David Hoffman is one of the most experienced advisors on geopolitical risk management in China and Southeast Asia. He led the technology-infocomms-entertainment advisory practice of PricewaterhouseCoopers for 21 years before joining The Conference Board as senior advisor on China in 2008. He is also a senior non-resident associate with the Center for Strategic and International Studies. In September 2024, he joined AmCham HK for a presentation and Q&A under Chatham House rules on managing risk in business with China, looking ahead to 2025. He shared this article with AmCham HK normally available only to members of The Conference Board, a global, non-profit business membership and research organization, based in New York City. A link to the complete article is at the end of the text.

Senior management ‘comfort’ on geopolitical risk management (GRM) preparedness can enhance HQ-China alignment and thereby unblock organizations to act with confidence and compete more effectively in China.

Operating in the Sino-Western geopolitical centrifuge

Sino-Western geopolitical risk is a topmost challenge for most Western firms active in the China market. The United States government is reportedly eyeing a raft of tougher trade and investment measures on China, including some more tightening of controls on the US-China technology trade in this third year of the US’s semiconductor export controls on China.[1] Europe, it seems, is increasingly aligned with the US “strategic competition” agenda. On the trade front, both the US and Europe are strengthening controls to avert Chinese overcapacity flows that threaten their respective domestic industrial bases and local producers. In the event of more US and/or European policy actions, China is likely to respond with counter measures. This backdrop points to increasingly difficult operating conditions for foreign companies in China, especially for those in the industrial and Information and Communication Technology (ICT) sectors of “national security” interest to China, the US, or both.
Figure 1

This expanding geopolitical risk-set poses an extremely difficult planning challenge for business. Potential geopolitical flashpoints are numerous, constantly shifting, and unpredictable. How any conceivable geopolitical event might propagate into a business disruption often depends on numerous “unknowables”. This complexity renders a conventional and static enterprise risk management (ERM) process unfit for purpose. A more agile process is needed, but one that is nevertheless systematic, objective, and robust.

Traditional scenario-based planning methods remain an essential part of the geopolitical risk management toolkit. Scenario game planning tests organizational linkages and response capabilities and helps identify process and accountability gaps that require fixing. It is a very useful practice for defining leadership responsibilities, control procedures, and communications protocols for worst-case scenarios, like the breakout of military battle in the South China Sea. The problem is that the envisaged scenarios may not necessarily—or even proximately—test for the actual events that could occur below the worst-case scenario level. Many things can lead to war or transpire even if war never occurs that can have long-lasting impacts on a firm’s operating environment. An organization might be better coordinated by virtue of scenario planning, but not necessarily be better equipped for the many business continuity risks posed by Sino-Western geopolitical tensions.

An Impacts-Based Approach to Geopolitical Risk Management

The geopolitical risks that emanate from tensions in Sino-Western relations comprise three types. They may arise from deliberate actions, accidental actions, or happenstance. They are often inter-related, mutually reenforcing, or causal. But, then again, sometimes they are not. 

1. Kinetic Disruptions are hard impacts caused by actual military actions, both physical and cyber, for example production stoppages, logistical delays, or Information Technology (IT) system crashes. Kinetic disruptions are typically triggered by geostrategic incidents (i.e., the ways and means that governmental actors or their proxies might instigate or respond to a geopolitical event). Examples of geostrategic incidents include, for example, military posturing, government-backed influence campaigns, sovereignty contestations, and coercive trade actions. When these maneuvers escalate to military action, kinetic disruptions can happen. Geostrategic incidents can cause kinetic disruptions or provoke hard barriers or soft barriers as described below.
2. Hard barriers mostly comprise formal or quasi-formal policy or regulatory actions that are necessarily disrupting to business. Their features typically calibrate to geopolitical events, and they are often triggered by escalations in geostrategic incidents.
3. Soft barriers are informal regulatory actions related to national security concerns. They can be overt, tacit, or surreptitious. They often follow in response to geopolitical incidents and/or in retaliation to the imposition of hard barriers.

While the events leading to geopolitical risks are unpredictable, the impacts of all three types of risk can be deduced via empirical analysis and learned experience.

Different companies and sectors will be exposed to different potential impacts, as will companies primarily exporting from China versus those marketing and developing business in China. A company with no supply chain presence in Taiwan and no semiconductors in its products, for example, would be less exposed to potential Cross-Strait frictions—and related kinetic disruptions like supply chain stoppages—than one that does.

The Geopolitical Risk Management (GRM) working group is pivotal

Once clear objectives are set top-of-house, ideally by the CEO, the right executives assembled, and a “safe space” created for candid and honest discussion of difficult and sensitive topics, excellent thinking and planning emerges (see: Managing Geopolitical Gray Swans). Deeper trust across the leadership team and improved Chief Experience Officer (CXO) and HQ-China-Co alignment are common side benefits of the establishment and empowerment of a strong GRM working group.

Once impacts are defined and prioritized, they can be planned for, say an import restriction in China on certain key components of a US company’s medical device product. Such planning might call for qualifying alternative component sources, product redesign to eliminate sensitive componentry, or in-China/for-China component development and production if the commercials for doing so make sense.

The process for an impacts-based approach to geopolitical risk management flows as follows:

1. Mobilization: Assemble an appropriate cross-functional, cross-regional working group to spearhead the process. Set the ground rules for sensitive and highly confidential working sessions. Champion the initiative from the top-of-house to underscore its importance, ensure HQ-China-Co alignment, and promote candor in discussions.
2. Prioritization: Brainstorm and list the potential impacts of plausible Kinetic Disruptions, Hard Barriers, and Soft Barriers of relevance to the company. Define potential impacts in as much granularity as practical. Determine probabilities and impact levels at a high level, and rank and prioritize potential impacts accordingly. Numerous sources exist to inform discussion, debate and deliberations here including historic precedence, lived experience, peer observations and case studies, relevant think-tank reports, and policy discourse trends in key governmental centers (Beijing, Washington, Brussels, Tokyo, etc.).
3. Response Planning: Via working group deliberations, identify the Company’s response options for each priority impact. Identify and rank the most practical options via cost-benefit and efficiency analyses. Make a playbook with the steps, roles, and responsibilities for implementing response options. Rehearse and train internally on a regular basis, updating priorities and playbooks as needed.

Situation Monitoring: Ensure organizational readiness by establishing and assigning dedicated “Watching Briefs” to systematically gather data and intelligence and monitor key geopolitical situations and related event triggers. Define analytical and reporting procedures and criteria for situation assessment and response mobilization.

This article was originally published by The Conference Board. To read a full length version, please click here. If you are interested in a company briefing from David on navigating Sino-Western geopolitical risk, please email service.ap@tcb.org

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[1] “Reset, Prevent, Build: A Strategy to Win America’s Economic Competition with the Chinese Communist Party”, The Select Committee on Strategic Competition Between the United States and the Chinese Communist Party, December 12, 2023. | “Annual Report to Congress”, “Recommendations to Congress”, The Sino-western Economic & Security Review Commission, November 14, 2023.