This is not going to be a political diatribe but an argument for including political risk in all your analysis – especially these days. And I will illustrate my argument with two recent discussions with senior executives from two totally different clients.
Client A is a very large corporation and is going to be in the market to buy large quantities of industrial goods. While discussing the challenges we will face on their behalf, the discussion led to the fact that there seems to be a concentration of suppliers (and there are not too many suppliers in the world for these goods) in South Korea. While those suppliers may not be on our potential supplier list, if that capacity goes offline for some reason or even gets impacted in any significant way, the lead times across the entire supply base are sure to be impacted. The client quickly realized that we needed to move fast and secure as much global capacity as quickly as possible.
A second discussion was with the CEO of a small manufacturer of building material who has significant sales to Canada and imports materials from Mexico. They are watching the discussion on NAFTA very closely because it could have a quick and major impact on their capacity utilization and the border tax would increase the costs of materials. The silver lining here is that their competitors are probably more dependent on imports from Mexico thus suffering a bigger impact. While the CEO was concerned about the potential impacts, he was much more worried about the uncertainty the situation was causing and having to freeze a number of decisions because of that.
A recent article discusses the administration’s “self-initiation” of an investigation of steel imports posing a national security threat. Self-initiation is when the US government launches the investigation even though no business or industry group has lodged a complaint. And under the national security clause, because the guidelines are not clearly defined by the WTO, these investigations are hard to refute and “put the entire system of international trade at risk”.
The article goes on to point out that of the 2,000 investigations since 1980 only 19 have been self-initiated so this is a fairly momentous investigation. This could lead to more trade barriers and increase costs for steel importers, impact consumers and tax payers and cost jobs. Because they are harder to prove, they will also lead to WTO actions and other retaliatory moves from other countries.
Another article points out that changes in trade policy (NAFTA and China specifically) could alter the Industrial Real estate market. ”… as policy details emerge, companies will start looking at their supply chain networks to determine the impact on operating costs,” said Jason Tolliver, head of Industrial Research, Americas at Cushman & Wakefield. While the study from Cushman and Wakefield concludes that a withdrawal from NAFTA and a trade war with China are unlikely, the impact on industrial related warehouse demand would be huge. China is our second largest trading partner and third largest export market and therefore a big driver of warehouse demand. Since the signing of NAFTA and because of NAFTA, US warehouse inventory has increased by 3.5 Billion sq. ft.
It is for all the reasons above that political risk and the level of uncertainty posed by it must now be a part of every category and supply chain strategy. That is not a negative statement but an acknowledgement of today’s reality. The alumni of our training will remember that our goal is to convert uncertainty into Risk because Risk can be analyzed and managed. This is an opportunity for us in this profession to take a leadership and strategic role in our companies and ensure that our stakeholders see the value that we provide – beyond just reducing supplier prices.