Trade Conflicts: How Businesses Are Preparing
A recent PwC survey revealed that 28% of CEO’s expected global economic growth to decline in the next 12 months, up from just 5% who felt similarly last year. That is clearly a sign that top business leaders are losing confidence in the growth momentum that has been built up in the past. What is interesting about the survey results though, is that rather than business reasons, a lot of this uncertainty is emanating from the fallout of geopolitical events. For example, 45% of the respondents were extremely concerned about “trade conflicts”.
The Eurasia Group has highlighted many of these risks in its report as well. Unsurprisingly, the risks include things like lack of political leadership, trade conflicts, populism, Brexit and so on. The risks itself are well documented in this report and elsewhere, but business leaders and managers around the world have to decide on how to eliminate, mitigate and/ or manage these risks.
Companies have to become creative with their financing. If a business has a strong balance sheet, it can withstand turmoil but companies with high leverage or shallower balance sheets will not have such an easy time. Adjusting loans, revising payment terms, exploring new ways to finance working capital requirements, etc. might be the need of the hour. The PwC survey mentioned earlier, shows that 22% of CEO’s are delaying capital expenditures and that might make sense for businesses facing geopolitical risks.
Supply Chain Strength
Trade conflicts usually affect supply chains in a very adverse way for some businesses. It can be an issue not only on the cost front but even if the business can absorb or pass on the cost to its consumer, deliveries can still be disrupted due to uncertainty or other teething issues during the transition. The disruption is compounded both by the uncertainty around Brexit and the US-China trade war. Supply Chains can be strengthened by entering into long terms contracts, finding alternative suppliers, having a multi-vendor strategy, vertical integration and so on.
Exploring New Markets
Uncertainties can cause problems, but they also give rise to new opportunities and sometimes entirely new industries. For example, disruption of supplies means that there is an opportunity for producing something locally, or it could also mean new opportunities in logistics, warehousing and so on. Then there are businesses which are anti-cyclical and as consumers cut discretionary spending, such businesses can see improved growth.
Trimming Down and Becoming Agile
Crises come and go but there’s always another one around the corner. Business can’t forever wait for the ideal environment for growth because that may never come. The most fool-proof option is to become agile enough to thrive in all scenarios. This means having the ability to quickly switch over from one strategy or product to another based on the need of the hour. It also means having the flexibility to drop bad ideas without being locked in by the sheer momentum that costly bad decisions possess. Companies with these strengths can survive all sorts of risks – geopolitical or otherwise.
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