Certainly, elements of the Eurozone were already in trouble, but few in the mainstream predicted quite how deep a mess the old continent would have got itself into by the end of the year – with a potential breakup of the EU, a not too outlandish possibility.
Across the pond, American politics was certainly bipartisan but few believed that Republicans and Democrats would be prepared to push themselves to the limits on the issues of taxes and public spending, to the extent that Moody’s downgraded the US’ AAA credit rating.
The Arab Spring—and the ousting of such long-lasting dictatorships in Libya and Egypt—were even further from the realms of possibility.
Stated simply, in 2011 the extraordinary became the ordinary.
Thus, predicting the year ahead would seem a fool’s game. The events of 2011 have highlighted just how much the world’s political and economic landscape is changing, and also how the potential risks and rewards for the manufacturing sector are evolving. Events underscored the need for companies to be aware not just of the most likely scenarios for their investments in both developed and emerging markets, but also of those high-risk, low-probability events that can potentially turn a firm’s fortunes upside-down in an instant.
New Paradigms Required
Of course, some of these events are not man-made. For many manufacturing firms, the crucial 2011 moment may have well have been March‘s devastating earthquake and tsunami in Japan, which exposed the vulnerability of supply chains to an over-dependence on one or a handful of Japanese suppliers. Nonetheless, whether entering a new market for the first time, or indeed simply maintaining or expanding an existing market presence, a strong element of preparation is required for man-made crises – both in being able to anticipate the risks that come from doing business in a certain country or region, and in being able to manage those risks should the worst occur. Companies capable of creative thinking (and preparing for the unexpected) generally fared better in 2011 than those stuck in rigid paradigms of how the markets would perform or how business is done in certain countries.
These changes to the “usual way” of doing business have manifested themselves in different ways. In Libya and Egypt, for example, the removal of the Qaddafi and Mubarak regimes, respectively, uprooted governments who provided relatively stable—if far from perfect—rules of the game for certain favored investors. The leaders’ removal, and that of some of the networks of individuals (whether from political or business worlds) behind them, has brought weak underlying institutions and an unclear framework for foreign investment. A great deal of patience will be required to navigate the changing terrain.
Elsewhere, in parts of Latin America, local communities are growing into an ever stronger and cohesive force against investment projects “imposed” on them without their prior consultation or consent. More prosaically, political and economic failures in the US and Europe are forcing manufacturers to look further afield for bigger potential markets and a stronger return on investments.
Fearful New Year
We have reason to believe that 2012 may be every bit as unpredictable. First, the rise of social media represents both a challenge and an opportunity for investors: the prominent role it took in the Arab Spring is indicative of its potential, not only as a force for change but more generally of how reactive entities, whether companies or governments, are expected to be to changing public opinion. By the same token, companies can use the same media in their favor, by using it to close the gap between increasingly cynical public perceptions of the corporate world and the reality of what companies do and what they can achieve.
Tied into this is the need for firms to become more accountable. Rightly or wrongly, local communities, governments and employees, in many cases, are increasingly demanding the right to participate in a firm’s decision-making process. At one level, in the US and Europe, activist shareholders have become more prominent.
In developing countries, appeals from such stakeholders fall into categories such as ensuring a good number of local employment opportunities; ties between the manufacturing company and the local supply chain; or other social investments to ensure that operations can bring a tangible long-term benefit in the form of the transfer of human or financial capital. Mapping these different stakeholders, understanding their concerns and how they can be managed is becoming an increasingly critical exercise for companies of all shapes and sizes.
Risk Management Assumes Increasing Importance
More than anything else, however, investors need to take a long-term, tailored, approach to risk management. Market entry strategies have to be based on the reality—and the potential reality—of each different country; “one size fits all” cannot be seen as realistic course to success given the changes the world is experiencing. In 2012, business may need to have answers to questions as diverse as: “What happens if Venezuelan president Hugo Chávez dies?” or “How might the Chinese government react to increased social unrest?” or “Where might the Arab Spring spread to next?”
As the economy becomes ever more globalized and ties from one country or one market to the next become tighter, these types of questions are likely to become ever more inter-linked and the knock-on effects for a global business more apparent.
Even in cases where the answers—or indeed, questions—are not obvious, being prepared for unexpected consequences is equally as important. A company’s ability to manage a crisis, or to prevent one of those high-risk, low-probability events from developing into a crisis in the first place, has huge reputational and financial repercussions. Similarly, being prepared for these events helps companies take advantage of the opportunities that the world’s changing landscape offers.
Change is certainly not something that investors need fear.
Simon Whistler is senior consultant, global risk analysis at Control Risks. He works with clients in the Americas region to produce tailored consultancy solutions to political, operational, security and social risk challenges. Working closely with the expert regional analysts within the Global Risk Analysis department, Whistler assists clients through providing greater assurance and foresight to their work in complex and challenging markets.
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