yet still impacts you. This is a good idea, but we must also remember that technology alone won’t solve the problem or make risk assessment more effective. The good news is that none of this is unexplored territory. There are plenty of good examples of portfolio management, social network analysis and risk evaluation tools. It is now the time to put them to systematic use. |