Doing business in a divided world
Australian companies are learning the risks of operating in markets where Washington and Beijing are feuding. Originally published in the Australian Financial Review.
For years, Australian companies have been making money without the need to pay much attention to geopolitical risks – apart from airlines and energy companies that need to understand the vagaries of the Middle East.
But geopolitical tectonic plates are shifting, and companies around the world, especially multinationals, have increasingly been caught in the crosshairs.
Global bank HSBC is undertaking a mission impossible to please both Beijing and Washington. The giant makers of microchips are navigating the treacherous waters of American sanctions against some of their largest clients, such as Huawei. The rising tensions over Taiwan will not make this any easier.
Australian companies have also received a rude wake-up call recently as the result of direct trade sanctions by China. The irresistible allure of China’s 1.4 billion-strong consumer market also comes with a nasty dose of geopolitical risks. Export markets worth hundreds of millions have vanished overnight due to punitive tariffs. Shiraz growers in the Barossa can feel the cold wrath of Beijing.
The cross-straits tension between mainland China and Taiwan is also causing headache for officials and company executives. Though the new headache is of different order than old ones, airlines and hotels used to worry about how to list Taiwan on their booking sites. But now officials and executives have deal with a much more significant issue. Taiwan is home to the world’s most advanced and largest microchip processing and fabrication plant run by Taiwan Semi-Conductor Manufacturing Company . People are worried about the global supply chain of chips, which power the modern industrial economy, if war were to break out. A Japanese government official told The Financial Times: “it is unsafe if TSMC is only in Taiwan. This is to counter the risk of a Taiwan war. That risk is very real.”
The escalating tension between China and the US is not the only area for concern. Military putsches and palace coups in south-east Asian countries are also making it challenging to do business there.
The military coup in Myanmar is a good example. Until recently, Myanmar was a poster child for economic opportunity in the dynamic Asia-Pacific region.
Australian energy giant Woodside expressed its desire to continue its offshore exploration drillings after the coup, but quickly changed course after agitation from human rights groups.
ANZ bank is staying put, but is under pressure from various activist groups, both domestic and international.
As the once globalised economy evolves into a semi-decoupled world, companies need to find creative ways to deal with competing demands.
The shifting global political landscape means Australian company boards and executives need to pay much more attention to geopolitical forces that are transforming the international business landscape. They have to update their risk matrix to include geopolitical dangers more prominently, alongside other key domestic political risk factors such as industrial relations.
For example, the technology war between the US and China is reshaping the global telecommunications industry. Australian telco operators such as Optus, Vodafone and TPG have been forced to ditch their long-term supplier Huawei over national security concerns. TPG even abandoned its project to build a mobile network after the Huawei decision.
This is likely to be a foretaste of what is coming, especially as China is emerging as a significant global force in providing technology, from artificial intelligence to supercomputing. Companies need to understand that apart from technology and cost, they must consider the complex rules around the US sanctions regime, which features a growing list of Chinese technology companies.
Corporate lawyers and risk experts need to pay more attention to notices published by the US Commerce Department’s once obscure Bureau of Industry and Security, which manages the list.
In retaliation, China’s Ministry of Commerce has been working on a similar scheme, which seeks to punish companies for damaging Chinese economic and security interests. Like its US counterpart, the scheme has extraterritorial application. Navigating between competing schemes could become a new reality for many businesses.
As the once globalised economy evolves into a semi-decoupled world, companies need to find creative ways to deal with competing American and Chinese demands. Japanese companies are the fast adaptors in this regard.
In the light of the US-China trade war, Japanese electronics giant Panasonic has created a separate China & Northeast Asia Company. Its chief executive, Tetsuro Homma, faces a momentous decision on whether to move the company’s appliances headquarters, or at least some of its global functions, to China.
“I don’t think that the Japanese manufacturing industry could survive globally without being presented in a market as big as China’s,” Homma says. But the company intends to keep its more sensitive technology and products, such as industrial robots, in Japan.
However, it is not entirely clear how far companies have to go to maintain separate identities, or whether it will be enough to satisfy the ever more demanding authorities.
ByteDance, the Chinese parent company of the popular video-sharing app TikTok, provides an example of the difficulty of executing this tortured formula. When TikTok faced a ban under the Trump administration, the company offered to restructure its ownership in order to continue its business in the US.
ByteDance proposed to restructure TikTok’s US operations as a new entity wholly owned by Oracle, Walmart and ByteDance, and to be headquartered in the US, with Oracle overseeing its data security in relation to American users.
However, there has been a dispute over whether the Chinese company could retain its majority ownership. To further complicate the picture, Beijing is banning the company from exporting its advanced algorithm technology.
The deal is still under review after Donald Trump’s departure from office. The ongoing TikTok’s saga shows it is far from easy to straddle two competing superpowers.
While Chinese companies can still plead their cases before US courts, many foreign technology companies including Google, Facebook and Twitter have long been banished from China.
Peter Cai is a research fellow at the Lowy Institute and director of the Australia-China relations project.
