The Era of Geopolitics First... Changed the Priorities of Corporate Management [Ukraine Shockwave④]

# ‘Fun&Tasty’, ‘Dionlyway’, ‘FreeCheckout’. Candidate brand names to replace McDonald's in Russia have been registered with local authorities. This came less than two weeks after McDonald's handed over its business in Russia after 32 years due to the impact of Russia's airstrikes on Ukraine on February 24. Starbucks, the world's largest coffee chain, and Nike, the US sportswear brand, which recently announced their withdrawal from Russia along with McDonald's, are also expected to change their signboards. The Russian government is swiftly acquiring Western companies fleeing one after another and is establishing legal grounds to protect the local economy and jobs.

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The Russian Invasion as a ‘Black Swan’ for Companies

The war in Ukraine was an entirely unforeseen ‘Black Swan’ issue from the perspective of companies. Companies with extensive operations in Russia faced unprecedented challenges last year, suffering losses and shutting down local businesses, resulting in tremendous damage. In earnings reports released in April and May, global companies consecutively disclosed the scale of asset damage incurred in Russia. British energy company BP incurred costs of $25.5 billion (about 32.2 trillion KRW) due to its withdrawal from Russia in Q1, and Google’s Russian subsidiary filed for bankruptcy after a local court froze its main transaction accounts.

As such experiences became frequent, geopolitical risks have become an essential factor companies must consider. Particularly, from a business perspective, it has become an element affecting brand image beyond just supply chain issues related to raw materials or agricultural products originating from Russia and Ukraine. According to a report released last month by US PR consulting firm Edelman ahead of the World Economic Forum (WEF, Davos Forum), a survey of 14,000 people across 14 countries showed that 95% of respondents believed political and economic pressure should be applied when a country invades another without just cause. Additionally, six out of ten respondents cited geopolitical risk as one of the key priorities to consider when conducting business.

Global Companies Tracked by Jeffrey Sonnenfeld, Yale University Professor

Ultimately, within three months after the Russian invasion, about 1,000 companies withdrew from or scaled down their operations in the Russian market and reduced local investments. Jeffrey Sonnenfeld, a Yale University professor who has been tracking global companies’ operations in Russia since the early stages of the war, said, "Historically, such a large-scale, rapid, and voluntary business withdrawal is unprecedented in terms of scale and impact," adding, "It is five times the size of the approximately 200 companies that withdrew in protest against apartheid in South Africa in the 1980s."

From Offshore to Onshore, Reshoring to Friendshoring

Russia’s invasion of Ukraine ignited a crisis in globalization, which had been strengthening since the 2008 global financial crisis. With the outbreak of the Ukraine war, the US and Europe united to respond with various sanctions and formed blocs, effectively entering a new Cold War era. Not only Russia, but the US and China are fiercely clashing over technology and various issues, imposing sanctions on each other or forming economic agreements centered on allied countries. Consequently, companies have no choice but to consider geopolitical risks arising from international political issues.

‘Friendshoring’ has emerged as a key concept in the process of reorganizing global supply chains against this backdrop. Friendshoring refers to locating production facilities in friendly countries free from diplomatic conflicts. Due to the prolonged supply chain and logistics disruptions caused by COVID-19, companies have successively revised their management strategies from offshoring (relocating production facilities overseas to reduce costs) to onshoring and reshoring (bringing overseas operations back to the home country). However, after experiencing the Ukraine war and US-China conflicts, geopolitical risk has become a core consideration, expanding beyond simply relocating production facilities to the home country to building supply chains with allied countries through friendshoring.

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The US is leading the friendshoring movement. Janet Yellen, US Treasury Secretary, stated that no country should disrupt the economy by leveraging its market position in raw materials, technology, or production, and expressed support for a friendshoring strategy of mutual dependence with allies regarding supply chain issues. Recently, President Joe Biden visited South Korea and Japan to strengthen technology alliances such as semiconductors and launched the Indo-Pacific Economic Framework (IPEF). Subsequently, Samsung Electronics Vice Chairman Lee Jae-yong and Intel CEO Pat Gelsinger held a surprise meeting to agree on cooperation, accelerating corporate movements based on geopolitics.

Preparing for Business Management Risks

Companies now view geopolitical risks as a key consideration and emphasize the importance of collecting extensive information and building resilient supply chains. According to Japan’s Nihon Keizai Shimbun, Hitachi Ltd. established an Economic Security Office within its procurement division in April to collect information related to economic security and analyze geopolitical risks. Heavy industry company IHI set up an Economic Security Promotion Department in October last year to formulate business plans in response to the Economic Security Promotion Act, which addresses the stable supply of strategic materials.

Additionally, Kirin Holdings conducted training on geopolitical risks for its management, Itochu Corporation refined its risk management guidelines last year, and Mitsubishi Electric established an Economic Security Office directly under the president’s office in 2020, before the outbreak of the Ukraine war. Nihon Keizai reported, "Most Western companies have specialized organizations for risk analysis. For example, UK-based Shell introduced scenario analysis with scientific forecasting in the 1970s and appears to have based its decision to withdraw from Russia on this approach."

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Ernst & Young (EY), one of the world’s Big Four accounting and consulting firms, stated in a report last month that "geopolitical alliances now have more influence on business decisions than economic considerations," and "changes in geopolitical power will affect growth and investment opportunities." EY advised prioritizing ▲assessment of current and future political risks ▲formation of geopolitical strategy teams across multiple functions ▲adjustment of strategies to fit geopolitical realities to manage geopolitical risks. EY added, "Executives must reassess their company’s operations, supply chains, and strategies to adapt to the new world."

Jim Hagemann Snabe, chairman of Siemens’ supervisory board and a WEF board member, said at last month’s Davos Forum, "The current global geopolitical situation raises doubts about whether the success of globalization and a more interconnected economy is a rational long-term strategy amid present and future armed conflicts and wars." Nevertheless, he emphasized, "Given the many benefits, we must enhance the international mobility of people, ideas, goods, and culture." He stressed that resilience, adaptability, collaboration, and trust are our valuable assets and that the future depends on companies, governments, and civil society growing together.

This content was produced with the assistance of AI translation services.