Commentary: Politics used to create the stability needed for business growth. That has now changed
While 2020 is the year of COVID-19, it may also coincide with that period in economic history when politics became the greatest risk for global business, says IMD Business School’s Patrick Reinmoeller.
LAUSANNE: Politics has become the greatest source of uncertainty for businesses globally.
There are several fresh examples. The UK government has been blamed for its indecisiveness in handling the COVID-19 crisis, which has impacted its GDP as the reopening of many businesses have consequently been delayed.
The US is ripping itself into two incompatible factions that will not be reconciled by an election, which will inevitably hurt business and investor confidence.
President Donald Trump seems determined to take down institutions like the World Trade Organization (WTO). He is also targeting foreign firms. Today it is Huawei and TikTok. Tomorrow, who knows?
Politics is, meanwhile, creating great uncertainty around the commercial viability of Hong Kong as a business and financial centre.
DE-GLOBALISATION HAS GAINED TRACTION
Politicians, once devoted followers of globalisation and liberal trade pacts, have for decades ensured that such “open” policies would not derail local economies. This stable framework was based on the idea that more trade is better for the economy, its businesses and people.
It lifted millions of people out of poverty in Asia, but sometimes at the expense of voters elsewhere, such as in the US, UK and France, as businesses shifted some business activity and jobs to lower cost countries.
Equality between countries decreased, as developing countries caught up, while inequality grew within countries due to the uneven gains of globalisation.
This trend provided a fertile ground for the rise of populist leaders like Donald Trump, Brazil’s Jair Bolsonaro and France’s Marine Le Pen, who are ripping up the rule book and reversing global trends of openness, globalisation and economic cooperation. Rather than fixing an imperfect system, their policies seem set on applying Silicon Valley’s pledge to “move fast and break things” in disrupting businesses to society.
Not since the Cold War have politicians been so interventionist, when trading with partners behind the “Iron Curtain” was outlawed. From US sanctions on Iran to coronavirus policies that make or break the fortunes of many firms, government intervention is on the rise.
And it is country, sector and company-specific too. Semiconductor creator Qualcomm is being told by the US government to avoid the lucrative Chinese market. Chinese technology company Huawei’s leading 5G technology is challenged on the grounds of national security in the US, UK and Europe.
The corporate strategies of executives at Chinese technology giants ByteDance, Tencent and Ant Group are being barred.
This new landscape challenges company leaders who rose through the corporate ranks in a free trade environment where politics created the stability that enabled business growth for decades.
WAKE UP TO THE REALITY
They are unprepared for the current reality and uncertainty, which undermines their effectiveness. Leaders need to build geopolitics into their corporate strategy, in three important ways.
First, the mastering of business in a politicised world starts with an awareness and acceptance of the new normal.
Leaders should perhaps abandon unjustified hopes that things will go back to the way they were.
Even with a coronavirus vaccine, the economic consequences of COVID-19, the loss of lives and trust in politics will prevent a return to the WTO orthodoxy of a liberal trade regime. Anything else is wishful thinking.
A NEW ORGANISATIONAL STRUCTURE FOR A NEW WORLD
Second, leaders need to come up with a more flexible organisational design.
Most multinationals are optimised for a different world. They comprise dispersed networks with nodes in myriad locations. Individual activities are concentrated where the productivity gain is highest.
But these increasingly lean supply chains that were once highly profitable have buckled quickly under the stress caused by the pandemic.
When politicians pile even more constraints on these fragile supply chains, they will fracture further.
A good example of a company that has pre-empted this trend and prepared for it is Huawei. It was stockpiling supplies to become more self-reliant ahead of a US government move to potentially block American companies from doing business with the Chinese telecoms company over national security concerns.
The lesson: Companies need to have an organisational structure that emphasises resilience over short-term profits and longer-term strategic planning ready for when political meddling strikes.
A MORE LOCALISED AND INTEGRATED APPROACH
So, the third key step is to develop capabilities that enable integration across an increasingly fractured network. If the stable platform of free trade crumbles, the transaction costs of moving capital, data, ideas, people and products will rise.
Integration capabilities will thus allow companies to operate as one network, despite rising “Chinese walls” between countries. These capabilities will include diplomatic skills, as well as cultural and historical intelligence – all of which may entail companies investing in their government relations and public policy functions.
A new mindset that is less-focussed on operational bottlenecks and more considerate of stakeholders is also required. When employees cannot move, finding and training talent in each locale is critical to ensure integration. This requires the ability to absorb diversity.
And when global capital flows are constrained, then retaining and reinvesting funds locally may also become more important too.
But if political interference becomes too strong, a skilful exit may be necessary, like when Argentina nationalised parts of the oil company Yacimientos Petrolíferos Fiscales (YPF) acquiring the 51 per cent stake of Spanish company Repsol in 2012.
Negotiations ultimately led Repsol to cease operations in Argentina before the Argentinian government finally agreed to pay the Spanish oil company US$5 billion in bonds in compensation in 2014.
Hence, navigating the new landscape of populist politics requires a broader understanding of strategic leadership – not only knowing how to navigate the political terrains and networks within countries they have operations in but also realising when it is best to cut its losses and move out.
While 2020 is the year of COVID-19, it may also coincide with that period in economic history when politics became the greatest risk for global business.
Three crucial steps provide a framework for executives to navigate this uncertainty: An acceptance of the realities, a flexible organisational design and integration capabilities.
Without which your company could end up becoming the next Huawei, TikTok or Qualcomm: A casualty in geopolitical war games.
Patrick Reinmoeller is Professor of Strategy and Innovation at IMD Business School. This commentary is part of a fortnightly CNA-IMD Business School series on leadership and business issues.