How manufacturers can adapt for success amid rising geopolitical uncertainty

Each geopolitical scenario would affect individual manufacturers differently, though in all cases their impacts would be enterprise-wide. As such, we use a broad analytical framework to evaluate them, focusing on nine dimensions:

Key dimensions for geopolitical scenario analysis

Selected key dimensions: Aerospace and defense

• Customer and revenue
  Commercial aerospace players’ reliance on China for growth emerges as a risk area in the more extreme scenarios. Boeing’s latest outlook of October 2022 forecasts that the Chinese market will account for more than 20% of global aircraft deliveries over the next two decades. If Western suppliers face reduced market access or are cut off completely, firms that have more aggressively diversified and added new sources of value will be best positioned.
  
  In contrast, scenarios with heightened geopolitical tensions will naturally benefit defense players. Cold War II would reward larger firms with the scale and existing international relationships to win the next wave of franchise programs. These firms would also thrive in self-reliance reigns, though smaller regional or in-country champions would experience unparalleled demand, as domestic self-sufficiency becomes a key priority for many countries. Irrespective of size, companies that have prioritized innovation in high-value capability areas (e.g., autonomous systems and advanced analytics or machine learning) will be best-positioned to ride the rising budgetary tides.
  
  
• Human capital
  Both commercial aerospace and defense firms currently struggle with skilled labor shortages, particularly due to technology sector competition. In more extreme scenarios, reduced international mobility creates additional inefficiencies in the talent market. Despite government policy support increasing along with geopolitical tensions, defense companies in particular will still struggle to fill seats due to their need for expertise in newer and advanced technologies as well as security clearances.
  
  Given these challenges, companies in both sectors should invest in their cultures and overall value proposition — looking beyond compensation to broadly defined benefits and post-pandemic flexible ways of working. Those that also effectively deploy technology to transform knowledge capture and skill development (e.g., augmented reality or virtual reality for accelerated training) and retention (e.g., data analytics to assess departure risk) will increase their competitive edge.

Industrial leaders should assess the impact of these and other geopolitical scenarios on their own businesses. Then they must identify and implement strategic actions to not only reduce risk, but to thrive — regardless of which scenario the actual future most closely resembles. Each firm will have its own priorities, though EY teams believe the following foundational “no regrets” moves are critical for every manufacturer:

1. Enhance scenario-planning capabilities

All firms should actively embed geopolitical scenario development in all corporate strategy exercises and focus on identifying opportunities (customers, pricing, M&A) as well as risks. However, this is particularly critical in the industrial sector, where output is often high value, large-scale, complex and resource-intensive.

Scenario development should include identification of early warning indicators — election outcomes, policy rhetoric, military spending, etc. — that can be monitored for signs of which future may be emerging.

2. Invest in the business of customer experience

Industrial firms need to place the customer at the beginning of their value chains — not the end — by aligning customer strategies and priority areas with their own. If geopolitical developments generate rapid demand shifts and operational complexities for customers, engagement platforms that increase the ease of doing business and transparency will be key differentiators.

Frictionless, consumer-style e-commerce platforms will be critical for commodities. Custom products and systems will require digital platforms that enable intelligent search, consultative selling and visibility of pricing and availability to drive increased customer revenues and reduced cost-to-serve.

3. Drive operational resiliency

The complexity of many industrial businesses means there are many potential avenues for increasing resiliency. They may include avoiding single sources of supply, increasing sustainability and circularity, establishing their own renewable power generation infrastructure, and harnessing data to optimize working capital and pricing execution. Firms should prioritize cost-efficient actions to maximize agility in the face of large-scale supply-and-demand fluctuations.

4. Create a differentiated employee value proposition

Geopolitical upheaval and uncertainty will only worsen the industrial sector’s existing recruiting and retention issues. Leaders must build a work culture that creates employee connections while also using data-driven insights into compensation, benefits and new ways of working to prevent this most critical resource from being depleted over time — or overnight.

5. Accelerate digitalization

Digitalization does not always rise to the top of manufacturers’ priority investments lists, but it is essential for long-term cost and market advantages. It also underpins numerous aspects of our other “no regrets” moves. Frictionless online selling, real-time supply chain monitoring, digital twin-enabled assessments of production and ecosystem vulnerabilities — without comprehensive digital transformation, none of these are possible.

In some geopolitical scenarios, your future may also depend on having selected digital suppliers and partners who will not suddenly be cut off by sanctions or other government intervention — so it is critical to assess potential new relationships as part of regular scenario planning exercises.

Conclusion

In the less volatile world of the not-so distant past, increasing globalization provided a relatively straightforward growth playbook. Now, that unique political and economic environment is gone. Going forward, successfully defending against emerging threats and seizing new opportunities will depend on highly vigilant observation of changing conditions, adaptive corporate strategies, and more agile and resilient operations.

Thank you to Chris Cardinal, EY Americas Chemicals and Advanced Materials Executive Director; Joe Gaynor, EY-Parthenon Advanced Manufacturing and Mobility Global Development Lead; and Mayukh Chaudhuri, EY Americas Advanced Manufacturing and Mobility, Strategy and Transactions Manager for contributing to this article.