Political Disruption - January 2024 Overview
Dear Political Disruption subscriber,
Welcome to the January 2024 edition of pd, where we delve into the intricate interplay between geopolitics, economics, and business dynamics. This month, we examine China's maritime expansion, supply chain disruptions in the Red Sea, the potential for sanctions on Israël, microchip production, and a snippet from the World Economic Forum.
1. China's Maritime Expansion: A Strategic Shift with Global Implications
China's recent investment in a new port in Peru represents a significant milestone in its broader strategy to expand its maritime network. This move underscores China's dual focus on advancing its economic interests and extending its geopolitical influence through strategic infrastructure investments.
The United States maintains a global network of naval bases. In contrast, China seeks to establish its presence in key maritime hubs worldwide. Chinese companies now wield substantial control over ports in 53 countries, with operations spanning every continent except Antarctica. Notably, three major companies—COSCO Shipping Ports, China Merchants Port (CMPort), and Hutchison Ports—manage 80% of China's overseas port interests, with two of them being state-owned enterprises.
However, China's maritime expansion is not merely driven by economic motives; it also serves strategic military objectives. Chinese legislation mandates that companies make their assets available to the military, blurring the line between economic and political influence. This convergence of economic and military interests raises significant geopolitical concerns, particularly in regions where China holds substantial control over critical infrastructure, such as the port of Piraeus in Greece.
pd risk: the more geopolitical and economic motives are intertwined, the higher the risk of political disruption in case of increasing tensions with China.
2. Geopolitical Disruptions and Global Supply Chains: Navigating Uncertainty
Recent geopolitical tensions, such as attacks in the Red Sea by the Houthis, highlight the vulnerability of global supply chains to political disruptions. These disruptions reverberate across industries, with companies like Volvo Gent experiencing idle production due to parts shortages.
Furthermore, natural phenomena, such as droughts affecting the Panama Canal, exacerbate supply chain challenges. The simultaneous disruptions in major maritime routes underscore the need for companies to meticulously map their supply chains and assess the potential consequences of delays. Strategies such as building extra margin into order lead times, as exemplified by the clothing retail group CRG after the Ever Given grounding in 2021, can enhance resilience against future disruptions.
pd risk: A combination of climate and geopolitical risk to global maritime supply chains increases the risk of delays and price increases of supplies.
3. EU-Israel Relations: Balancing Politics and Trade
The European Union's stance on Palestinian statehood and Israel's opposition raises questions about the potential consequences for their trade relationship. While the EU has voiced support for a two-state solution, Israel's resistance complicates diplomatic relations. Potential sanctions by the EU could disrupt trade flows, particularly given Israel's significant dependency on the EU as its largest trading partner.
Moreover, individual EU countries like the Netherlands and Germany, which have robust trade ties with Israel, could face specific disruptions in the event of sanctions. Understanding the trade dynamics and potential economic repercussions of political tensions is crucial for businesses operating in the region.
pd risk: While the risk of EU sanctions on Israel remains low, firms doing an important part of their trade with Israel should closely watch this space.
4. Microchip Production: Navigating Economic and Geopolitical Realities
Taiwan's TSMC's decision to delay the construction of a new microchip factory sheds light on the complexities of expanding production globally. Microchip production, integral to modern technologies, is increasingly caught between economic imperatives and geopolitical realities.
Fragmentation in microchip production poses challenges, including the need for substantial subsidies in the absence of scale advantages. Additionally, microchip production involves intricate ecosystems encompassing not only manufacturing facilities but also supply chain partners and a skilled workforce.
Furthermore, the geopolitical implications of microchip production extend beyond economic considerations. Taiwan's strategic position as a major producer of advanced microchips raises questions about the potential consequences of dispersing production to other countries. Balancing economic efficiency with geopolitical stability presents a multifaceted challenge for companies navigating the microchip industry's complexities.
pd risk: States seeking greater strategic autonomy in the supply chain of microchips create the risk of increasing costs of microchip production being borne by either governments or customers.
5. Political Disruption as an Opportunity: Insights from the World Economic Forum
At the World Economic Forum, Mathias Miedreich, Umicore's CEO, made four interesting remarks:
🔋 Fragmentation will lead to greater costs for companies as business can no longer be done most efficiently. The return on capital decreases.
🔋 Fragmentation also has benefits. It reduces competition for companies by excluding certain countries.
🔋 The subsidies given by governments will also partially offset the extra cost for supply chains.
🔋 In itself, a more fragmented world may be better for the climate because supply chains will be shorter and there will be less carbon emissions.
pd risk: Greater fragmentation will create problems for global firms but will also create more opportunities for regional companies.
Conclusion
So there's a lot more political disruption to come but as Miedreich showed there's also a bright side to every political disruption :-)
Until next month!
Hans