Against a backdrop of heightened political risk, supply chain professionals looking to operate more strategically and build resilience need to create as much certainty as they can
A version of this article first appeared on our sister site, Global Reinsurance.
Multinational companies are facing rising political and security risks in nearshoring and friend shoring hubs, according to Verisk Maplecroft.
The rising political risk comes as supply chains pivot towards different emerging markets to decrease exposure to widening geopolitical tensions and the strategic competition playing out between the West and China.
The report analysed five-year trends in 40 emerging markets that make up a major bloc of the ‘nearshoring’ or ‘friendshoring’ universe.
Verisk’s dataset revealed increasing risk across a combination of issues in 27 of these countries.
These include key manufacturing hubs, such as Indonesia, Mexico, Poland, Thailand and Turkey.
What does it mean for businesses?
Civil unrest is the standout threat, but disruption from other political risks, including government instability and exposure to conflict and terrorism, are also posing challenges that need to be factored into supply chain strategies.
Over three quarters of the emerging markets Verisk Maplecroft assessed saw a rise in civil unrest risks over the last five years, including Bangladesh (ranked the 7th highest risk country for the issue globally on the company’s civil unrest index), Turkey (27th), Thailand (34th) and Indonesia (70th).
According to the data, the deterioration is driven by a combination of global, regional and national issues, but economic inequalities remain the top factor.
Wage-related protests in response to inequalities have had a particular impact on supply chains. Thousands of Bangladeshi textile workers forced the closure of hundreds of factories outside Dhaka in November 2023, with reports indicating that some facilities were ransacked during clashes.
Widespread, coordinated industrial action at the end of 2023, including protests, also broke out in Indonesia over 2024 minimum wage levels.
“Asia Pacific remains a key area of strategic competition, leaving supply chains exposed to a geopolitical push/pull between the US and China.”
With all 40 countries classed as high or very high risk for civil unrest over the next 12 months in Verisk Maplecroft’s predictive model, the outlook for 2024 is for more turbulence in these important manufacturing hubs.
Mexico, for instance, which has recently overtaken China to become the primary source of goods to the US, ranks as the 5th highest risk country globally for civil unrest risks over the next 12 months.
International supply chains are also caught in the middle of a deepening divide between the West and China, Verisk Maplecroft said.
Interstate allegiances and dependencies are increasingly shaping trade relationships as levels of sanctions and countersanctions increase in response to geopolitical tensions.
Asia Pacific remains a key area of strategic competition, leaving supply chains exposed to a geopolitical push/pull between the US and China.
Regional conflict impacts
It’s not just the Global South that is feeling the impacts of political risk. Conflict is creating waves for vital supply chain routes in the Middle East and Europe.
The conflict between Israel and Hamas has highlighted vulnerabilities in a vital international logistics route.
A recent escalation in attacks on cargo vessels in the Red Sea by the Houthis, as Iran seeks to react to the war via its proxy in Yemen, has forced major shipping companies to suspend activities in these critical lanes.
Despite US and UK aerial attacks on the Houthis in response, the threat to shipping is unlikely to decrease soon, Verisk Maplecroft observed.
Without access to the Suez Canal, alternative routes from Asia to Europe and the Americas around Africa are significantly longer, with increased costs that will ultimately be passed on to consumers.
The ongoing war in Ukraine also continues to be felt in Europe; Hungary, Poland and Slovenia have all shown deteriorations in their political risk scores over the past five years.
As well as the obvious sharp increase in exposure to regional conflict, these nations have all seen a rise in civil unrest risks, combined with more pronounced government instability concerns since the start of the Ukraine war in early 2022.
With no end in sight to either conflict, Verisk Maplecroft expects impacts in both Eastern Europe and the Middle East to continue exposing supply chains to direct and indirect consequence.
How to tackle the threats
With the world in a state of extended instability, political risk and disruption triggered by geopolitics, conflict and economic instability will be hard to escape across many key sourcing locations.
Olivia Dobson, principal risk consultant, Verisk Maplecroft said: “Companies need to understand and get ahead of these localised but expanding political threats to protect flows of vital commodities and manufactured goods.
“In an increasingly dynamic world, supply chain professionals looking to operate more strategically and build resilience need to create as much certainty as they can.
“Tracking political risks in manufacturing hubs and logistics pinch-points, alongside using scenario analysis to map potential geopolitical shifts, can help organisations understand where the next shocks could come from.”
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