The Impact of Great Power Conflict on Corporate Strategy
Welcome to The Executive Perspective.
In an era marked by escalating tensions that could lead up to a potential great power conflict in foreseeable future, corporations find themselves amidst a complex web of business decisions that significantly shape their strategy development and implementation.
The ongoing and ever-increasing disputes between global superpowers introduces multifaceted challenges and opportunities, urging businesses to recalibrate their approaches to thrive amid uncertainty.
And, please don't be naive to think uncertainty and turmoil are bad for every company. There will be winners and losers along the way.
It is not easy to say who will emerge in the winner's side yet but the losers will be the ones who still conduct business operations based on the antiquated assumptions such as "globalization is not dead" or "there's nothing we can do about it".
Well, first things first, I suggest it's high time leaving the cozy comfort zones at least to be ready to what you will experience starting 2024.
Geopolitical Landscape Redefining Strategy
The rising tensions between major global powers—be it trade disputes, territorial ambitions, or ideological differences—have become pivotal factors influencing corporate strategies. A once stable international landscape has now transformed into an intricate tapestry of uncertainty, demanding agile and adaptable business strategies.
Shifting Supply Chain Dynamics
Great power conflicts disrupt supply chains, posing substantial risks for corporations heavily reliant on interconnected global networks. Heightened tariffs, trade restrictions, and geopolitical rifts prompt companies to reevaluate their supply chain resilience. Diversification, regionalization, and friendshoring emerge as critical strategies to mitigate geopolitical risks and ensure uninterrupted operations.
Navigating Regulatory Challenges
The clash of global titans often leads to regulatory shifts and policy changes, directly impacting business operations. Corporations need to proactively monitor geopolitical developments and anticipate regulatory alterations, allowing them to swiftly adjust compliance measures and avoid potential penalties or market exclusion.
Market Volatility and Adaptability
Fluctuations in markets due to geopolitical tensions require businesses to fortify their risk management capabilities. Agility becomes the hallmark of success as corporations navigate unpredictable market dynamics, leveraging scenario planning and flexible strategies to swiftly adapt to changing geopolitical landscapes.
The Imperative of Adaptable Strategies
The impact of great power conflicts on corporations necessitates a fundamental shift in strategic thinking. Businesses must adopt a proactive, anticipatory approach, diversifying risks and embracing flexibility.
Companies capable of agile responses to geopolitical disruptions are poised to thrive amidst uncertainty. Successful strategy development and implementation in this context require a blend of astute risk assessment, scenario planning, and a keen focus on resilience.
Corporations must prioritize understanding the geopolitical terrain and its implications to thrive in turmoil.
Collaborations and alliances become strategic tools to mitigate risks, fostering resilience against the ripple effects of great power conflicts. Businesses that harness these insights and integrate them into their strategies are better positioned to not only withstand the storms of geopolitical turbulence but also uncover opportunities amidst the chaos.
In conclusion, great power conflict presents a new reality for corporations—one that demands strategic adaptability and resilience.
Thriving in this environment requires a paradigm shift in approach, where businesses proactively embrace uncertainty, anticipate disruptions, and pivot swiftly to mitigate risks while seizing emergent opportunities.
Let's now carry on with putting global events in perspective.
Here are the latest developments on global trends that will shape the way we do business in 2024.
1. Boardroom Challenges:
Strategy isn't What You Say, it's What You Do.
In the realm of corporate strategy, the refrain often echoes: "Strategy Isn't What You Say, It's What You Do."
A mantra recited by disgruntled managers lamenting their organization's purported lack of strategy, yet, a fallacy under scrutiny.
The crux lies not in the absence of strategy but in its manifestation—a company's strategy resides in its actions, not in lofty proclamations uttered by executives.
Consider this: an organization operates within a specific domain, employing distinct methodologies and wielding a unique arsenal of capabilities—all choices meticulously crafted and continuously enacted by its constituents.
Managers decrying their company's ineffectual strategy often fail to grasp the essence—that strategy isn't the rhetoric espoused by their superiors but the tangible actions undertaken within the organization. Frequently, a company boasts an ambitious strategy statement or a grandiose mission, meticulously formulated by higher-ups.
While commendable, unless these proclamations translate into actionable steps within the organization, they remain mere hollow slogans, devoid of strategic essence.
The crux of the matter lies in connecting the dots—realizing that strategy embodies actions rather than words uttered by the leadership.
Thus, it becomes imperative for every individual within the organizational fabric to comprehend and align their actions with the overarching strategic intent.
Strategic decision-making cascades through the organizational hierarchy, necessitating each member to play a pivotal role in crafting and executing strategy.
To navigate this landscape effectively, individuals must ruminate on four crucial aspects:
Success hinges on ownership—embrace these facets, and as a manager, you wield agency over your choices and, consequently, your strategy.
Furthermore, by imparting this understanding to your subordinates, you empower them to follow suit, fostering a chain reaction of strategic ownership throughout the organizational layers.
Through this collective embrace of ownership, a company can transcend the realms of mere rhetorical strategies, elevating them to tangible, actionable realities.
Easier said than done obviously. But think about this: Why some companies always outperform others? There must be reason, right?
2. Geopolitics and Investment Climate:
EU-China Summit 2023: Moderate Reception Overshadows Catastrophe.
The recent rendezvous between European Union (EU) dignitaries and Chinese counterparts on December 7 in Beijing yielded no fervent disputes, yet failed to foster substantial accord.
The summit, it appears, maintained an equilibrium of non-disruptiveness but fell short of generating consequential outcomes. Both Ursula von der Leyen, President of the European Commission, and Charles Michel, President of the European Council, seemingly anticipated such tepidity.
Von der Leyen's call for a "frank and open exchange" of views with Chinese President and Communist Party Chairman Xi Jinping set the tone, and post the closed-door meetings, it seems to have been the predominant feature.
The EU delegation, accompanied by High Representative Josep Borrell, engaged in two segments of discussions — first with Xi and later with Premier Li Qiang over lunch. Throughout both encounters, the looming shadows were cast by the United States and Russia.
As customary, Chinese leaders sought to exploit divisions among transatlantic allies, cautioning EU leaders against external interference, particularly from the U.S., citing recent export restrictions on advanced artificial intelligence components. In response, the EU leaders endeavored to sway Xi on Russia's actions in Ukraine, a pivotal issue they claimed could define EU-China relations. Despite their efforts, Xi appeared unyielding, maintaining support for Russia.
Trade and market access disputes took center stage at the first EU-China summit in four years.
Given the economic challenges faced by both Europe and China, stemming from the Ukraine conflict, social policy expenditures, and industrial decline, a mutual recognition of interdependence prevailed. The EU leaders voiced concerns over the massive trade deficit, nearing 400 billion euros in 2022, and asserted the urgency for Beijing to rectify the situation promptly.
China, however, rebutted these claims, citing the decline of the trade deficit by 17 % in 2023 compared to the previous year. Xi dismissed EU complaints, highlighting the role of European-owned factories in China contributing to the exports.
Additionally, he justified China's industrial progress, refuting allegations of overcapacity and unfair subsidies for electric vehicles (EVs). Despite EU fears of an influx of low-cost goods, such as solar panels and electric cars, China contended that these products were vital for Europe's green transition.
Nevertheless, EU delegation expressed concerns about China potentially flooding European markets with subsidized goods, exploiting low consumer demand, massive state subsidies, and an unlevel playing field for EU companies.
The EU estimated substantial losses for China-made EVs sold in Europe, leading to von der Leyen initiating an investigation into Chinese subsidies for EVs. With high tariffs imposed by non-EU countries, the EU remains a crucial market for China's low-cost export strategy.
The summit concluded with unresolved tensions and ongoing strategic implications for the EU-China relationship.
No sane person would expect the opposite, by the way.
3. Friendshoring and Supply Chains:
Ford Invests in Indonesian Nickel Plant to Strengthen EV Supply Chain.
Ford Motor Company has announced its investment in a battery-nickel plant in Indonesia as part of its strategy to bolster its supply chain for electric vehicle (EV) production. The American automaker is collaborating on this project with PT Vale Indonesia and Zhejiang Huayou Cobalt Co.
The nickel plant, named Pomalaa, is currently under construction and is expected to begin commercial production in 2026. The joint effort aims to produce 120,000 tons of nickel chemicals annually, catering to the increasing demand for EV batteries.
The investment in this nickel plant is crucial for Ford as it strives to secure a sustainable and efficient supply chain for key raw materials needed in electric vehicles. Nickel is a vital component in the production of batteries, and with the anticipated growth in EV sales, automakers are actively seeking ways to ensure a stable supply of these materials.
Ford's move aligns with the broader trend in the automotive industry, where companies are investing in strategic partnerships and projects to secure resources like lithium, cobalt, and nickel.
While the exact financial contributions from each collaborator remain undisclosed, the overall investment in the Pomalaa project is estimated to be around $4.5 billion. The direct involvement in the construction of the nickel plant provides Ford with a more controlled and cost-effective approach to sourcing nickel for its EV batteries.
Moreover, it allows the company to maintain oversight, ensuring that the nickel mining process aligns with Ford's sustainability targets.
Lisa Drake, Vice President of Ford's EV Programs and Energy Supply Chain, emphasized that the company's commitment to direct investment in plants plays a pivotal role in achieving cost-efficiency and sustainability. This approach enables Ford to meet its ambitious goals, including the production of over 2 million EVs by the end of 2026. Looking further ahead, Ford aims for EVs to constitute 50% of its global sales by 2030.
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The investment in the Indonesian nickel plant reflects the broader industry trend of automakers securing their supply chains for critical raw materials.
This strategic move by Ford positions the company to navigate the evolving landscape of the automotive industry, driven by the transition to electric vehicles and the increasing focus on sustainability.
4. Energy Security and Diversification:
EU Secures Agreement Empowering Member States to Prohibit Imports of Russian LNG.
In a pivotal move towards energy security, the European Union (EU) has reached a preliminary agreement on a gas regulation that empowers member states to effectively ban Russian liquefied natural gas (LNG) shipments, all without resorting to new energy sanctions.
The European Parliament and the EU Council, representing member states, gave their endorsement last week to a segment of a comprehensive package defining common rules for natural gas, renewable gases, and hydrogen.
This strategic move positions the bloc to transition away from fossil fuels, with the specific provision enabling member governments to temporarily hinder Russian and Belarusian exporters from securing the infrastructure capacity necessary for LNG and natural gas shipments.
A statement from the EU Council following the talks emphasized the regulation's intent to allow member states to impose restrictions on the supply of natural gas, including LNG, from Russia or Belarus. This measure aims to safeguard essential security interests while considering broader security of supply and diversification objectives.
Despite the absence of EU-wide sanctions on Russian gas, the initiative aligns with the region's broader agenda to diversify energy sources following President Vladimir Putin's invasion of Ukraine.
While pipeline flows of natural gas have plummeted to historic lows, LNG shipments from Moscow have surged. EU Energy Commission Kadri Simson had previously advocated for halting Russian LNG shipments, urging companies not to renew long-term contracts upon expiration.
Notably, certain European nations such as the UK, Poland, and the Baltic states have already ceased purchasing Russian LNG.
EU lawmaker Jerzy Buzek, the Parliament's lead negotiator, underscored the legislation's historical significance, describing it as the most far-reaching of its kind. Buzek framed the move as a strategic response to Russia's historical use of energy as a tool against the EU and its partners' economic interests and solidarity.
However, the regulation's journey to becoming law requires formal approval from both the European Parliament and member states in the Council. The outcome holds substantial implications for the EU's energy landscape and geopolitical dynamics.
5. Sanctions and Trade Restrictions:
European Aluminium Urges EU to Expand Sanctions on Russian Aluminium.
European Aluminium, an industry association representing the European aluminium industry, has called on the European Union (EU) to expand its sanctions on Russian aluminium by including primary aluminium metal in its measures. The EU is currently considering a 12th package of sanctions, which includes proposed bans on specific aluminium products such as wire, foil, tubes, and pipes.
However, European Aluminium argues that the vast majority of Russian aluminium exports to the EU, especially primary metal, are not covered by the proposed measures. The industry group expressed regret that more than 85% of Russian aluminium exports to the EU will remain outside the scope of the proposed sanctions.
In a letter addressed to European Commission President Ursula von der Leyen, European Aluminium emphasized that the circumstances have changed considerably since Russia's invasion of Ukraine in February 2022. The EU initially took a cautious approach due to the region's reliance on Russian supplies of aluminium, a critical material for European industry.
However, the industry group noted that the European aluminium industry has accelerated its efforts to decouple from Russian supplies over the past 21 months.
The call for expanded sanctions on Russian aluminium comes at a time when the EU is looking to impose measures targeting specific products. According to Eurostat data, the EU imported almost 500,000 metric tons of Russian aluminium and aluminium products worth €1.26 billion ($1.37 billion) in the first nine months of 2023.
While the proposed sanctions focus on certain aluminium products, European Aluminium argues that the scope of the measures should be broader, including primary aluminium from Russia.
Pål Kildemo, Chief Financial Officer at Norwegian aluminium producer Hydro, emphasized the need for strict anti-circumvention rules to prevent the circumvention of sanctions by shipping Russian aluminium to third countries and converting it into products sold in Europe.
Russian aluminium is primarily produced by Rusal, a major global supplier that accounted for 6% of global supplies in 2022. European Aluminium had previously discussed the possibility of actively calling for EU sanctions on Russian aluminium, excluding Rusal, in a letter to its members in July.
6. Decarbonization and E-Mobility:
U.S. Treasury to Issue Guidance on Hydrogen Subsidies Post-COP28.
The U.S. Treasury is set to issue guidance on hydrogen subsidies embedded in the Inflation Reduction Act (IRA) after the COP28 climate conference in Dubai, according to U.S. energy advisor John Podesta.
The guidance is eagerly awaited by the industry, as it will outline how hydrogen producers can secure subsidies, which are considered crucial for jumpstarting the green hydrogen sector.
The Biden administration views green hydrogen as essential for decarbonizing challenging industries such as aluminum and cement. The subsidies, amounting to $3 per kilogram, aim to support hydrogen production powered by zero-emission sources, such as solar, wind, nuclear, or hydro.
The debate centers on whether the incentives should be limited to hydrogen producers using new clean energy sources, excluding existing facilities. A proposal backed by environmental groups suggests imposing restrictions to prevent unintended consequences, such as increased emissions resulting from higher overall power demand fueled by fossil power.
On the other hand, industry groups, including nuclear backers, argue that overly strict subsidy programs could render some projects economically unviable, posing a threat to the administration's green hydrogen goals.
Deputy Secretary of Energy David Turk acknowledged that even federal agencies are divided over the design of the lucrative tax credit.
The Treasury and the Department of Energy hold differing opinions on the matter. A preliminary draft of the guidance reportedly includes the additionality provision, excluding existing power sources, but the administration is considering special treatment for nuclear and hydro.
The draft also proposes requiring hydrogen electrolyzers to operate concurrently with renewable energy to ensure the avoidance of fossil fuel electricity.
In addition to the IRA subsidies, the Department of Energy has selected seven proposed regional "hydrogen hubs" to receive $7 billion for demonstrating and scaling up clean hydrogen. Three of these hubs would include existing nuclear plants, raising questions about their economic feasibility if excluded from the IRA subsidy.
Industry voices, such as the U.S. Chamber of Commerce's Global Energy Institute, argue for enabling faster production with looser rules, emphasizing the long-term benefits of decarbonizing energy-intensive sectors.
Meanwhile, green hydrogen companies, like HyStor Energy, prefer stricter rules, emphasizing the importance of getting the decarbonization process right from the start. The upcoming guidance from the Treasury will play a pivotal role in shaping the direction and inclusivity of hydrogen subsidies in the U.S.
7. Rare Earths and Commodities:
Start-ups Race to Transform Rare Earth Refining Challenging China's Dominance.
In the race to transform the refining process for rare earth minerals, start-up technology firms are emerging as contenders, seeking to revolutionize a sector that plays a crucial role in electronic devices and clean energy technologies.
The existing industry standard for rare earth refining, known as solvent extraction, is both expensive and environmentally damaging, a process that China has dominated over the past three decades. Western rare earths companies, including MP Materials and Lynas Rare Earths, have faced difficulties deploying solvent extraction due to its technical complexities and environmental concerns.
Rare earths comprise a group of 17 metals essential for producing magnets used in electric vehicles, cell phones, and various electronic devices. Despite the United States contributing to the development of solvent extraction in the 1950s, the process fell out of favor due to concerns about radioactive waste.
China seized the opportunity to rapidly expand its rare earths industry in the 1980s, currently controlling 87% of global refining capacity, a factor that has significantly contributed to its economic rise.
Novel processing technologies, such as Ucore Rare Metals' RapidSX, continuous ion exchange, and nanotechnology by Aether, are promising alternatives to the current refining methods. These technologies aim to offer faster, cleaner, and more cost-effective ways to refine rare earths.
While these technologies have not been commercially launched yet, several companies are aggressively pursuing their development with the goal of revolutionizing the rare earths refining process by 2025.
The success of these novel processing technologies could have a profound impact on the rare earths market. If implemented successfully, these technologies have the potential to reduce dependence on China's refining capabilities, offering Western firms the ability to command premium prices for these strategic minerals.
Despite the promising outlook, many in the industry caution against overly optimistic expectations. They emphasize the challenges and timelines associated with developing and deploying these new refining technologies, particularly given the aggressive electrification targets set globally.
The need for alternatives has become more pressing following Beijing's decision earlier this year to curb exports of germanium, graphite, and other metals, sparking concerns about potential restrictions on rare earths exports. Western governments, including Canada, are exploring the establishment of central rare earths processing hubs to enhance their strategic positions.
Private companies, such as Ucore Rare Metals, the Saskatchewan Research Council, and others, are actively developing and testing innovative refining processes. The goal is to achieve greater efficiency and environmental sustainability, supporting the growth of the rare earths sector outside of China. These efforts align with the broader global goal of facilitating the energy transition and achieving net-zero targets.
8. Aerospace and Defense:
Japan, Britain, and Italy to Sign Treaty for Joint Advanced Jet Fighter Development.
Japan, Britain, and Italy are reportedly set to sign a treaty in Tokyo to establish a joint organization and industry group for developing their planned advanced jet fighter.
The industry group venture, led by BAE Systems PLC, Mitsubishi Heavy Industries, and Leonardo, will be overseen by an inter-government body. The group will distribute work to teams in different parts of the Global Combat Air Programme (GCAP), such as the engine and avionics.
The agreement, which requires ratification by each country's parliament, comes a year after the three nations merged their separate next-generation fighter efforts.
While Japan and Britain are expected to dominate GCAP with about a 40% share each, the new agreement signifies a deeper collaboration in the defense industry. The management of the project may initially be led by someone from Japan, with management roles rotating among the three countries.
The headquarters for GCAP is expected to be located in Britain. The involvement of other nations as junior partners is also being considered, with Saudi Arabia among the contenders, offering both funding and a lucrative market for the project, which is expected to cost tens of billions of dollars.
Various companies are participating in the project, including European missile maker MBDA, Japanese avionics manufacturer Mitsubishi Electric Corp, and engine makers Rolls-Royce, IHI Corp, and Avio Aero.
The collaboration highlights the increasing trend of international partnerships in the defense industry to pool resources, expertise, and funding for large-scale projects.∎
That's all for now and hope to see you again in the next edition.
Do not hesitate to drop me a line should you need any further information.