9 minute read 13 Dec 2022
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How to shift strategy for a new geostrategic era in 2023

Authors
Courtney Rickert McCaffrey

EY Global Geostrategic Business Group Insights Leader; EY Global Research Institute Director – EY Knowledge

Geopolitical analyst and strategist. Creative methodologist. Proud feminist. Passionate about generating insights to help executives make better-informed decisions.

Oliver Jones

EY Global SaT Markets, Sustainability and Geostrategy Leader

Passionate about providing outstanding support to governments and businesses in a fast changing world. Deeply committed to excellence in public policy. Team builder. Mentor. Flexible worker.

Contributors

Famke Krumbmüller

9 minute read 13 Dec 2022
Related topics Geostrategy Strategy and Transactions Strategy by EY-Parthenon Supply chain CEO agenda
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  • EY 2023 Geostrategic Outlook (pdf)

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Policy volatility will elevate the importance of geopolitics to corporate strategies to its highest level in a generation.

In brief

  • The importance of geopolitics to corporate strategies is at its highest level in a generation; executives need to manage political opportunities and risks.
  • Governments’ pursuit of self-sufficiency will be driven by geopolitical tensions, economic uncertainties and environmental sustainability.
  • Geopolitical developments are likely to continue to influence supply chain strategies, shift investment destinations and push up costs for companies.

Geopolitics has been increasingly volatile in recent years, with US-China tensions and the growing assertiveness of a variety of middle powers driving a shift from a unipolar to a multipolar world. Rising populism and nationalism have also contributed to a weakening of multilateral institutions as national governments have exerted more control over their economies. These trends were accelerated by the COVID-19 pandemic — and then they have been supercharged by the war in Ukraine.

As a result, the era of relatively liberalized global trade amid ever-increasing globalization has ended (at least for now). In its place is a transformed global operating environment in which geopolitical considerations often outweigh purely economic considerations in business decisions. This has led to a medium-term outlook for globalization that is highly uncertain, as explored in our world-in-five-years scenario analysis.

In the short term, however, the outlook for the course of 2023 is clearer. In the year ahead, the geostrategic environment will be characterized by two overarching themes.

  • Stabilized volatility. First, the oxymoron of stabilized volatility. Many of the recent trends in geopolitical tensions and government intervention in economies are likely to persist, perpetuating volatility but likely at a more consistent level than in 2022.
  • Policy trade-offs. Second is the prevalence of significant and urgent policy trade-offs. The current geostrategic environment is posing a variety of acute challenges for governments, such as energy security and elevated inflation — with no easy solutions. Governments in different countries will diverge in their trade-off choices, further complicating the operating environment for international companies.

This article highlights findings from the 2023 Geostrategic Outlook (pdf), which presents our view of the most likely and impactful developments in the geopolitical landscape in 2023. It also explores the implications of these developments on different sectors and highlights five no-regrets geostrategic moves executives can implement to help their companies thrive.

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The top 10 geopolitical developments in 2023

The EY Geostrategic Business Group identified the top 10 geopolitical developments that are likely to have the most significant impacts on organizations across sectors and geographies in 2023. Many of these developments will evolve from the geopolitical trends that leaders have had to manage in recent years.

  • Can’t view infographic above? Click here for description.#Top 10 likely geopolitical developments for 2023

    1. War in Ukraine

    Uncertainty around the war and its consequences will remain very high, with significant regional and global political and economic impacts. Every significant escalation in the war will likely lead to additional developed-market sanctions on Russia, which will also affect sanctioning countries’ economies.

    2. China-Western decoupling

    Washington and Brussels will likely continue to impose new restrictive policies explicitly or implicitly targeted at China. And Beijing will likely continue to shift domestic and foreign policies to become less intertwined with Western value chains. The result is likely to be a steady erosion of economic connectivity.

    3. Geopolitical swing states

    Geopolitical tensions have created growing pressures on middle powers to align with a geopolitical bloc. But some will seek to maintain relations with multiple global powers and maximize diplomatic leverage. India, Brazil, Turkey and Saudi Arabia will be among the most influential geopolitical swing states.

    4. Focus on economic self-sufficiency

    Governments will seek to reduce their economies’ reliance on other countries, particularly strategic rivals. These policy incentives and restrictions will tend to be sector-specific with an emphasis on strategic industries. In some instances, they will include allies and partners with policies that promote nearshoring and friendshoring.

    5. Hardening of technology blocs

    Technology will continue to be a strategic area of geopolitical competition, with restrictive policies likely to expand through new trade and investment controls. Semiconductors will likely continue to be a key area of focus. These trends may further reinforce the emergence of fragmented and distinct technology blocs.

    6. Energy security imperative

    Governments are pursuing multiple, sometimes incompatible, energy security goals simultaneously: reliability of supply, affordability for households and businesses, and environmental sustainability. Policymakers are likely to diverge in their prioritization of these goals, leading to a more complex global energy landscape.

    7. Multispeed ESG policies

    Environmental, social and governance (ESG) policies are likely to focus on near-term challenges such as meeting emission reduction goals, heightened scrutiny of social issues and expanded nonfinancial corporate reporting. A pushback in some markets and geopolitical tensions globally will lead to multispeed progress on ESG issues.

    8. Inflation-recession paradox

    High inflation is likely to persist, even as central bank interest rate tightening could push economies into recession. This could lead to more changes in government, political instability and social unrest. Sovereign defaults and economic crises are likely in some emerging markets — which could also lead to political instability.

    9. Food insecurity and instability

    Food insecurity is likely to remain a major challenge, as governments will be challenged to stabilize prices amid elevated interest rates and high import costs. A lack of coordinated global action means food insecurity will likely continue to elevate the risk of political instability.

    10. Latin America’s left-leaning governments 

    Most of Latin America’s largest economies will be governed by left-leaning presidents. These countries are key producers of agricultural commodities and green minerals, so their policy choices may affect global market dynamics. Government policies will also affect investment and supply chain opportunities in the region.

How geopolitical developments will impact different sectors

The top 10 geopolitical developments in the 2023 Geostrategic Outlook will have broad-based impacts on companies across sectors and geographies. But some developments are likely to have more direct impacts on certain sectors, particularly in the near to medium term.

Select the sector below to explore the key geostrategic themes and business impacts for that sector.

  • Advanced manufacturing and mobility

    Geopolitical developments will likely continue to affect growth opportunities and strategic options for manufacturing companies. While some policies are squeezing manufacturers in terms of supplier options and input prices, other policies are boosting demand for some industrial products.

    The persistently high level of geopolitical tensions is likely to generate higher demand for aerospace and defense products. Government policies will directly affect the availability and cost of energy for manufacturers — as well as for petroleum-derived inputs for chemical companies. Semiconductors and other technological inputs are likely to be increasingly restricted to “friendly” countries, limiting supplier options.

    Manufacturers of strategically important products are likely to face increasing pressures and incentives to onshore, nearshore or friendshore their operations. Manufacturers are also likely to be a focus of policymaker scrutiny on carbon emissions and labor rights.

  • Consumer products and retail

    While most governments do not consider consumer products to be a geostrategic sector in terms of national security or international competitiveness, geopolitical developments will nevertheless have significant impacts on consumer companies throughout 2023. In particular, there is a risk that revenue and growth opportunities will be curtailed and that supply chains will continue to be disrupted in a variety of ways.

    How policymakers handle the inflation-recession paradox will determine macro-level growth and revenue opportunities. And China’s role in global supply chains is likely to be increasingly complicated by rising geopolitical tensions (as well as COVID-19 policies). Policy incentives to onshore, nearshore or friendshore supply chains will create strategic and logistical challenges — but could reduce transportation and carbon costs.

    Farmers and agribusiness companies will likely continue to face rising fertilizer and other production costs. In addition, ESG policies will affect consumer companies in a variety of ways, with the potential to deliver top-line growth, bottom-line savings and intangible benefits (e.g., reputational).

  • Energy and resources

    The energy and resources sector was significantly impacted by geopolitical developments in 2022 — a trend that is expected to persist in the year ahead. Nearly all of the top 10 geopolitical developments for 2023 will affect energy companies, with strategic implications in both the short and long term.

    In the short term, geopolitical swing states will play key roles in global supply-and-demand dynamics for energy. The risk of a recession or economic growth slowdowns in key markets, including the US and China, is likely to weigh on energy demand.

    Policymakers are likely to continue to send the market mixed signals, seeking to incentivize demand reductions while simultaneously trying to control energy costs for end consumers.

    In the long term, sustainability regulations are likely to tighten on the energy and resources sector and affect companies’ cost of capital. And utilities, electricity companies and miners of green minerals will likely have significant growth and investment opportunities.

  • Financial services

    Geopolitical developments affecting financial institutions have expanded significantly in recent years and are likely to persist in 2023. Sometimes these impacts will be direct. Other times they will be indirect, such as policy shifts that affect financial institutions’ customers and the economies in which they operate.

    Central banks’ rate tightening creates potential opportunities in terms of the interest rates banks offer on loans and deposits. At the same time, economic challenges could reduce overall demand for financial services.

    Sanctions will likely continue to have a significant effect on operational resilience. Sanctions compliance could become even more costly and challenging — even as the shifting power of global financial hubs makes diversity of market access more important.

    Any rupture in economic and financial relationships between large markets is likely to lead to high market volatility, lower asset values, and reduced capital efficiency and mobility.

    Financing both the energy transition and decarbonization efforts are key opportunities for the sector.

  • Government and public sector

    Unsurprisingly, governments and the public sector will be affected by all 10 geopolitical developments in 2023. In some cases, policymakers will be forced to respond to exogenous shocks. In other cases, governments are creating political risks and policy challenges through their own actions.

    Industrial policies may boost countries’ international competitiveness — although they face not only potential pitfalls associated with productivity declines and rising costs, but also tensions with trading partners.

    More broadly, the weakening of the multilateral system will likely exacerbate obstacles to effectively address global challenges such as climate change. And geopolitical developments are likely to create or deepen humanitarian crises that governments will need to address.

    Tackling multiple urgent crises simultaneously will be difficult, particularly given the limited fiscal resources of many governments.

  • Health sciences and wellness

    Companies that produce pharmaceuticals, medical devices and other health care products are likely to be significantly impacted by geopolitics in 2023 — particularly in terms of their supply chains and operations. Despite health care delivery being a highly localized industry with unique structural characteristics in each country, it is nevertheless likely to be affected by some geopolitical developments as well.

    Companies will likely continue to face rising input and production prices — with labor cost inflation likely to be significant. And with the government often being the largest payer in the health care system, it will likely limit the price increases that health providers can pass on.

    Governments are likely to continue to intervene in supply chains for pharmaceuticals and medical devices to boost self-sufficiency. Clinical trials may be constrained by stricter controls or limits on cross-border data flows.

    In addition, the growing emphasis on health equity and the social impact of health care will affect reputational risks and regulatory compliance.

  • Private equity

    The impact of geopolitical developments varies across sectors and geographies, so for private equity (PE) firms, much of the impact lands at the portfolio company level. Any or all of the top 10 geopolitical developments may affect PE firms, depending on the sectors present in their individual portfolios.

    Regardless of their portfolio holdings, PE firms are likely to be affected by several political risks at a macro sector level. Heightened restrictions on cross-border trade and investment are likely to create more “no-go” market segments for PE firms globally. But the onshoring push can create opportunities for new deals within domestic markets.

    Cross-border PE firms will likely focus on deals in sectors not deemed to be of geostrategic importance, while opportunities in the technology sector may be constrained.

    Economic uncertainty may push PE firms to focus more on managing their current portfolio rather than making new acquisitions — although low valuations could increase PE activity. The most favorable capital and financing environment will be in markets where policymakers stabilize inflation without pushing the economy into a recession.

  • Technology, media and telecommunications

    Many global technology companies thrived in an era of open digital borders, but rising geopolitical tensions and important advances in emerging technologies have made the technology sector central to geostrategic competition. Data has similarly become a strategic asset given the ubiquitous digitization of a variety of activities and industries. Government policies and geopolitical tensions will continue to shape opportunities for the sector in 2023.

    Semiconductors, artificial intelligence (AI) and quantum-computing companies are likely to continue to be the focus of export controls and other restrictive policies. Telecommunications networks may also face more government restrictions on suppliers from countries that are seen as strategic competitors.

    Within China, consumer technologies may face regulatory headwinds, while emerging strategic technologies are likely to enjoy policy tailwinds. Globally, economic uncertainty may reduce demand for technology hardware, while demand for software is likely to be more resilient.

    Scrutiny of the energy and water usage of some technology firms could rise. But technology companies have opportunities to be part of the solutions to governments’ policy trade-off challenges.

How to build a robust strategy for a volatile world

All of these geopolitical developments pose both challenges and opportunities for global organizations. To thrive in an era of geopolitical volatility and uncertainty, companies will need to develop more strategic approaches to managing these and other political risks – and incorporating political risk into their long-term strategies. There are five broad no-regrets geostrategic moves executives can implement to help their companies thrive amid stabilized volatility and policy trade-offs in 2023.

How EY can help

Geostrategic Business Group

Political risks are creating both challenges and opportunities for global organizations, creating an imperative to develop more strategic approaches to managing political risk. The Geostrategic Business Group helps companies to do this by translating geopolitical insights into business strategy.

Read more
1. Manage higher costs.

Nearly every development is likely to push up costs for companies. Restructuring supply chains, enhancing cross-border operating model effectiveness and improving energy efficiency could help to manage these cost increases.

2. Evaluate supplier ecosystems.

Each development will likely impact supply chains — the second year in a row for which this is the case. Boost resilience by conducting a multidimensional risk assessment; identifying opportunities to onshore, nearshore or friendshore suppliers; and positioning supply chains to support sustainability and ESG goals.

3. Explore opportunities in “friendly” markets.

The shift toward greater use of industrial policies and self-sufficiency will challenge traditional global business models. Exploring home country markets and those with which a company’s home country is allied may provide the most robust growth and investment opportunities.

4. Align strategies with stakeholder priorities.

Geopolitical developments are likely to shift stakeholder priorities and their expectations of companies. Developing a growth strategy designed to satisfy the demands of customers, employees, investors and policymakers could help to proactively mitigate these political risks.

5. Conduct scenario planning.

Geopolitical developments in 2023 highlight the high level of uncertainty for the medium-term geostrategic outlook. Conducting geopolitical scenario analysis can help to strategically position companies to flourish during the turbulent times ahead.

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Summary

Companies need to integrate geopolitical analysis into their strategies, business models and corporate governance. By embedding geopolitical analysis into a company’s DNA, executives will enable their companies to better account for political risks when making strategic decisions, giving them a crucial advantage over competitors in a turbulent geopolitical environment.

About this article

Authors
Courtney Rickert McCaffrey

EY Global Geostrategic Business Group Insights Leader; EY Global Research Institute Director – EY Knowledge

Geopolitical analyst and strategist. Creative methodologist. Proud feminist. Passionate about generating insights to help executives make better-informed decisions.

Oliver Jones

EY Global SaT Markets, Sustainability and Geostrategy Leader

Passionate about providing outstanding support to governments and businesses in a fast changing world. Deeply committed to excellence in public policy. Team builder. Mentor. Flexible worker.

Contributors

Famke Krumbmüller

Related topics Geostrategy Strategy and Transactions Strategy by EY-Parthenon Supply chain CEO agenda
Upvote