Corporations Can’t Ignore Geopolitics Anymore

When Apple, once enthusiastic about manufacturing in China, announced in December that it was planning to move some of its production to Vietnam and India, it was clear that something had shifted in the way globalization worked. Now a new report documents what many have already surmised: Countries are aligning into two blocs—one led by the West, and one led, so far, by China. This development has enormous implications for businesses, which, since the end of the Cold War, have been able to operate globally with little concern for grand geopolitics. Now companies have to get used to a world where corporate neutrality is no longer a winning strategy—or even possible.

At one point, 85 percent of Apple’s Pro-series iPhones and many other Apple products are made by some 300,000 workers at the massive iPhone City plant in Zhengzhou. But the mobile-telephone giant appears to have come to the same conclusion as companies including its rival Samsung, which has moved some of its production to Vietnam. Globally operating companies, in fact, became uneasy about their dependence on China for manufacturing and sales some time ago. The global insurance broker WTW’s 2022 political-risk report, released in March last year, found that the ratio of executives saying they’re concerned about political risk in the Asia-Pacific region (in reality, China) to those saying they are unconcerned is now nearly 20-to-1, up from 2-to-1 less than two years ago. (I have occasionally consulted for WTW since November 2022, but I was not involved in the report.)

That’s a far higher leap than in any other region. And in a survey published last summer by the European Union Chamber of Commerce in China, 23 percent of companies said they were planning to move operations out of the country. “The only thing predictable about China today is its unpredictability, and that is poisonous for the business environment,” Bettina Schoen-Behanzin, a vice president of the chamber, said when the survey was released.

Companies are responding to the increasing risk by friendshoring, a process of redirecting parts of their manufacturing, supply chains, and sales to friendlier countries. Apple is far from the first company to consider Vietnam and India. So far, most of these firms aren’t divesting from China entirely—instead they’ve become conscious of the dangers of putting all their eggs in one basket. China’s tumultuous domestic politics and policy changes over the last three years have caused a big rethink about the country’s stability.

But the reputational and political costs of doing business in a state that now increasingly frames the West as the enemy are getting harsher. The risk doesn’t end with Chinese business because the world is dividing into two increasingly clear geopolitical blocs. In a report, to be released later this month, WTW and the research firm Oxford Analytica assessed 61 countries and territories typically included in political-risk reports: countries outside the political safety of the wider West (which includes countries such as Japan and South Korea) but whose markets are significant enough for international companies to want to operate in.

The report found that 25 of the countries lean West, while 18 lean East, opposing the Western powers on many key issues. The countries range from wealthy ones such as Saudi Arabia and the United Arab Emirates (UAE); to populous ones such as India, Pakistan, and Nigeria; to smaller and less wealthy ones such as Myanmar and Cambodia that are popular with international manufacturers. While both blocs are very loose, especially the Eastern bloc, given China’s lack of formal alliances, the Western bloc is led by the United States and the EU, and the Eastern bloc is led by China. Much as was the case during the Cold War, there’s also a nonaligned group. Of the 61 countries assessed by WTW and Oxford Analytica, 18 have attempted to be neutral.

“Geopolitical alignment doesn’t necessarily dictate trading relationships,” said Sam Wilkin, head of political risk analytics at WTW. “There are many countries that have strong trading relationships with the East but strong geopolitical ties with the West. But geopolitical alignment is increasingly driving investment risk.” That poses a fundamental risk for companies, which since 1991 have been able to set themselves virtually anywhere in the world without having to worry about greater geopolitics, just local conflicts and instability. Countries joining the globalized economy, in turn, were able to do so without choosing one side or another. Vietnam, for example, trades with the United States, China, and Japan.

From a Western corporate perspective, the world looked very different before this new era of conflict, as sales and manufacturing opportunities have trumped any other considerations. Chinese multinationals have long been aware that their fates depend on the political whim of the government; Western firms have enjoyed relative safety. Their own governments mostly aren’t the problem; dealing with an autocratic state in a time of geopolitical hostility is.

Many Western countries have also long had strong trading relationships not just with China and Russia but with other countries in the emerging Eastern bloc as well. Companies in these countries will now need to pay close attention to the nations’ leanings to ensure they don’t encounter geopolitically motivated trouble. If they operate in a country that decides to retaliate against their home states, they’re now at considerable risk, as China has pioneered punishment of foreign firms as a geopolitical strategy. Beijing has, for example, avenged alleged offenses by the governments of Sweden, Lithuania, and Australia by punishing companies, specific sectors, or the entire private sector in these countries.

The punishment can be extraordinarily severe: After Australia’s government called for an independent inquiry into the origins of COVID-19, Beijing imposed punitive tariffs on Australian wine that caused Aussie wine exports to China, Australian winemakers’ largest export market, to plummet by 96 percent. And when Lithuania allowed Taiwan to open a representative office in Vilnius, Chinese authorities blocked imports of virtually all goods containing Lithuanian parts. Other countries in the Eastern alliance could become inspired to employ similar tactics.

The blocs’ emergence will cause particular trouble in economically integrated regions such as the Far East, where close trading partners are now joining different blocs.

But unlike NATO and the Warsaw Pact during the Cold War, today’s blocs don’t require formal membership—and that leads to fluctuating numbers and consummate risks. Over the past five years, four countries (including the Philippines) have moved West, while 10 (including Belarus and Iran but also Pakistan and Myanmar) have shifted East. In total, WTW and Oxford Analytica find, five fewer countries lean West today than did so five years ago.

In fact, the West is losing friends. Five years ago, 13 of today’s Western-aligned countries were bosom buddies of the West. Today, only five countries—including Jordan, Mexico, and Qatar—are, as is the unique island of Taiwan. Another 15, including Argentina, the UAE, and Saudi Arabia, are assessed to have moved toward neutrality. Vietnam, in turn, has moved from close alignment with China toward a more neutral stance. That has clearly made the country attractive to large investments by Western firms.

Paradoxically, such neutrality is good news for the West, because it suggests that countries are willing to distance themselves from China, despite its offerings of large investments. “Forty countries failed to support the U.N. resolutions condemning the Russian invasion of Ukraine,” said Michael Fallon, a former head of the U.K. Defence Ministry and business minister. “The West needs to work harder at widening and deepening respect for the international order and the defensive alliances on which mutual prosperity depends.”

To be sure, many countries will not be easily courted, including the 18 currently adopting neutral positions. But geopolitical neutrality today, when even Sweden and Finland have applied to join NATO, indicates that the countries feel they can achieve more by playing hard to get. “Turkey, Argentina, and a number of sub-Saharan African states can play the superpowers off against each other,” Wilkin said.

But getting them may still be worth the effort. Friendshoring is accelerating, and having crucial goods made in countries on which one can rely is indisputably a good thing. Many Western companies seeking to reduce their presence in China are, for example, eyeing potential locations in Turkey. Western governments and companies need enough countries they can rely on, even if those countries are not as close friends of the West as Taiwan. Otherwise, deglobalization will result in very small trading blocs. Friendshoring requires friend-winning.