The geopolitics of the Western Pacific have entered a perilous new phase following China’s military exercises in the waters and airspace surrounding Taiwan, launched after US House Speaker Nancy Pelosi’s visit to Taipei. Unprecedented in their scale and scope, the exercises were designed to intimidate Taiwan, warn the United States and its allies, and play to nationalist sentiments by showcasing the capabilities of the People’s Liberation Army.
There are now plausible outcomes short of all-out war that could further draw in the United States or its Asian allies and partners. Xi Jinping faces clusters of critics within China who fault his handling of the domestic economy, his “zero-Covid” policies, and his management of foreign affairs, and Xi could opt for a more aggressive course as he seeks a third term as general secretary of the Chinese Communist Party. “Grey zone” actions – deployed with a thin veil of plausible deniability – could disrupt Taiwan’s communications, power grids, and commercial transport. Such attempts to weaken Taiwan’s economy, coupled with efforts to discourage foreign investment or foment social unrest, especially in the run-up to Taiwan’s presidential election in January 2024, would put new pressures on the United States, Japan, Australia, and other governments to adopt stronger positions in support of Taipei.
With international tensions already spiking due to Russia’s invasion of Ukraine, there is virtually no multinational company shielded from these geopolitical factors, whether via supply chains, consumer bases, or the myriad other second- and third-order consequences that arise from heightened conflict between global powers. While some potential disruptions to companies can be mitigated, others will demand a complex calculus of real-time risk analysis and dynamic hedging. “Business as usual” is not an option, especially if multinational companies are forced to choose sides.
How can corporate leaders make sense of critical geopolitical signals, separate these from distracting noise, and position their organizations for upside opportunity capture and downside risk mitigation? Based on our experience supporting companies as they navigate geopolitical and market disruptions related to China, Southeast Asia, and other complex global markets, we recommend taking the following four steps:
1. Map out likely scenarios over fixed timeframes that simulate the impact of events on strategic decision-making. Consider each scenario’s effect: How might an international dispute escalate or de-escalate? What events could undermine a social or political license to produce, operate, market, or sell? Which supply chains would be most affected? What could trigger negative publicity and cause harm to brand and reputation? Early warning indicators for each scenario should be identified, monitored, and continuously reassessed.
2. Collect and analyze high-quality, on-the-ground intelligence by engaging independent sources from varied perspectives, in addition to seeking views from government officials, diplomats, military leaders, or other policy influencers. Information must flow in all directions to build and share an understanding of the potential impact under different scenarios, such as how decisions would be perceived by key stakeholders or how public sentiment may shift.
3. Establish an analytical framework, decision-making principles, and a crisis response team to guide the company through fast-moving external circumstances. Planning can prepare boards and executive leaders for a range of scenarios, but not all outcomes can be foreseen. By codifying their approach to crises, particularly related to the integration of information about geopolitical events, companies increase the likelihood that their response to contingencies is consistent with corporate values and strategy, regardless of what situation might arise.
4. Formulate and test likely responses to formulated scenarios with an emphasis on preserving flexibility and agility to react to cascading events. This could include developing alternative vendors to safeguard against shocks, or drafting a public relations strategy to respond to sudden shifts in consumer sentiment. Table-top exercises (with white and red cells escalating a simulated emergency) should be designed to emphasize senior executive participation and test top-team assumptions.
While acute tensions surrounding Speaker Pelosi’s visit to Taiwan will likely subside, deeper mutual distrust between the United States and China and the weakening of bilateral diplomatic channels have already increased the potential for future miscalculation. Given what the latest tremors between Beijing and Washington could portend, and with geopolitical events top of mind for business leaders across the world, companies should take the time to determine whether they are adequately looking over the horizon, informing themselves with dispassionate analysis, ensuring continuity of sound decision-making throughout the organization, and testing potential responses to emerging scenarios.
Jay Truesdale is Chief Executive Officer of Veracity Worldwide, where Bill McCahill – former US Chargé d’affaires at the U.S. Embassy in Beijing – is a Senior Advisor and Mitch Hayes is a Director.