How companies are planning for east Asian instability

Towards the end of September there was an earthquake near the site where North Korea detonated a hydrogen bomb earlier in the month. It was, in fact, a 3.4 magnitude event but the Chinese, in the immediate moments after it began, speculated that the country was testing another weapon. What North Korea might have thought during those first seconds of the earthquake is, as most things with North Korea, unknown.

Tensions surrounding North Korea are nothing new; the country has been a geopolitical hotspot for decades. To state the obvious, though, in the past few months the situation has escalated to a highly uncomfortable – even nerve-wracking – level, thanks in no small part to the war of words between US president Donald Trump and North Korean leader Kim Jong-un.

On a knife edge

This is why events such as earthquakes worry Brent Eastwood, founder and CEO of GovBrain, a company that predicts world events using artificial intelligence, and a lecturer at George Washington University. There is a lot of US military hardware and manpower in east Asia, he notes, and with that comes a greater probability of mistakes and accidents, and a greater likelihood that a natural disaster might be misconstrued as something else.

“The North Koreans’ strongest weapon is their artillery system,” says Mr Eastwood. “So anything that the US or its allies does – whether it is an accident or not – the first response from North Korea would be the artillery.” Thousands in South Korean capital Seoul could be killed in an initial attack, he adds. South Korea, the US and its allies would respond with their own firepower and the thousands of deaths would grow to millions. The use of nuclear weapons, unspeakable and horrifying a prospect as it is, should not be discounted.

For businesses contemplating these possibilities, nuclear war is not the first and last factor in a risk assessment in the region. The ugly fact is that if nuclear war breaks out, assumptions about everything are off the table. It will be a new paradigm; one in which every geopolitical player and corporate entity is the loser. But there are other, less extreme scenarios that companies concerned about their supply chains should also consider.

Poor communication

Unfortunately, most organisations do a poor job of assessing non-financial risks and have difficulty expressing what their risk appetite for disruption is in meaningful terms, according to Andrew Townley, CEO of risk consultancy Archistry. “Also, risk inter-dependencies or systemic risks aren’t very well understood or tracked by most organisations,” he adds.

Indeed, the threat of interdependent risk is great when contemplating North Korea, says Paul Laudicina, chairman of the Global Business Policy Council at management consultant AT Kearney. “We already have a state that is increasingly being isolated by the world community in terms of trade and financial controls,” he says. “There may be other consequences, such as other states that might suffer some kind of economic consequence by not abiding by those kinds of strictures on North Korea.”

Certainly, it is clear that the sanctions imposed by the UN Security Council to punish North Korea for its nuclear and missile tests are starting to hurt not only North Korea but China as well. Currently, more than 90% of North Korea’s exports are restricted and the US is talking of a total trade embargo to force the country to the negotiating table.

"Digging further, which factories in China might be hurting the most from the North Korean sanctions; perhaps one with which you are partnering? If it shuts down completely, what impact will it have on revenues? It seems like this would be an easy question to answer, but in reality, even though a disruption of supply chains in the Asia-Pacific is a plausible and well-known risk, companies still find it difficult to quantify," says Mr Townley.

Disjointed ventures

One reason for this, according to Mr Townley, is that people in the various parts of an organisation know that the impact of that particular risk event is significant, but they see it from their own perspective. “For one person it might mean ‘we can’t make the 10,000 widgets a day that we need’. They make the necessary adjustments to production –and that’s where they stop because that’s their view of the world,” he says.

“But from the rest of the organisation’s perspective, those 10,000 widgets go into a product line that contributes 60% of the overall annual revenue. Now, let’s say the same widget is also used in another product which is more heavily produced at the company but that product only brings 20% of all revenues. Now you have two numbers by which to judge, but which is the most important to the company?”

Mr Townley acknowledges that this a simple example, but it serves to illustrate the point that it is very difficult to make exact comparisons in a risk assessment. Another reason why risk assessment rarely delivers practical benefits, he says, is “usually the risk assessment statement is a fluffy, high-level one that is useless, or it is expressed in ways that nobody really understands apart from whoever constructed the statement in the first place”.

That said, concludes Mr Townley, it is still important to try. “Even if you don’t get it right, it’s a way to facilitate a much-needed conversation,” he says.

Companies will need to initiate such inter-corporate conversations more often as the world moves to a more closed environment, says AT Kearney’s Mr Laudicina as “we cannot depend on a free and open trading system as far as the eye can see”. He adds that all companies have to understand two things. One is the type of world that is most likely to prevail. The second is how to plan for another type of world that the worst-case scenario may bring.