People
The conflict in Ukraine has entered its second month and the nation continues to suffer its shocking humanitarian impacts. Civilian death and displacement counts rise daily as the wider world hopes for a swift, peaceful end to these devastating events.
Businesses beyond the borders of the epicenter have been rocked, and have responded in securing the immediate safety and security of their employees. They have pivoted production where possible and quickly reassessed revenue from, for many organizations, previously essential markets that now seem a far cry from the forecasts of late 2021.
The consequences of any disruption of this magnitude will undoubtedly persist far beyond the first-order macroeconomic ramifications, such as the fast-evolving sanctions landscape and the challenges presented by a significant physical presence in the affected geographical markets.
However, it is the second- and third-order impacts that will fundamentally reshape strategies in the longer term, as leaders seek to galvanize their businesses to absorb the initial seismic shock and then recover and rebuild:
1. Logistics and supply chain distress
COVID-19 has already punctured the performance of global supply chains, faced with multiple infection spikes and associated restrictions of movement and supply route shutdowns.
The invasion of Ukraine has exacerbated this fragility, with the impact on logistics remaining critically connected – and perhaps also underestimated. Insecurity surrounding rail and truck routes from China to Europe is intensifying the squeeze upon sea and air freight activity, in both the re-routing of operations to circumvent volatile areas and the increased demand for alternative modes of transport that can meet delivery deadlines. A decades-old global commercial construct driven by just-in-time strategies is creaking, yet the full impact will only be felt in the medium term, as the immediate workarounds of swallowing exorbitant costs to switch carriers to remain on schedule prove to be unsustainable.
Capacity will be crunched, and the broader geopolitical unease and price volatility of commodities will push rates even higher. Russia and Ukraine also register several specialized (especially heavy lift) air freight carriers, which will further dent availability, alongside the much-publicized container shipping challenges – currently, fewer than 25% shipping container deliveries are running to time – already being experienced.
Supply chain distress is further aggravated as a reflection of reliance upon Russia and Ukraine for vital commodities such as steel, oil, gas, wheat, fertilizer, nickel, palladium, and neon, amongst others. Few industries will escape the impact of this, and while a direct supplier base may appear intact at first glance, the second and third tiers reliant on these regions could reveal themselves as the weakest links over time.
2. Energy availability and pricing power
The framework for future energy strategy is now intrinsically bound to events in Ukraine, alongside the already pressing imperatives associated with climate change. Risk patterns are shaped by geography and segment, and it is becoming clear which businesses can best cope with availability of energy to continue full production operations. This challenge will be felt most keenly in industries with a requirement for intensive power consumption, such as machinery-heavy industrial production sites. The most severe restrictions to availability in particularly dependent regions may, at worst, constitute a ‘black swan’ event where governments dictate the prioritisation of energy use to essential services such as healthcare, for example. This would leave production sites idling and, in turn, bring some supply chains to a standstill.
Should energy supply be secure, the soaring cost of oil and natural gas still presents businesses with the dilemma of how much they can pass onto customers. Pricing power in any industry will play a directly connected role on the positivity or otherwise of any performative outlook. As levels of pricing power decrease, so the inflection point of being unable to further pass through cost increases, meaning profit margins will be eroded by the cost inflation.
Organizations with lengthy order books and price adjustment clauses in place with their customers may be able to weather this storm more effectively. However, any significant dips in consumer confidence and a potential spiral into recession can melt down a current healthy looking orderbook quickly. If the events of this year so far – and the two before it – have taught us anything, it is that macroeconomic uncertainty still reigns supreme.
3. The acceleration of deglobalization
As highlighted in the 2022 AlixPartners Disruption Index, a gradual recoil from globalisation has been evident for a some years now, demonstrated by the number of protectionist policies deployed by the US, China, EU, UK, and India.
The conflict in Ukraine will only serve to turbocharge this activity, as supply chain disruptions, raw materials availability, and price volatility are no longer seen as short-term transitory obstacles to overcome. Heightened global instability may give rise to concerted efforts by businesses to ring-fence and “cocoon” local markets. For example, ensuring a predominantly local value chain with revenues, costs, and financing in local currency, while using digitalization as means to share intellectual capital between multinational areas of operation.
Security of supply may prove to be the most coveted business attribute in times to come, and companies must stress-test their supply chains regularly and rigorously to withstand and recover from the worst-case scenarios set before them. While raw materials cannot be deglobalized per-se, the vital component of long-term energy availability also looks set to prompt significant geopolitical shifts in the pursuit of strategic autonomy. This could lead to political rethinks about the right energy mix for the future, including the global push to increase renewable energy capabilities and, for many countries the previously deprioritized area of nuclear energy.
The certainty of medium- to long-term instability requires the highest levels of agility to keep production rolling, inventories stocked, and customers – cognizant of the uncertain world around them – loyal. Whether that constitutes full-scale “cocooning”, radical pricing optimization, supply chain diversification, or indeed all three, the pursuit of ironclad business resilience once again has risen to the top of the boardroom agenda.
