Geopolitics: Growing politically driven decision making impacting supply chains in 2022

Political decisions will play a much more significant role in supply chains in 2022 as governments seek to control strategic resources and secure competitive advantage.

There are two key strands to the longer-term challenges we see to supply chain resilience—both ultimately anchored in more systemic shifts.

On the one hand, there is geopolitical risk impacting supply chains—this is really just a small slice of the challenges and disruption we see today, which as discussed is primarily about blowback from the pandemic and logistical challenges. But we expect to see political decisions playing a much more significant role for supply chains going forward, particularly as governments make decisions about

strategic resources and how to secure their competitive advantage. Strategic minerals and components critical to energy transition are likely to be the key focus, but also a broader desire to secure advantageous trade relationships more generally to support domestic resilience.

On the other hand, there is increased focus on climate risk and ESG responsibility more broadly. There are two dimensions: direct disruption to supply chains from climate stress and social and governance instability; and regulatory, shareholder, and consumer pressure to improve sustainability credentials and protect corporate reputations.

So what will this mean in practice?

For geopolitical risk, this is primarily about governments focusing on supply chain resilience. We have seen this across key regions: the proposed US Build Back Better Act; emphasis in China’s 14th Five- Year Plan on ‘self-sufficiency’ in core technologies; the EU’s focus on ‘strategic autonomy’ in high- capacity batteries, semiconductors, and the ‘critical minerals’ required for new, greener technologies; and India’s focus on self-sufficiency and “trusted supply chains”. We have also seen the Quad—loosely a framework for security cooperation among the US, India, Japan, and Australia—that has started talking about cooperation around supply chain resilience. There are two main implications of this for supply chains:

The imperative for resilience—in the context of very ambitious goals for energy transition—means demand for some ‘critical minerals’ is already surging and will likely intensify competition for influence over their major exporters, including Chile (copper), Indonesia (nickel), Australia (lithium), DRC (cobalt), as well as potential future exporters (such as Afghanistan and Saudi Arabia for lithium).

This in turn is likely to sharpen political scrutiny of the affected sectors, especially in extractive industries and manufacturing, and as a result there will probably be increased ad hoc interventions by governments in these sectors on grounds of national interest. That ultimately means greater uncertainty and, as a result, higher costs of operations and sourcing in these markets.

For climate stress and sustainability, we are likely to see both direct physical risks to supply chain and increased pressure from regulators, investors, and consumers for companies to ensure responsible and sustainable sourcing. There are already examples of water stress driving supply shortages, both directly and indirectly. Directly where agricultural production is affected by drought or floods, but also indirectly where water stress is impacting livelihoods and generating protests and disruption to production and transport logistics. This has been evident in Mexico and in parts of Central America in the past couple of years. Continued climate stress is likely to exacerbate this, creating more regular disruption and delays that supply chain managers will need to plan for.

The increased focus on corporate—and government—sustainability credentials means supply chain managers will be dealing with a complex puzzle. So far, the attention is mainly on the environmental dimension to ESG, but social and governmental credentials are likely to come increasingly into focus. This will challenge some sourcing where suppliers are in locations with comparatively poor credentials in this space—for instance, labor practices, levels of corruption, and human rights issues. And whereas climate credentials can—to a degree—be tackled through offsets, there are no offsets to be had for social and governance impacts.