As we trend towards deglobalization, how can companies adapt?
Simon Lee CPA, Honorary Institute Fellow, The Asia-Pacific Institute of Business at the Chinese University of Hong Kong Business School
Before the COVID-19 pandemic, there was a high level of interdependence among countries. Things have since changed. Recent and ongoing events such as United States-China tensions, global warming, and the Russia-Ukraine War have changed the rules in today’s global economy. The trigger point was the pandemic, which suspended many cross-border activities. Frankly speaking, I think the world was too reliant on certain countries for production, raw materials and labour, with many companies not putting enough focus on diversification.
At this year’s Davos World Economic Forum, deglobalization was a hot discussion topic. I believe the extent of this development depends on when the pandemic will end and the eventual outcome of U.S.-China tensions. While the outcome of political negotiations is unpredictable, one thing that is quite certain is that the degree of globalization is decreasing. Governments and big companies are restructuring their production and logistics network to reduce the risks of interdependence. Such reshaping actually started before COVID and can be traced back to 2016 when the Trans-Pacific Partnership was signed. The signing of the Regional Comprehensive Economic Partnership in 2020 further reflected the trend of more regional entities being formed rather than global entities such as the World Trade Organization.
Reorganizing such networks takes time and involves huge initial investments. Some companies have already started their diversification by moving some of their facilities to countries in Southeast Asia to serve the regional markets there.
ASEAN countries like Thailand, Indonesia, Vietnam and Cambodia have a vast population of young people who specialize in areas such as production or provide professional services. Businesses could form a new company with local corporations or set up a new office there involving local people. With that said, small- and medium-sized enterprises in Hong Kong should consider gaining a better understanding about ASEAN countries and the business opportunities there.
Before the pandemic, several ASEAN countries had already reported gross domestic product growth higher than Mainland China, but such trends were often ignored as many were perhaps too focused on growth within the Mainland. I believe that if companies are exploring opportunities in the Greater Bay Area, they should also consider exploring opportunities within some of these ASEAN countries to cope with the trend of deglobalization.
“Small- and medium-sized enterprises in Hong Kong should consider gaining a better understanding about ASEAN countries and the business opportunities there.”
Chris Chan CPA, Partner, Strategy and Transactions, EY Transactions Limited
After nearly three decades of worldwide macroeconomic maturation, the forces of globalization – fuelled by economic growth through geopolitical openness, cross-border trade and interdependence – are now slowing down. Deglobalization is influencing global value chains while at the same time, the COVID-19 pandemic has intensified the Mainland government’s policies focusing on the domestic economies. With geopolitical tensions and protectionism on the rise, businesses are increasingly doubtful whether the benefits of globalization have outweighed the dangers. Business leaders need to articulate a clear and robust strategy to navigate the ever-changing global landscape.
At EY, we have identified key steps every company should take to adapt to the ever-changing reality:
- Map all operational dependencies and vulnerabilities: Conduct a comprehensive, clear mapping of all dependencies within its operational footprint. By considering risks from every angle – geopolitical, financial, regulatory etc. – business leaders can gain the necessary insight into material risks in each market before adjusting their strategy accordingly.
- Realign supply chain to match geopolitical realities: Deglobalization dynamics will complicate traditional cross-border supply chains. Business leaders should seize the opportunity to re-examine their companies’ supply chains for nearshoring, onshoring or “friendshoring” opportunities, which involves relocating operating activities to close political partners, to improve resilience and security.
- Incorporate geopolitical risk in acquisition and divestment strategies: EY’s 2022 CEO Outlook Survey found that 55 percent of business leaders adjusted their strategic investments due to geopolitical challenges. Business leaders should anticipate potential geostrategic complications by incorporating political risk assessments in transactions, due diligence and broader business planning.
- Strengthen digital security and technological acceleration: The rise of new technologies presents a primary source of disruption and dislocation, and an increasing number of businesses are at a heightened risk of cyberattacks. Business leaders should prioritize strong cyber defences and data protection systems to gain a competitive advantage, and to gain stakeholders’ trust.
The transformation imperative is now clearer than ever. Business leaders should actively reconfigure their companies for resilience, invest strategically for optimal growth, and ensure they have access to the right expertise and insight to ensure their geostrategy mirrors the ever-changing geopolitical environment.
“Business leaders should actively reconfigure their companies for resilience.”
Patrick Rozario, Managing Director, Moore Advisory Services
The past 30 years have seen a dramatic increase in globalization, as businesses have become increasingly interconnected and international trade has grown exponentially. But it has also led to a concentration of wealth in multinational corporations, disrupting industries and making developed economies more vulnerable with issues like jobs elimination.
The COVID-19 pandemic has further exposed the risk of globalization, as it has quickly spread around in an interconnected world. An interconnected world may not always be a good thing when it comes to national health, for example. While vaccines may be produced in one country and then shipped to another, this means that a break in the supply chain can have serious consequences. A COVID outbreak or an industrial accident leading to contamination in a plant responsible for producing vaccines could halt the supply of lifesaving vaccines, for instance. The pandemic has shown that the safety of national health is only as strong as the weakest link in the global supply chain.
In recent years, we have seen increases in international trade disputes and geopolitical conflicts, forcing companies to rethink their supply chains and look for ways to de-risk. As a result, we are seeing the trend of decoupling, where companies are focused on reducing their dependence on any one country or region. Another trend is the move to onshore production, where companies are seeking to bring productions closer to the end market in order to reduce exposure to potential disruptions. The net effect of these trends is that globalization has reached an inflection point and we are now seeing a shift towards deglobalization.
For companies, this presents challenges, opportunities, and a need to adapt to changes in the business environment. On one hand, they may need to adapt their business models to cope with reduced demand for their products and services from overseas markets. On the other hand, they may be able to benefit from opportunities arising from shifts in global supply chains. One solution is to “deglobalize” your company’s operations. This involves tailoring your products and services to the specific needs of each market and establishing regional supply chains.
With deglobalization, capital flows have begun to slow and nations have become more protectionist. This shift has created challenges for companies that have come to rely on globalization for their growth. In order to adapt, companies need to focus on becoming more efficient and effective by investing in technology and talent, and finding new ways to reach their customers. In addition, they need to re-evaluate their business models and strategies. The companies that are able to adapt will be the ones that survive and thrive in the new world order.
“With deglobalization, capital flows have begun to slow and nations have become more protectionist.”