3
How We Got Here: Megatrends in Business, Technology, and Politics Since the Cold War
On February 5, 2014, Manila mayor Joseph Estrada signed a new law to provide relief to local commuters. Manila, the sprawling Filipino metropolis of several million residents, was growing so fast that it was being overrun by traffic. Gridlock was everywhere. Commute times of five hours or more were common. To ease congestion, the city government passed an ordinance that banned cargo trucks on main roads from 5 a.m. to 9 p.m.—sixteen hours a day. “The days when buses and trucks were king of the road are over,” Estrada proudly declared.1
Greg Elms/Getty Images
But the truck ban quickly led to trouble. Manila was also home to the country’s most important port, responsible for handling half of all overseas freight transiting the Philippines. Before Estrada’s truck ban, up to six thousand containers could be moved in and out of the port each day by truck. Now the number was closer to thirty-five hundred. Shipping containers were quickly piling up. Loading equipment was getting stressed. Streets inside the port complex were clogged with containers, further impeding the flow of equipment and the efficiency of operations.2 At one terminal, cargo processing time ballooned from six days to ten.3
Eventually, the national government had to step in. Philippine president Benigno Aquino III publicly blamed city officials for the port congestion, noting that the truck ban was “a city ordinance that perhaps, nobody envisioned how bad this would amount to.”4 In September, after seven long months, Mayor Estrada finally signed an executive order lifting the ban.
Among those affected was Toyota, the world’s largest automaker, which had made the Philippines a hub for Toyota suppliers who shipped auto parts to Thailand for final production. In 2014, thanks to the truck ban and a political crisis in Thailand, Toyota experienced a 10 percent decline in shipments from the Philippines, and its exports fell noticeably short of the company’s $897 million forecast.5
It was a very different world than in 1933, when Sakichi Toyoda started the Toyota Motor Corporation. In 1950, Toyota sold just 492 cars outside of Japan.6 The year’s top-selling car in the American market was the American-made Chevrolet Bel Air. In Moscow it was the Russian-made GAZ Pobeda, and in Paris it was the French Renault 4CV.7 By 2009, in contrast, Toyota was selling 80 percent of its vehicles outside of Japan.8 By 2015, the automobile industry was so globalized that the top-selling car in the United States was a Japanese model (the Toyota Camry) and, for the first time since the 1970s, the top-selling car in Russia for a given month was not the Russian Lada, but the South Korean Kia Rio.9 The globalization of production and markets for automobiles meant that a Japanese automaker selling cars in other Asian countries had to worry about the political actions of a mayor in the Philippines.
Toyota’s cargo container woes in Manila illustrate just how much business has changed, even for traditional industries like automotive companies. As venture capitalist Marc Andreessen told us, “There is no substitute for having some sense of a global perspective” today.
“There is no substitute for having some sense of a global perspective.”
—Marc Andreessen, cofounder and partner, Andreessen Horowitz
In this chapter, we take a step back and look at history, examining three trends that have profoundly shaped this landscape over the past thirty years: supply chain innovations, the communications revolution, and dramatic changes in politics since the end of the Cold War. The convergence of these megatrends has created a best-of-times/worst-of-times moment for businesses: unprecedented economic opportunities coupled with unprecedented political risks.
Business Trends: Globalization and Supply Chain Innovation
The past thirty years have witnessed a revolution in supply chain management. Today’s supply chains are longer, leaner, and more global than at any time in history. Even very small businesses can have long global supply chains, enabling them to seize opportunities and profits by taking advantage of lower wages offshore, low shipping costs, and better inventory management to customize products for different segments. Fairphone is one of them. A twenty-seven-employee cellular phone company based in the Netherlands, Fairphone aims to minimize the social impact of manufacturing smartphones by carefully understanding its supply chain. A Fairphone smartphone requires thirty-nine minerals. Some, like tungsten and tantalum, come from notoriously conflict-ridden countries like Rwanda and the Democratic Republic of Congo. Other components travel from North America, Europe, and the Middle East before arriving at a handful of factories in China for production. In total, Fairphone parts travel nearly once around the world before the phone ever gets turned on by its owner for the first time.
We interviewed Fairphone’s director of impact and development, Bibi Bleekemolen, about how Fairphone designed its supply chain. She told us, “We are different in that we view political risk as maximizing opportunity rather than minimizing the risks. We don’t shy away from risky places, but instead find what’s wrong in the world and go after it to try to fix it.” Fairphone carefully selects its Chinese production partners based on their willingness to uphold various social and environmental practices and works closely with local partners in Africa to ensure that Fairphone is using conflict-free minerals and metals in its phones. Fairphone has nearly as many nodes in its supply chain as it does employees in the company.10
Supply chains are leaner now, too. Sparked by Toyota’s innovations in the 1980s, companies have developed just-in-time inventory management systems that have substantially improved profits by reducing inventory storage costs and ensuring that this year’s model, or this season’s hottest item, makes it out of a warehouse and into the hands of consumers while they still want it. Efficiency and customization are at all-time highs. With AmazonFresh, you can order Granny Smith apples grown in New Zealand and have them sitting on your doorstep by morning. Interested in purchasing a mobile phone handset? There are nine hundred more varieties to choose from now than in 2000.11
But there is a dark side to the supply chain revolution: Longer, leaner, more global supply chains have increased supply chain vulnerability to disruptions in faraway places. As companies extend supply chains to more locations in search of margin, customization, and speed, chances are that a political action someplace, sometime will occur, impacting the distribution of goods and services to customers. Often, these disruptions are immediate. In 2014, for example, China moved an oil rig just 130 miles off the coast of Vietnam and 70 miles inside Vietnam’s exclusive economic zone, near the disputed Paracel Islands. Anti-Chinese protests erupted in Vietnam, leading to the ransacking and preemptive closing of several factories that sourced everything from Nike shoes to iPads.12 Li & Fung Ltd., the world’s largest supplier of clothing and toys to retailers like Walmart and Target, was forced to close its factories in Vietnam for a week during the riots, halting delivery of goods to American retailers. What began as a conflict over disputed territorial waters between China and Vietnam quickly ended up affecting store shelves in American cities.13
Sometimes, supply chain disruptions take longer to work their way through a business. Remember Boeing’s troubles in chapter 2? In 2007, the company’s new 787 Dreamliner became a business nightmare, with unprecedented three-year delays in production. The root cause: Declining air travel after the 9/11 terrorist attacks led to reductions in airplane manufacturing, which in turn triggered layoffs and consolidation in the fastener industry making the super-strength nuts and bolts that hold airplanes together. When Dreamliner production finally started to take off years later, Boeing’s main fastener supplier, Alcoa, could not keep up, because it had cut its division by 41 percent. Fasteners accounted for only about 3 percent of the cost of an aircraft, but ended up throwing a wrench in Boeing’s $136 billion Dreamliner program.14 Even worse, Boeing’s workaround—buying temporary fasteners from Home Depot and Ace Hardware to try to keep production going and then removing them later—ended up damaging the planes.15 CEO Jim McNerney admitted to investors that executives did not see this slow-motion supply chain disruption coming. “The fastener industry got consolidated, post 9/11,” said McNerney. “The consolidators misjudged the demand swingback—a lot of us misjudged the demand swingback—post 9/11.”16 The fastest-selling airplane in company history became the most delayed airplane in company history because of a supply chain disruption that started six years earlier.
Perhaps the most important thing to remember about supply chain vulnerability to political actions is cumulative risk: The risk of disruption in any one node of a supply chain may be low, but the cumulative risk of disruption across the entire supply chain is much higher. With global businesses, some political action somewhere is nearly always putting a kink into the smooth flow of business, whether it’s an election, a coup, a local protest, a territorial dispute, a scandal, a diplomatic crisis, a regulatory change, a cyber breach, a referendum, a disease outbreak, a government intervention into the economy, or a terrorist attack. Consider the following list of events that occurred in 2016, nearly all of them viewed as highly unlikely beforehand.
As FedEx founder, chairman, and CEO Fred Smith told us, “You should take very seriously political risks to your business that seem far-fetched.” In 2016, FedEx’s own risk analysts estimated that there was a 25 percent chance of Brexit and a 25 percent chance that Donald J. Trump would win the 2016 American presidential election. But as we’ll see in chapter 8, FedEx’s business requires planning for the unexpected so often that the company always has contingency plans on hand in the event the unlikely becomes reality.
Natural disasters are even more frequent disrupters and more commonly the focus of supply chain management. Taken altogether, supply chain interruptions from rare events turn out to be not so rare after all. As the saying goes, lightning does not strike in the same place twice. But it does strike someplace nearly all the time.
“Just in time” inventory management magnifies these disruption risks. Supply chains have grown so lean that each key link often keeps just days or even hours of inventory on hand, which means there is no cushion if something bad happens to a supplier.20 Political scientists Martin Landau and Donald Chisholm presciently warned that “just in time” has displaced “just in case.”21 The search for short-term profits has generated longer-term risks.22
In the last chapter, we noted how Ford and Chrysler had to contend with the grounding of all U.S. flights after the 9/11 terrorist attacks. For both auto manufacturers, the sudden elimination of air shipping threw a wrench into production lines. Chrysler acted fast, asking logistics suppliers to switch from air to ground transport. Ford waited, and by the time it tried to switch to ground shipping, none was available. Ford had to shutter five U.S. plants for several weeks and reduce its production by 13 percent that quarter.23 While Chrysler managed the sudden disruption better by responding immediately, both Chrysler and Ford were extremely vulnerable to disruption in the first place because their supply chains were so lean. They had almost no slack in their inventory to keep the production lines moving more than a few days before new shipments could arrive.24
Supply chain visibility is also a challenge. With so many suppliers outsourcing to so many sub-suppliers in so many places, business executives often have only vague ideas of exactly how far their supply chains extend or just who is doing what where and when. Here, too, Boeing’s 787 Dreamliner provides a cautionary tale. Fasteners were a major problem for Boeing, but they were not the only problem. The company also famously suffered from an exceptionally complicated and opaque supply chain with poor measures to ensure accountability and coordination. To meet the unprecedented demand for the 787, Boeing decided to try a new supply chain system designed to cut delivery time from six years to four and production costs from $10 billion to $6 billion.25 Using a tiered structure, it contracted with approximately fifty first-tier partners, who assembled major parts of the aircraft from sub-systems they received from second-tier partners, who received the individual components from third-tier suppliers. In total, Boeing used more than a hundred partners across twelve countries on five continents in manufacturing and delivering the 787.26 Parts shortages or shipping delays at any of the second-or third-tier suppliers meant significant production setbacks. To help manage the supply chain, Boeing utilized a Web-based program to track each component in the chain. It sounded good. The problem was that second-and third-tier suppliers often failed to enter accurate and timely information into the system, which meant that the first-tier partners were often unaware of delays or shortages. As of February 2016, Boeing had fulfilled only 380 of the 1,143 orders placed since 2004.27
Boeing has plenty of company when it comes to supply chain visibility challenges. In a 2008 IBM survey, supply chain executives from twenty-five countries and twenty-nine different industries—including retail, industrial products, pharmaceuticals, food and beverage, telecommunications, and electronics—complained that poor supply chain visibility was their number one concern. Seventy percent of respondents said that visibility issues impacted their operations “to a significant or very significant extent.”28
In addition, the widening geography of supply chains is making them more vulnerable to production interruptions. The quest for lower production costs has led many companies to use suppliers in places like Bangladesh, Indonesia, and Brazil, parts of the world that are more prone to political instability, natural disasters, and other nasty surprises. “We buy stuff from all over the world,” said John Hach, risk manager at Lincoln Electric Co., a Cleveland-based manufacturer of welding products. “I’d estimate we have suppliers from about 50 different countries other than the United States, many of them third-world nations, which is where a lot of mining takes place.”29
All of these factors explain why supply chain disruptions caused by political risks are becoming increasingly prevalent. A 2013 World Economic Forum report noted that more than 80 percent of executives and corporate directors were concerned about supply chain resilience to geopolitical instability, extreme weather events, unstable prices, and other disruptions.30 With good reason. Increasingly, businesses are reporting lost income from supply chain disruptions, and surveys repeatedly find that companies do not think enough about supply chain risk management, especially disruptions arising from civil unrest, policy changes, regime instability, interstate conflict, terrorism, and other political risks. A 2013 survey conducted by APQC, a leading business practices nonprofit, interviewed 196 companies in 22 different industries and found an overwhelming majority of companies—83 percent—were caught off guard by a supply chain disruption in the previous twenty-four months. In the majority of these cases, disruptions were serious enough to attract the intervention or sustained attention of C-suite executives. Perhaps most interesting, 86 percent of companies surveyed said they were concerned specifically about political events that had a high impact their supply chains. Why? Because in the search for margin, they had moved to lower-cost suppliers in parts of the world known for more political instability and extreme weather events. Only about a quarter of businesses surveyed thought that they were well prepared to anticipate and mitigate these disruptions.31
Small Groups, Big Effects: The Rise of Connective Technologies
The second megatrend shaping the political risk landscape is technological: The spread of social media, cell phones, and the Internet has empowered small groups in big ways. Already, 48 percent of the world is online. There are more cell phones on the earth than humans.32 By 2020, more people in the world are expected to have mobile phones than running water or electricity.33 Connectivity is here to stay, and it is generating profound transformations in politics, business, and society.34
In 2006, Time magazine’s Person of the Year was You. This was a radical departure from the magazine’s tradition, in which it chose world leaders and other well-known public figures who had impacted the world—in good ways or bad—during the previous year. In years past, for example, Time had selected Martin Luther King Jr., Adolf Hitler, and Nikita Khrushchev. But by declaring everyone the 2006 Person of the Year, Time was onto something. Its editors realized how much innovations in technology were empowering individuals. Managing editor Richard Stengel said that the editors wanted to highlight that “individuals are changing the nature of the information age, that the creators and consumers of user-generated content are transforming art and politics and commerce, that they are engaged citizens of a new digital democracy.”35
Economists and political scientists have conducted a great deal of research about the costs of collective action—the effort it takes for people to join forces in pursuit of a common cause. What they find is that normally, such costs are high, even for a cause that every member of a potential group believes in deeply. Organizing is hard. It drains time away from family and work. It requires effort up front for benefits that come later, if ever. It often costs money. It can be difficult, and even dangerous, to try to discover who might be on your side, to meet with them, and to take action, particularly if potential members are geographically dispersed or not already known to one another. What’s more, the bigger the group, the more concerned each member becomes that others won’t do their share.36 Because everyone worries that everyone else will shirk, shirking becomes rampant, and not much gets done. On a societal scale, people often feel that their individual contribution cannot make much of a difference (this is one of the reasons why only about half of eligible American voters actually vote on Election Day).37 The costs of collective action help explain why mass movements historically have been so rare, even when large sectors of a population might share the same views and goals.
Connective technologies, however, have sent the costs of collective action plummeting, making it much easier, safer, faster, and cheaper for like-minded people to find one another, share information, organize, and take individual actions in loosely coordinated ways toward a common goal, even across vast geographical distances. Transnational movements of all stripes, from human rights activists to Taylor Swift fans to jihadi terrorists, are able to recruit, organize, and act more easily and effectively, in large part because communications technologies have driven down the costs of collective action. It is one thing to travel each week to a meeting across town; quite another to click “send,” “like,” or “upload” on your smartphone.
The Arab Spring of 2011 revealed just how transformative communications technology can be in powering collective action. The protest movements that swept the Middle East and North Africa and led to the downfall of the Tunisian and Egyptian regimes all started with a rural Tunisian fruit seller named Mohammed Bouazizi. On December 17, 2011, Bouazizi was stopped by a police officer. After she demanded that he give her several free bags of fruit and confiscated his scale, an altercation ensued. The officer hit Bouazizi with her baton and slapped him across the face, a public humiliation. Fed up with having to face constant police corruption and deeply shamed by this particular encounter, Bouazizi went to city hall and demanded to see an official. Nobody would meet with him. The next day, he walked to the municipal building, poured paint thinner over his body, and set himself on fire. Small protests quickly erupted nearby. Bouazizi’s cousin went to one of them. He took out his cell phone, recorded a video of it, and posted it online. A thirty-three-year-old blogger in Tunis named Slim Amamou saw the video and posted it on his Facebook account. From there, the Facebook postings spread like wildfire. That evening, the cable television channel Al Jazeera, with a large Arab audience, started broadcasting the video repeatedly. Protests in Tunisia grew. Within weeks, Tunisian president Zine El Abidine Ben Ali had fled the country, and Bouazizi’s self-immolation had ignited rebellions in Yemen, Syria, Egypt, Libya, and Bahrain.38 As Marc Fisher of the Washington Post wrote, “This wave of change happened because aging dictators grew cocky and distant from the people they once courted, because the new social media that the secret police didn’t quite understand reached a critical mass of people, and because, in a rural town where respect is more valued than money, Mohammed Bouazizi was humiliated in front of his friends.”39
Connective technologies have made it more likely that one person’s act can have outsized and even unintended effects, and not just when it comes to protesting long-running corruption in Middle Eastern countries. On April 24, 2013, the eight-story Rana Plaza factory in Bangladesh collapsed, killing more than eleven hundred garment workers inside. The tragedy was not a black swan—a bolt from the blue that could never have been expected. At the time, Bangladesh was the second-largest garment exporter in the world, with a $20 billion industry, five thousand factories, and 4.5 million garment workers. Safety problems in the country’s factories were both widespread and widely known. In 2011, just two years before the Rana Plaza disaster, hundreds of garment workers were killed in a rash of fires and other incidents caused by building safety lapses. International unions proposed an Accord on Fire and Building Safety to global retailers, suppliers, unions, government officials, and NGOs at a meeting in Dhaka. No retailers signed it.
But in 2013, after the Rana Plaza collapse, the unions’ stalemated safety plan suddenly gained traction. Why? Because this time, news of the collapse, and the resulting public outcry, went viral over the Internet. Within twenty-four hours of the tragedy, the Worker Rights Consortium started a “name and shame” campaign, listing retailers who had produced garments in the collapsed factory.40 At the same time, a disturbing photo from the tragedy taken by a local Time photographer also went viral. The photo, under the headline “A Final Embrace: The Most Haunting Photograph from Bangladesh,” depicted an unidentified deceased couple holding each other, half of their bodies buried in the rubble and a trickle of blood running down one of the man’s eyes like a teardrop.41 International labor unions, leading NGOs, and a United Nations expert group collaborated virtually, using connective technologies to reach their supporters, launch online petitions, and coordinate. Within a month, companies, including Swedish retail giant H&M (the largest buyer of Bangladeshi garments), began signing a legally binding, five-year accord on fire and building safety that required retailers to undertake independent safety inspections, publish public reports on their findings, offer safety training for workers and management, pay for mandatory repairs, and terminate business with any factory that refused to make necessary safety upgrades.42 By summer, the United States had announced the suspension of Bangladesh’s trade benefits under the Generalized System of Preferences until the country improved its monitoring and inspection of factories and increased fines and other sanctions for noncompliance. By fall, one hundred retailers in Europe and the United States had signed the accord, and other retailers, including Walmart and The Gap, had reached a separate nonbinding safety accord.
The Lego Group’s experience with Greenpeace shows that the effects of connective technologies can reach across industries—sometimes in surprising ways. At first glance, the Danish company known for its Lego brick toys does not seem like a prime target for an environmental group known for scaling oil rigs at sea. But the Lego Group was a longtime partner of Shell, and that gave Greenpeace an idea. In July 2014, as part of its campaign against Arctic drilling, Greenpeace produced a digital video depicting a pristine Alaskan Lego brick wilderness, replete with Santa Claus, polar bears, ice-skaters, and children, being covered in toxic oil sludge. Greenpeace’s strategy was clear. The organization declared on its website:
Every company has a responsibility to choose its partners and suppliers ethically. LEGO says it wants to leave a better world for children and has a progressive environmental policy. But it’s partnered with Shell, one of the biggest polluters on the planet, now threatening the Arctic. That’s a terrible decision and it’s bad news for kids. We’re calling on LEGO to stand up for the Arctic—and for children—by ditching Shell for good.43
The video caught on, attracting six million views. Greenpeace’s social media activism worked.44 The Lego Group eventually ended its fifty-year partnership with Shell. And then it did much more. As we will see, the Lego Group is one of the world’s companies who are best at managing political risk, constantly looking for “risks around the corner.” The Greenpeace video suggested that environmental activism and consumer preferences for sustainable products, even in the children’s toy market, were likely to rise. The Lego Group had already started a sustainability effort that included a strategic partnership with the World Wildlife Fund, but Greenpeace’s video kicked these efforts into overdrive. A year after the video, the Lego Group announced a major new initiative that included ambitious environmental goals for its materials, packaging, and operations and the creation of a new Sustainable Materials Center with $150 million in funding and a hundred employees to implement sustainable alternatives to its materials by 2030.45
Whether it’s the Arab Spring, a Bangladeshi factory collapse, or a toy company’s remote association with Arctic drilling, connective technologies are lowering the costs of collective action, making it possible for seemingly distant events or actions by small groups of people to have substantial effects. Today, it is far more likely that the word will get out. “News travels very fast,” noted Enrique Alanis of Cemex, the Mexican building materials company. “Bad news in Nicaragua is going to be known in the U.S. and in Mexico, as well as in Europe. And because we are a global player, we have to manage our brand.”46
These changes in connective technologies offer new hopes for citizens seeking freedom in repressive societies and new challenges and opportunities for businesses everywhere.
Key Trends in Politics Since the Cold War’s End
This is the most complex security environment in modern history. During the Cold War, superpower rivalry between the United States and the Soviet Union set relatively clear dividing lines between adversaries and allies. Trade politics and security politics were more sharply delineated, too, with the world largely split between Western capitalist markets and the command economies of the Soviet bloc. China’s rise, Russia’s aggression, strains within the Eurozone, nuclear proliferation, the disintegration of the state in parts of the Middle East and North Africa, and the rise of nonstate terrorist groups and cyber criminal networks, to name just a few trends, make the current global context far more complicated.
Security is not just about security anymore. International economic challenges have become tightly connected to security politics. States, led by China, are playing a more direct role in the world economy, investing in the infrastructure of other countries, making strategic investments using sovereign wealth funds and state-owned enterprises, and purchasing other governments’ debt.47 Sanctions have become a more frequent tool of statecraft across the globe. Prior to 1990, the UN Security Council imposed sanctions against only two countries: Southern Rhodesia (now called Zimbabwe) in 1966; and South Africa in 1977. Since then, the UN has established over twenty sanctions regimes, with the United States also implementing its own sanctions in some cases. In 2015, the United States and the European Union imposed sanctions on Russia for invading Ukraine at the same time that Russian, European, and U.S. negotiators lifted sanctions on Iran in exchange for a nuclear deal. And it gets even more complicated than that. In 2016, the United States lifted nuclear sanctions against Iran but at the same time imposed new sanctions on the regime for conducting ballistic missile tests in violation of a UN resolution. And while global international economic policy issues used to be the province of just seven advanced economies, the rising importance of emerging markets has expanded the club: The G-7 has become the G-20.
Specifically, four distinct external or “exogenous” shocks have affected the political world—and by extension the business world—in serious ways.
The most significant shock to the international system was the terrorist attacks of September 11, 2001. It was a day that no American will soon forget.
For Condi, who was serving as President Bush’s national security adviser at the time, the biggest effect of 9/11 was the realization that the United States was threatened by weak and ungoverned spaces, not just powerful states. This was a radically new world. Once the Treaty of Westphalia marked the beginning of the modern state system of international relations, great powers had always been most threatened by, and most focused on, other great powers. Not anymore. While you could count on states to control their territory, places like Afghanistan operated as breeding grounds and safe havens for groups that wanted to do serious harm to the United States. September 11 also marked the first time since the War of 1812, when British troops burned the White House, that the United States had been the victim of such a large attack on its own soil, changing Americans’ perceptions of what constituted security.
Seven years later, the global financial crisis caused a second shock. The financial crisis increased political risks to businesses in a different way, leading to greater government intervention in the form of austerity measures and new regulations of firms and industries. It also created a heightened sense of awareness among populations of the impact of the global economy on their personal well-being. When you lose your house because of the global financial system, international economics becomes personal.
The other two major shocks involved changes to the international order. The Arab Spring and the subsequent unrest that unfolded across the Middle East made it more difficult for both governments and businesses to figure out how to handle operations in that part of the world and put enormous pressure on the state system’s ability to endure in the region. Artificially constructed at the end of the Ottoman Empire by the French, British, and Italians, the national borders of present-day Saudi Arabia, Yemen, Turkey, Iraq, Syria, and the Gulf States were drawn on the back of an envelope and cut across regional concentrations of Shia, Sunni, and Kurds. The Syrian civil war added an additional level of complexity as nearly seven million displaced people need shelter. The strain on Turkey, Lebanon, and Jordan was direct and immediate. But the impact on Europe and the politics of the refugee crisis may end up being more long-lasting, fueling a strong sense that the European Union no longer protects its borders and its citizens from the dangers of the Middle East.
The last shock was what Condi likes to call “Great Powers Behaving Badly.” With the rise of China and the reemergence of Russia as major world powers, both governments have become increasingly assertive, reigniting long-running territorial conflicts—Ukraine in Russia’s case, the East and South China seas in China’s.
Russia and China have presented different challenges. The former is essentially an extractive industries giant with only a marginal impact on the international economy beyond the production of oil, gas, and minerals. Tensions over Russia’s annexation of Crimea have led to sanctions, making the business environment there less certain and significantly more challenging.
China, on the other hand, as we discussed, has been a critical hub for manufacturing as well as an essential market for growth. Several years ago, in conversations with CEOs in almost every industry, China was the hot topic—the place to be and the future for growth and investment.
Today, there is greater caution about the People’s Republic of China. In part, this is due to a growth of economic nationalism and continuing problems in the protection of foreign intellectual property. But it is also due to rising unease with China’s more assertive foreign policy in the Asia-Pacific region. The United States and China seem to be on a collision course over Beijing’s claims in the South China Sea and other territories in the region and America’s determination to defend freedom of navigation and protect its allies. Many ask whether these old-fashioned geopolitical differences will ultimately lead to a less stable environment for commerce and business in China.
These four shocks have been evident in the international system for almost a decade. But a new concern has emerged alongside them—the growth of populism and protectionism as significant political forces. The global order that businesses have come to take for granted is essentially the one that emerged after World War II. The United States and its allies were determined to build a more open international economy that would not be a fixed pie and thus a zero-sum game. They were haunted by the period after World War I in which protectionism and beggar-thy-neighbor trading policies had led to the Great Depression. This time free trade and comparative advantage among nations would lead to growth. The Bretton Woods institutions—the International Monetary Fund, the World Bank, and then the General Agreement on Tariffs and Trade (now the World Trade Organization)—were the vehicles to support an open economy. It took some time, and the collapse of the Soviet Union and the opening of China, but globalization took root thoroughly and comprehensively. The global company with operations, manufacturing, and labor forces all over the world is a direct result of those key decisions.
But nativism, populism, protectionism, and isolationism are making a comeback. Globalization lifted millions of people out of poverty and benefited millions of others through macroeconomic growth. Still, there were losers—people who lacked the skills to compete in the modern economy and those for whom a call center in India, servicing American customers, became a symbol of threat, not an opportunity.
The Brexit vote in 2016 and the election of Donald Trump in the United States—the first time that the country elevated someone with absolutely no government experience to the presidency—stemmed in part from these reactions to globalization. And while it is not clear that populists will continue to win elections, it is obvious that all politicians are responding to the “Do you hear me now?” message from those who feel cheated by globalization. It is telling that in the American election, not one of the candidates—Trump or Bernie Sanders or even the former secretary of state, Hillary Clinton—defended free trade. It is also telling that politicians tread very lightly in Europe and America on the issue of immigration, careful to highlight their toughness on the issue.
What is a global business to do when politicians in the United States talk openly of buying, hiring, and producing goods only in America, and politicians in the United Kingdom talk openly about promoting industrial policy? It is likely that economic realities will temper these protectionist impulses—after all, globalization is a state of being, not a policy. That said, the risks to a system that for several decades has moved in the direction of openness and freer trade should not be underestimated, by citizens or businesses alike.
At this point you may be asking yourselves, “If political risk matters now more than ever, what can companies be doing to help mitigate and manage their vulnerability to it? Is there any hope?” The short answer is yes. Understanding and managing political risk is notoriously difficult for companies, which may explain why studies repeatedly show that they do not focus on political risk, and if they do, they do it badly. But good political risk management mostly comes down to focus. In the next chapter, we take a closer look at why political risk management is so hard, and then we turn to solutions, laying out in the second half of the book a framework that companies of all sizes, operating in all industries and all geographies, can use to better manage this complex landscape.
KEY TAKEAWAYS: HOW WE GOT HERE
Megatrends in business, technology, and politics have created a best-of-times/worst-of-times moment: Businesses face more global opportunities but also more political risks.
Supply chains have grown leaner, longer, and more far-flung. Innovations have reduced costs and increased product customization.
However, the search for margin puts supply chains in higher-risk locations, and extended supply chains expose companies to cumulative risks that are often hard to see.
The spread of cell phones, the Internet, and social media is empowering small groups in big ways. Connective technologies lower the cost of collective action, making it easier for like-minded people to find one another and join in common causes, even across vast distances.
Social activism is not just for activists anymore. In a hyperconnected world, bystanders can post cell phone videos and participate in spontaneous “Twitter mobs.” Governments and businesses must contend with events that “go viral” with little warning.
Changes in politics have made borders more porous and economic issues more centrally intertwined with international security.
The Cold War brought an end to the separation of Western capitalist economies from the Soviet bloc and ushered in a period of globalization.
Since then, four shocks have affected the political and business worlds. The attacks of September 11, 2001, revealed that the ability to do great harm no longer resided only in states with great power. The 2008 financial crisis prompted greater government intervention and rising populism. The Arab Spring and the subsequent unrest have stressed the state system in the Middle East. And China’s rise and Russia’s reemergence are challenging the international order at a moment when America is turning inward.