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The top 3 medium-term global risks for business and how we manage them with crisis simulations


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Last week, we illustrated the key near-term risks and our NextRisk platform. This week, we look a little farther over the time horizon and explore medium-term risks.


The medium-term (2-5 years) is a bit different than the near-term. In this time frame, many risks are highly uncertain but garner the threat of high impact if they do occur. Importantly, we find that these risks are no longer, or perhaps never were, “black swans” (high-impact events that are difficult to predict). Rather, they are risks that have become >10% likely and, therefore, require real risk mitigation planning.


To prepare for this type of risk, we recommend crisis simulations, a tried and tested method to rehearse and prepare a plan as a team in a simulated environment. Crisis simulations are extended sessions (from several hours to a few days) designed to play out the potential actions of suppliers, competitors, governments, and other key actors in the midst of real emerging risks.


PRISM takes a four-step approach to running crisis simulations:


1) Design the scenarios, roles, facilitation, scoring, and so on

2) Create relevant materials, pre-reads, scoring sheets, and more

3) Facilitate the scenarios live with the full group

4) Learn by documenting insights, plans, and recommendations


By this stage of the time horizon, it has become pertinent to understand various risks’ impacts and develop a proactive plan and mitigation strategy. In the following article, we’ll explore the top three global risks for business on our clients' radars in the medium-term time horizon: China-Taiwan, Trump ‘24 , and impending climate catastrophe.


 

Medium-term global risk for business: China-Taiwan


Military, geopolitical, and economic activity suggest China may be preparing for a conflict over Taiwan. These developments risk a war that would dwarf the Russian invasion of Ukraine in terms of economic impact.


Taiwan has become a crucial actor in the global economy, dominant in the critical semiconductor industry, and a major player in many companies’ supply chains. Because of the world’s technological dependence on Taiwan, a conflict of this magnitude could threaten internet and energy usage in Taiwan, China, and potentially much of East Asia as well. It could also set the US and other economies in a scene of total war. However, the Chinese leadership views Taiwan as part of China, and China’s President Xi Jinping intends to make this a reality.


When gauging the likelihood of such an event, the attempted Chinese takeover of Taiwan is inevitable. The only question is when.


Right now, China is in the midst of preparation. The Chinese military continues to build both its offensive and deterrence capabilities and show its force at any hint of provocation from the US or Taiwan. However, according to the US intelligence community, China won’t be ready for a full-scale invasion until 2027 at the earliest. Some experts suggest the timeline could be shifted earlier, meaning that our business-oriented counter-preparations must be tried and ready sooner to account for any and all possibilities.


Regarding impact, a conflict would immediately take Taiwan and China off of the supply map for most companies, sending shockwaves across the global economy.


US resistance toward a Taiwan takeover would create the potential for a shooting war between the world’s two superpowers. Massive effects on the global economy would follow. As a key manufacturing hub, especially for the critical semiconductor industry, we would see an immediate halt to production and exports in Taiwan, as well as vast physical damage risk. On the political front, Western sanctions would likely make almost all Chinese supplies unavailable. This would be an unfortunate replay of many companies’ experiences with Russia but on a much larger scale. From there, the global economy would likely dip into a rapid recession, with shortages and inflation arising in many sectors.


So, what can you do to avoid the brunt of the damage?


Strategically, businesses must consider the reorientation of their geographic footprints, relationships, and overall strategy to mitigate exposure to a conflict between China and Taiwan. Additionally, tactical plans for day zero and beyond to ensure safety, secure supply, and address financial risks are essential to weathering the fallout of such a far-reaching conflict. By recognizing the already-shifting geopolitical order and industrial economy in ways that create opportunities, prepared businesses may survive, and even thrive, while others sink beneath the weight of uncertainty onset by a Chinese invasion.


Medium-term global risk for business: Trump ‘24


The US has become a key source of global political risk. A second Trump term would cement a range of disruptive changes to the US economy, trade, and role in the world.


Whatever your view of the first Trump administration, its disruptive nature cultivated business volatility. It kicked off the US-China trade war, threatened NAFTA, re-escalated diplomatic tensions with Russia, created a whipsaw in climate and ESG policy, drove rifts between the US and EU, and destabilized the traditional US role in the world.


A second term could have even more impact. Planning to use his experience from his first Administration, the former President aims to overcome government roadblocks put in place to stop more radical policies. The sensitive nature of the US’ current economy and foreign policy will exacerbate any potential political risks.


The three key areas we predict to be disruptive for businesses are:

  1. Russia-Ukraine: The former President has previously harbored friendly relations with Vladimir Putin and has recently suggested he would end the conflict “in 24 hours”. In practice, this may mean reducing support for Ukraine, effectively handing victory to Russia. The global economic outlook of this scenario would largely depend on Europe’s response. However, the US lifting sanctions would have a huge effect on the global economy and increase the risk of other authoritarians taking action elsewhere–not least Taiwan.

  2. Trade: While Biden has continued and accelerated Trump’s trade conflict with China, the Trump ‘24 agenda suggests even more aggressive moves if Trump is to carry out a second term. President Trump has proposed implementing “universal baseline tariffs” on every country and revoking China’s most-favored-nation status. The plan looks to phase out all imports of essential goods from China over the four-year term.

  3. ESG: The Republican party writ-large is increasingly skeptical of ESG, leading to high-profile conflicts like Ron DeSantis’s dispute with Disney, as well as a genuine bifurcation in consumer behavior, exemplified by the plummeting of Bud Light sales earlier this year. A second Trump term promises to hammer this type of wedge even further between politics and consumerism, creating a real need to assess and adapt strategies for a new domestic environment.


As far as likelihood, the best prediction this early in the race, as with any US election, is a 50/50 chance for either party.


Medium-term global risk for business: Climate Catastrophe


Climate change is accelerating, and the effects are increasingly visible and impactful to businesses.


Extreme weather has become more and more economically damaging over the past several decades. As widely predicted, it is accelerating with the potential for exponential change. Despite the broad success and huge investment in renewables in the past few years, much of the change is baked in. A historic turnaround in climate fortunes might limit warming to 1.5 degrees Celsius. The level of difference from today that this future would create is hard for many to imagine.


Fast, large-scale changes such as this take many by surprise. Today’s three-day stoppage for a hurricane could soon be tomorrow’s complete forced-location-shutdown. Here are five factors businesses can take into consideration when preparing for recurrent climate catastrophes:

  1. Net zero plan: The first step is to get your own house in order in terms of emissions and the sustainability agenda. This is more difficult than it seems, especially given the need to decarbonize across the supply chain.

  2. Extreme weather damage: Extreme heat, floods, hurricanes, etc., will all become more frequent. The risks will differ significantly by location, but the frequency and extremity of impacts will only grow. Planning must be done to assess exposure and adjust tactically (e.g., insurance) and strategically (footprint and cost trade-offs).

  3. Regulatory compliance: Aligned to exponential growth in extreme weather damage may be exponential increases in regulatory requirements across your company and supply chains. This must be watched closely to remain compliant.

  4. Reputation and messaging: The need to lead on ESG from a messaging and reputational standpoint has grown rapidly over the past decade. While it is now seeing some backlash, the emerging youthful majority (millennials will be 75% of the global workforce by 2025) will quickly leave behind any stragglers on sustainability, with consumers ready to vote with their wallets on company behavior.

  5. Opportunities: The transition will be one of the largest transformations in economic history. There will be those who struggle to adapt, but there will also be big winners —companies and countries—that position themselves correctly.


Partner with PRISM to run crisis simulations for your team


At PRISM, we take a comprehensive, structured, and customized approach to tackling this complexity and uncertainty. Our NextRisk Tracker platform tracks the full range of global risks, monitoring both specific and custom risks for our clients. Alongside the full range of global risks, we track specific, custom risks for clients to help them save money by making earlier, smarter decisions.


Sometimes, that means analyzing crisis simulations to find ways your business can adequately prepare for future risks. Take the situation between China and Taiwan: We held a crisis simulation to stress test potentially-affected supply chains in the instance of conflict, aiding our clients in developing tangible plans to mitigate any risks they might face when scenarios begin to play into reality.


Contact PRISM to learn more about key global risks and how to track them for your business.

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