Geopolitical and economic uncertainty will continue to affect businesses across the Asia Pacific region in the coming year as markets adjust to the new post-pandemic environment. Based on a recent regional panel discussion involving KPMG leaders from across Asia Pacific, there are currently four key geopolitical drivers affecting the business environment globally and across the region.
The first key geopolitical driver is structural. As emerging and developing economies grow and become more influential, their interests and perspectives are challenging the status quo in the international system. This creates competition, mistrust, and uncertainty in the international system. To maintain or increase power and influence, many countries are using economic tools for geopolitical purposes, and there is a rise of geopolitical rather than economic logic in policymaking.
The second driver is socio-political. The past few years have brought an extraordinary decline in levels of trust in traditional institutions around the world. People are becoming sceptical of those in power, who they see as untrustworthy, and they are shifting their political loyalties away from the centre and towards the extremes. This creates fertile ground for populist and authoritarian leaders, increasing tendencies towards nationalism and protectionism, and pressure on domestic and international institutions that provide stability and predictability for business.
The third macro geopolitical trend at play is technological. A massive global competition is underway for technological supremacy. The two big heavyweights in this contest – the US and China – continue to take center stage, and other countries are being increasingly drawn into what some describe as a ‘tech cold war’.
The fourth driver is climate change. We know it brings extreme weather events and disrupts supply chains. Yet the path to mitigate many of the risks are starting to become heavily politicized in the name of national and energy security. Markets are now vying to become renewable energy superpowers. There is more competition for shared resources. The potential for millions of climate refugees to disrupt foreign markets is significant and growing.
“Asia Pacific markets and businesses have been incredibly resilient through the disruptions of the past few years and, broadly speaking, they continue to show signs of above average growth compared to markets in other regions,” says Patrick Cowley, KPMG’s Global Head of Restructuring and moderator of the recent Asia Pacific round table. “Yet we are heading into a very uncertain geopolitical and geoeconomic environment and some sectors and companies will likely find themselves in distressed situations. It is more important than ever for business leaders to understand the key trends at play today.”
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Making choices in a competitive global landscape
The challenge for organizations across Asia Pacific is that these geopolitical dynamics are being played out in their backyard. Asia Pacific markets are facing the same structural, social, technological and climate-related stresses and pressures being faced by other markets around the world. However, they are even more aware of the growing competitive dynamic between China and the US.
Consider, for example, the current trend of Western companies ‘derisking’ their supply chains. Many ‘low-cost’ markets in Asia Pacific – Vietnam and Malaysia, for example – have been able to maintain fairly robust economic growth in part thanks to significant new flows of foreign capital.
The risk is that these choices will become structural and embedded. It wouldn’t be unimaginable for countries to restrict the use of certain telecoms technologies in their infrastructure. Or for access to critical rare earths and resources to be restricted. For example, Russia is already using its resources to shape a parallel market system. Once certain choices are made, they will be difficult to undo.
“For most of the past century or more, Asia Pacific markets have very skillfully navigated between a rising China and a globally dominant US,” notes Merriden Varrall, Director at the KPMG Australia Geopolitics Hub. “The implications of potentially needing to make choices to work with one or the other could be far-reaching and disruptive. We are already seeing this issue start to take shape, particularly in supply chains.”
Evaluating the impact of decisions in an increasingly volatile geopolitical context
On top of managing economic, financial and social uncertainties, companies in Asia Pacific will likely need to carefully consider the geostrategic context for their decisions. “Companies that are moving parts of their supply chain outside of China, for example, will want to think dynamically about their choices,” Varall says. “How might that move impact their ability to sell in China? What will that mean in terms of growth, ability to secure investment and access to markets? And what are the geopolitical risks of the markets they are moving towards?”
They will also need to consider how changes in domestic and regional policies might impact long-term growth and viability, particularly given the competition for technological supremacy. Companies operating in the semiconductor sector, for example, are seeing significant inflows of capital (both domestic/government and foreign private) but are also under massive pressure to ‘secure’ their supply chains in friendly markets. Indeed, the choices facing that industry are largely driven by geopolitics and sovereign competition rather than financial returns.
Conditions ripe for dealmaking, turnaround and restructuring
In this environment, we expect to see significant operational restructuring within companies across the Asia Pacific region. The rising influence of geopolitics will likely result in big decisions being made and lots of dealmaking activity as companies start to adjust their footprint and realign their ecosystems
KPMG professionals believe the winners will likely be those that see today’s global disruption and geopolitical uncertainty as an opportunity to transform for tomorrow. Industry-leading companies across Asia Pacific markets are taking an informed, data-driven approach to decision-making based on a reliable reading of current trends to create value in the near-term and drive transformative change over the long run.