Bob Trebilcock: Welcome to The Rebound, where we'll explore the issues facing supply chain managers as our industry gets back up and running in a post-COVID world. This podcast is hosted by Abe Eshkenazi, CEO of the Association for Supply Chain Management, and Bob Trebilcock, editorial director of Supply Chain Management Review. Remember that Abe and Bob welcome your comments. Now to today's episode.

Welcome to today's episode of The Rebound: Lions and Tigers and Bears, Oh My, Global Risk in the Supply Chain. I'm Bob Trebilcock.

Abe Eshkenazi: I'm Abe Eshkenazi.

Bob: Joining us today is Jacob Shapiro. Jacob is a geopolitical analyst and the founder and chief strategist of Perch Perspectives, a consulting firm based in Austin, Texas. With apologies to the Wizard of Oz, running a global supply chain today is a little like Dorothy's journey back to Kansas. Just when we think things are going our way, we're fighting off packs of wolves, wild crows, and black beets. Although in our case, it's tariffs, trade wars, and pandemics. Figuring out how companies can navigate their way through the geopolitical maze is what we're going to talk to Jacob about today. Jacob, welcome to The Rebound.

Jacob Shapiro: Thanks so much for having me. It's a pleasure to be with you all.

Bob: It's a pleasure to us as well. Let's start and talk a little bit about geopolitical risks. Give us an overview of the state of the supply chain from a geopolitical perspective and what you're watching. For instance, what's happening between China and India right now?

Jacob: I started in the geopolitical risk space right after the great financial crisis. That meant I came of age as an analyst, if you will, in 2010 and 2011. A lot of what's happening right now reminds me of that in the sense that it's one of the busiest and riskiest times that I've ever seen in my career. If you think back to 2010, 2011, you had the Arab Spring, you had the Libya intervention, you had the Fukushima disaster and the European sovereign debt crisis, and they were all happening at or around the same time, and they were beginning to interlock with each other and affect each other.

I think it's similar today. There are so many different things happening at once, and I think one broad takeaway for listeners is to remember that politics functions like that. It's not a steady stream where things evolve sequentially over time. A lot of things can happen at once over a six-month period, and then you can get five years of relative quiet, and then another explosion again. We're in one of those explosions. In terms of what I'm looking at, we could spend the whole podcast talking about what I'm looking at, but there's three overarching things that I would point out, and then a couple of smaller-scale things that are also on my radar.

The biggest, of course, has to be US-China relations, far from having a phase one trade deal, what's happening now is a real deepening and escalation of the US-China trade war. What the United States has done to undercut Huawei to impose export controls on defense and high-tech equipment going through Hong Kong, all that stuff is reshaping supply chains and changing trading relationships in ways that make the beginnings of the trade war look pedestrian by comparison. A second high-level issue that I'm looking at is the future of the European Union.

I don't think it's an exaggeration to say that how the European Union decides to respond to COVID and you have EU finance ministers and leaders actually meeting this week to talk about that and try and iron out some of their differences. How they decide to balance between federalism, how they decide to respect the sovereignty of individual member states, that's going to have huge implications in the European market and everywhere that the EU is trying to be a player. Then, yes, you referenced India. India has really moved in the last couple of months squarely towards protectionism.

For the last couple of years, Prime Minister Modi has been talking about making India and trying to relocate supply chains to India and bring foreign companies there, but if you follow Modi, in May he gave this huge speech about self-reliance. It's not like he was reading Ralph Waldo Emerson, he was actually talking about how he felt like India needed to assert itself and needed to be more secure. When you look at what India has done, in part because of the disruption of COVID-19, you've got them building defense corridors in the aerospace manufacturing sector. You've got them unshackling India's farmers so that they can sell directly to clients in the system, rather than the state controlling that.

You've got whisperings and rumors of new rules and tariffs and local content requirements that are going to go specifically towards Chinese imports just because India imports so much from China as part of the supply chain. I don't think you should make any mistake about that showing you that India's long-term ambition is protectionism is to move up that value chain and to put itself in the situation that China is in right now. Those are the three overarching things that I'm looking at. Besides that though, just look at the world. Everything's going crazy.

Ethiopia is damming the Nile River and Egypt is making noise about that. NATO is coming apart at the seams because France and Turkey are on opposite sides of the ongoing Libyan civil war. In the South Caucasus, you've got Azerbaijan and Armenia shooting at each other. We had the biggest India-China border spat in 40 or 50 years. I'm worried about Taiwan, I'm worried about the South China Sea, and I'm also increasingly worried about the deteriorating security situation in Mexico. AMLO's position post-COVID-19 is beginning to become a little tenuous and a cartel tried to assassinate a Mexican chief of police or security in Mexico City a week ago.

That's unheard of. Mexico City is supposed to be the bubble that this stuff doesn't touch. Overhanging all of it is the US election. It's hard to give us a synced picture, but those are just an example of the bigger trends that I'm looking at, and then some of the blips on the radar that are there along the way.

Abe: Really dynamic instances and activities, Jacob. The old axiom, don't fail to take advantage of a crisis, seems to be a watchword for everybody today. You've likened the COVID to a catalyst, speeding up events that may have happened anyway or were much more future-focused, specifically like decoupling supply chains. Give us some insight in terms of what you mean by that.

Jacob: Sure. I take your point on never waste a good crisis, but before you can take advantage of the crisis, you also just have to make sure you don't get destroyed by the crisis first. I think a lot of folks are still in that first camp before they can start taking advantage. In terms of COVID-19 functioning as a catalyst, the first trend that COVID-19 has accelerated is this move towards multipolarity. Multipolarity is a fancy political science term that literally just means that the United States is not the dominant global power in the world anymore.

Instead of one power that is shaping an international trading order, an international security system, you've got different nodes of power that are competing against each other. For instance, you've got China rising in one area, you've got Turkey in the Mediterranean, you've got the European Union figuring itself out, even India, Brazil. When you zoom out, there's a lot of different areas that are emerging. I think COVID-19 has both accelerated this and demonstrated that the United States really isn't at the cutting edge anymore. It's hard for me as an American to say that, but I don't see any other objective conclusion from how badly the United States has managed COVID-19 from that.

I think if you need a demonstration of how the world is becoming more multipolar, how different countries are responding to COVID-19 gives you a different window into that. The second thing that COVID-19 has accelerated is decoupling. This is the one that really has taken away those off-ramps that I talked about. Part of multipolarity is that different countries don't want to be dependent on each other anymore, or if you're a country like a Turkey or a China, you're becoming more powerful and you want to enjoy greater economic benefits because of your power.

You don't want to just be a cog in a US company supply chain, you want to be a center of commerce yourself. You want other countries to be cogs in a Chinese supply chain or a Turkish supply chain and things like that. Particularly important here is, of course, the US-China relationship, and while I've been pessimistic about the US-China relationship for a while, I thought that there was still a chance that things could be repaired, or at least that things could get back to a more pragmatic basis of dealing with each other. I think that's off the table now. I think the stresses that have emerged around COVID-19 have basically locked in place a long-term US-China strategic conflict.

I think that will remain the case whether a Biden administration comes to power or whether Donald Trump stays in power. If you look at what Biden has been saying on the campaign trail, he's been very tough on China and the folks he would put in foreign policy-wise are also going to be very tough on China. It's not just US and China though, we're seeing decoupling happen in an incredible way around the world. We're seeing trade relationships change overnight. Changes that usually take years to happen are happening very, very rapidly.

I was just doing some research earlier today and I saw that China became Argentina's most important trade partner because Argentina's trade with Brazil dropped 50% year on year. We're seeing statistics like that crop up all over the place. Decoupling is happening rapidly, much more rapidly than you would have expected without a catalyst like COVID-19. Then the third issue, and this follows from the two others, is that the high-tech wars have really begun in earnest. If you go back to when my company launched, we put out a report where we identified biotech and anything space-based, aerospace and satellites, all those other things. Then connectivity tech, which 5G is one example of that, but there's also a lot of other examples.

Those are becoming strategically significant industries. If anything that you make touches any one of those industries, governments are looking at that and you're seeing new legislative matters, you're becoming parts of political bargaining and negotiations globally. All that stuff is now about these different countries trying to make sure that they are at the cutting edge technologically and making sure that another country can't cut them off from technology, the way that the United States just did with China and semiconductors and microchips.

That's what I mean when I say that COVID-19 is a catalyst. Multipolarity was there, decoupling was happening. There was tech competition before, but COVID-19 basically just gave it a massive steroid shot. Now all this stuff is accelerating much more quickly. Unfortunately, I think there's much less chance to roll some of these things back to deal more diplomatically. I think you're going straight into a more competitive landscape overall.

Bob: Thank you, Jacob. There's a lot of talk about China, you just touched on it. When you talk to some supply chain managers, they feel like, well, China is still the next China. What's your perspective and are supply chains going to reconfigure in new ways and in new places?

Jacob: It made me think of some reading I did way back in the day in college, and specifically it made me think of Thomas Kuhn and his idea of paradigms. I think this concept is maybe overused some time, but I don't think it's wrong to use it here. We're in a new paradigm. If you're a supply chain professional and you're asking yourself, what is the next China? I think you're in the wrong paradigm. I think you're in the past. You're not thinking about what has changed radically in the world and what questions you need to be asking in the future.

Let's break that apart. What was China? China was a cheap, highly motivated, highly disciplined labor force managed by a very, very stable and controlling central government that was able to scale enough to become literally the world's factory. Everyone could go there and have whatever they wanted made, and it was reliable and you knew the government was on your side and they were going to do whatever they needed to do to make sure that you got what you wanted. China's rise was only possible as part of a process of globalization. China's unique strengths allowed it to be an indispensable part of globalization, but without globalization, China doesn't become China today.

Now, the only country on the landscape that you could even imagine being able to replicate China's advantages is India. I don't think I have to tell you guys that despite India's vast potential, its infrastructure is terrible, its central governance is extremely inconsistent, and as I mentioned earlier, it's becoming much more protectionist itself. It basically wants to skip the 20 years of globalization that China went through and emerge as a stable power in and of its own right, right now. If you're selling into the Chinese market and you're confident that your access to the Chinese market is assured, then yes, China's your next China. There's still tremendous opportunities in China.

If your access to the Chinese market isn't assured, and I'm assuming for most of the listeners it isn't, your next China depends entirely on what markets you're selling to. If you're trying to tap into rapidly growing and demographically young markets in East Africa or in the Indo-Pacific in general, maybe Ethiopia is a part of your next China. If you're manufacturing parts that are going to be components in an open Rand 5G telecoms network in 5 or 10 years, maybe West Virginia is your next China. The reason I brought up the Kuhn and the paradigm example is to say that there is no next China in the way that there was before, but there are potentially lots of smaller next China's once you realize that the world has gotten smaller.

Don't get trapped into trying to find that next China that is the next piece to the globalization puzzle. You have to think in terms of the world is becoming less globalized and where am I going to relocate, or what opportunities am I going to find that are going to allow me to succeed in that new world because there's not a next China, there's not a next phase of globalization. We're really entering a new paradigm. This is something different.

Abe: Jacob, really interesting point that you're making about China and really just regionalization versus globalization. Maybe a related question, as we're taking a look in companies and supply chain professionals are talking about nearshoring and reassuring, give me a sense by industry where this is having a much more dramatic impact and where the supply chain professionals really need to pay attention to this idea of either nearshoring or reshoring or regionalization.

Jacob: It's absolutely different by industry. There's no one-stop-shop or one size fits all. For instance, I advise some agribusiness companies, they have very different concerns than say a tech company with a product that's being assembled in multiple locations with parts and components that are coming from all over the world. In terms of reshoring, I'm not seeing a great move towards that yet. Maybe the US government is going to pony up enough money and pass through enough legislative incentives to create an environment where that happens.

When you look at the way the election polls are looking right now, I wouldn't discount that, but I still think we're a ways away from that. As for nearshoring, yes, but again, maybe not in quite the way that folks are thinking about it. I'm hearing and working with companies that are accelerating plans that they already made and not for ones that were just caught completely flat-footed. One of the questions I do get a lot is not necessarily should I reshore or nearshore, it's about who has capacity. Vietnam, for instance, looks like a great move for supply chains until you realize that they basically have barely any slack capacity and that to increase capacity, it's going to require massive of investments.

The problem with China in a certain sense was that it made us lazy. We've gotten used to going to that one-stop-shop and used to the idea that you're going to be able to sell things anywhere in the world. The next China question, thinking about nearshoring and reshoring, it can be a dangerous concept because it sounds like a band-aid solution for a world that doesn't exist anymore. It encourages complacency because it implies you just move X or Y to new locations and everything's fine. It's a much bigger change than that. There are different economic, technological, and security ecosystems emerging in front of our eyes and now the world is basically dividing itself off from each other.

You're not necessarily going to have access to markets the same way that you might have before. You're going to have to be a lot more intentional about what market or markets you're selling into. Then you have to think about a reliable and cost-effective supply chain that allows you to sell into that market. I have found that the buzzword in supply chains for a lot of years now has been to have a lean supply chain. I think the new buzzwords are going to be flexible supply chain and intentional supply chain. The world has gotten a lot smaller. If you're going to take advantage of that and if you're going to reshore or nearshore, or if you're just going to reconceptualize what it means to have a supply chain in this world, I think you have to accept that we're not just going to go back to business as usual once we have a COVID 19 vaccine.

Hopefully, that's very soon, knock on wood, but that really we're in a brave new world here and that your supply chain depends entirely on who you're selling to, and then what level of political reliability and trust you have in having access to that market and then working backwards from there.

Bob: Great. Jacob, last question. Supply chain managers often think about their competitive advantage. How do they now factor in political risk as part of that calculation?

Jacob: There's no one answer to this and that's part of the reason I started a new company. I've been working in this space for a decade now and I've seen firsthand how clients either expect cookie-cutter solutions or answers. Sometimes providers even insist that there's some magic eight-ball solution that's going to fix all their woes or that there's a secret framework that actually answers all the questions of the secret meaning of the universe. That's just not how it works. This stuff is really hard and every solution is different for every client. There's no band-aid that fits everything.

That said, there are a few things that I can abstract out and apply to any situation no matter what. Personally, I start by doing a few things. First of all, you really have to ask the right question. What is the risk that I'm worried about? That sounds simple, but you really have to drill down into that because it affects all of the analytical decisions that make afterwards. It has to be a succinct question, something that's very, very clear in your mind that you're trying to understand. The second thing you have to do, you have to forget everything that you thought you know. We all have biases both conscious and unconscious, and in politics, all the more so.

You really have to forget everything, start from scratch. Don't trust that the common sense is what's actually going to work or that you know what's in front of you. Do the hard work of forgetting what you know and building it yourself so that you can see the gaps in your own logic that you didn't even know were there. The third step is finding the center of gravity of the problem. That's the trickiest part. It's where I like to bring in diverse range of different frameworks or methodologies. If you're factoring in political risk in China, for example, that means deeply understanding the future trajectory of US-China relations. It also means having a really good handle on internal Chinese political dynamics.

That's very different, say, than Ethiopia. If you want to understand risk in Ethiopia, you're really talking about ethnic differences within that country and how that could affect the overall functioning of the Ethiopian government, or Mexico which I mentioned earlier. If you're going to deal in Mexico, you have to have a handle on organized crime, on drug cartels, on the price of drugs globally, about how Mexican geography and history are interacting with the present to create this inflection point in Mexico's politics, not to mention its trade relationships with both the United States and Canada.

You have to figure out what's the center of gravity of my problem, what framework, what methodology do I need to use to understand it to help me answer that question about risk? Then fourth, you start mitigating. That means a few things. It means constant monitoring and awareness of what's happening on the ground so you know in time what's affecting you. It means constantly reconsidering whether you got the questions and the issues right. Just because something is true today doesn't mean it's going to be true tomorrow. Risk analysis is often just a snapshot in time. It doesn't guarantee what's going forward. It just gives you a sense of ground truth now.

If you do the hard work of getting that ground truth now, even if you don't perfectly predict the thing that's going to happen next, you've already thought about it, so you can react quicker. It doesn't mean knowing the future in advance. It means being prepared when the unexpected happens in the future. Just look at COVID-19 how fast that changed things. Things can change really, really quickly. More than anything, mitigating risk means hoping for the best and planning for the worst. If you've got a strategy that has no alternative or no backup plan, and you're just hoping things stay the same indefinitely, that's not a strategy.

You have to develop alternatives and relationships and flexibility and depth so that you can absorb a shock and so that you aren't starting from zero when something unexpected really does happen. You have to have someone on your stand who understands political risk. You don't want to muddle your way through this. If you are a semiconductor manufacturer, for example, you're not going to go down and manufacturer the chip yourself just because you have some experience with it. Don't think you're going to be able to assess political risk just for yourself because you read The New York Times, or because you read The Economist, or because you think you understand these things.

Just like you invest in any component of what you're doing in your supply chain, invest in the help you need to manage political risks, and it'll function like an insurance policy and save you, or at least I think it will save you in the long run. That's the approach that I take to managing political risk, with the understanding that every client is different, every solution is different, there's not just one thing you can take off the shelf and apply. You really have to think through specifically your supply chain, your business, how are you going to be affected by all these things, then craft a strategy going forward.

It's not all doom and gloom here. I feel like sometimes because the world is so crazy right now, people think that I'm talking about doom and gloom and the sky is falling. It really isn't from where I sit. We're not powerless to shape some of these forces around us and how they're impacting us. I really do think there's a lot of opportunity in the world right now. You just have to go out and seize it. You have to really take a step back and be willing to be lonely, be willing to be the lone voice that is arguing for something that the herd is running in one direction.

If you think because you've done that process of starting from top to bottom and reassessing everything that there's another solution that's going to be better, now's the time to have the courage to say, "Look, we can control this, I think we should do this," and be the trendsetter rather than somebody that's following the herd. If you can do that and if you can get on political risk at that level and get ahead of it on that level, you'll set yourself up really, really well for the next period of calm that that follows this geopolitical explosion we're living in.

Bob: Thank you, Jacob. These are just great insights. I think you've given us something to think about. That's all the time we have today. Thank you for joining us, and we hope you'll be back for our next episode. We look forward to seeing you then. I'm Bob Trebilcock.

Abe: And I'm Abe Eshkenazi.

Bob: Thank you. The Rebound is a joint production of the Association for Supply Chain Management and Supply Chain Management Review. For more information, be sure to visit ascm.org and scmr.com. We hope you'll join us again.