Globalization and Emerging Risks (Part 3)

Due to the increasing interdependence of global systems, risks now transmit much further and more quickly than before,jumping from one industry or country into several countries or sectors. In the previous two articles, I looked at where the risks lie and how they impact the business. This article looks at the other classes of risks: Natural Disasters, Climate Change, Urbanisation, Cybercrime, Changes in Legislation and the Power of China.

1. Natural Disasters: This year alone, 2010, natural disasters have had a significant impact on business across the globe. In January, a massive 7.0 magnitude earthquake struck the Caribbean nation of Haiti wrecking the presidential palace, UN headquarters and other buildings. A large number of UN personnel and peacekeepers from different parts of the world were reported missing while others were buried and feared dead.

Then in March, though not having extensive physical damage like the Haiti earthquake, a cloud of volcanic ash erupted in Iceland. This Icelandic volcanic ash disrupted air travel in Europe and across the world. Global airports were forced to shut down, supply chains were disrupted, business meetings were cancelled as employees failed to travel, flight users were stranded in hotels or at airports with no extra cash to spare. A report by the European Commission put the cost to European tourism sector at one billion euros.

Having a more damaging impact than the above events is the oil leak in April in the Gulf of Mexico where an oil drill rig operated by British Petroleum (BP) Company exploded on April 20, 2010 killing 11 people, injuring 17 others and causing a massive oil spill which has become the largest accidental marine oil spill in the history of the petroleum industry. BP was forced to bear over $30bn in costs in the first half of 2010 after the oil spill. With total clean up and compensation costs running into billions of dollars, already this year, the company has sold some of its assets in North America, South America, Asia and Africa for a total of about $21bn to try and meet these expenditures. Yesterday, Bloomberg reported the company is apparently considering $1bn sale of some of its assets in the North Sea as it attempts to cover clean up costs.

The above events illustrate why environmental risk management is very important and strategic in nature. Managing environmental risks should form part of the decision making process. Some countries are more prone to natural disasters such as natural bush fires, earthquakes and hurricanes. These areas should be identified before locating offices there.

2. Cybercrime: As organisations continue to take advantage of the internet to conduct their businesses, cybercrime and cyber-warfare is more likely to intensify. Identity theft is reportedly on the rise- both for individuals and commercial enterprises. Hackers and criminals are always attempting to find new ways to interfere and manipulate the wireless and mobile signals. Cyber-warfare is also on the increase in the form of anti-satellite operations.

For example, China has been accused of conducting low-level anti-satellite operations against the United States. In 2006, Defense News reported that a U.S. reconnaissance satellite was blinded by a laser while over China. The communist nation “fired high-power lasers at U.S. spy satellites flying over its territory”, in what experts see as a test of Chinese ability to blind the spacecraft. However, China downplayed the test and argued the test was was not directed at any country and does not constitute a threat to any country.

Companies should be aware of how many public and private transactions go through satellites and how serious their disruptions could be.

3. The Power of China: The communist country has just overtaken Japan to be the world’s number two largest economy, after USA. Over the last decade, China has sought to establish itself as the new global economic titan. The country has amassed close to $3 trillion in foreign currency reserves and continues to be heavily involved in infrastructural development projects both at national and international level.

As an emerging economy which relies mostly on exports, China has the potential of hugely destabilising the global economy. In the past months there has been talk of “currency wars” with China being accused of manipulating its currency to boost exports. The Western world, the main destination of Chinese exports is still reeling from the aftermath of the global financial crisis. With burgeoning budget deficits, these nations are more likely to reduce their imports hence the need for China to find ways to stimulate its domestic demand although there has been slight improvements over the past few years. The population in China is growing at an alarming rate and the country is forecast to have 22million ‘spare’ 18-25 year old males in 10 years time. This demographic and gender imbalance is more likely to cause problems for China. The big question is, “Can China withstand these pressures in its present form, and what effect will this have on the global economy?”

4. Legislation: Various jurisdictions are passing various laws everyday. What might be acceptable in one country might not be acceptable in another country, maybe because of cultural differences. The risks and consequences of non-compliance are far much greater than those posed by compliance. The new Bribery Act to be enacted in the UK next year, for example, will punish any individual who knew about any kind of corruption or bribery and did not deal with it effectively. This is more likely to increase the companies’ exposure and encourage them to get cover. In the US, the Securities and Exchange Commission is increasingly filing claims against European companies operating in the country.

As regulators begin to take tougher stances on foreign companies, managers should ensure that all compliance is adhered to.

5. Urbanisation and Resource Wars: Recent research has revealed the world is widely expected to undergo huge urbanisation. By 2035, 70% of the world population is expected to be living in the cities, a 20% jump from the current statistics. This is forecast to have huge implications on infrastructure, living space and resources. Competition for resources will rise as the population continues to increase and the effect will be a rapid increase in prices too. We are also more likely to experience a series of wars over resource disparities that will exist. Businesses, therefore, need to be always on the guard, establish how these events will affect operations and bottomline and implement protective measures.

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This is the final article of the 3-part series “Globalisation and Emerging Risks”. The risks mentioned in this series are not conclusive, there are still a host of other risks that the business should be on the watch-out for. As conditions begin to improve, businesses must learn from the mistake of the past decade. There is need to take a holistic view of all the risks and other threats to the business. Also, it is important that risk be viewed over a longer time frame, and not just focus on the latest threat.

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