Australia’s monogamous relationship with Chinese supply lines could be unwise. But with the new risks other Asia-Pacific countries could bring, it may feel like it’s better the devil you know…

Australia’s supply chain is heavily reliant on one country – China. And this is problematic. Diversifying the possible pool of resources would bring great benefits, but it isn’t without its challenges.

Control Risks director Martin Baghdadi says: “To reduce the risks arising from our reliance on China as a trading partner, Australian businesses may consider opening up alternative supply lines to and from other countries within the Asia-Pacific region. But, in doing so, they need to understand and be prepared for the different risks that will arise from this strategy.”

Out of the 45 countries in the Asia-Pacific region, 51% have a medium-extreme political risk environment and 55% have a medium-extreme regulatory risk environment (and these figures are significantly higher when developed countries within the region are removed from the calculation). Specific supply chain risks could include militant port unions, extortions at entry points, conflict over shipping routes and non-tariff trade barriers.

Baghdadi gives an example: “An Australian business might find a market for its meat pies in Thailand, unimpeded by tariffs, but its supply chain into Thailand could be significantly impacted by an anti-government demonstration blockading the relevant port.” So, while Australian businesses should branch out, detailed pre-market entry risk assessments must be conducted, with targeted due diligence and careful macropolitical scenario planning.

Unconventional Confrontations

In addition to the usual supply chain risks, risk managers need to also consider macropolitical tensions and cyber risk. Surprisingly, over the last 18 months, global security risk ratings have either remained the same or decreased, indicating less military intervention, terrorism and crime. However, during the same period, there has been a notable rise in political risks, resulting in trade wars, espionage and cyber threats; all of which have a direct impact on supply chains.

“While it is unlikely this will result in conventional warfare or military response,” Baghdadi says, “countries and businesses must brace themselves for unconventional confrontations that are a hybrid of so-target responses and asymmetrical warfare in which business, and their supply chains and IP, will be targeted.”

Ask Questions

Risk managers must actively monitor:

  • global trade tensions – particularly between the US and China, due to the indirect impact this will have on competitive supply chain pricing.
  • trade tensions between the US and its allies.
  • Australia’s changing relationship with China, in particular, with respect to:
    • China’s growing interference in Australian domestic politics.
    • China’s increasing economic influence in Australia from its investments in Australia.
    • China’s assertions in relation to the South China Sea.

They must also conduct a supply chain threat and risk assessment, and consider broadening the supplier base, as well as a strategic cyber threat and risk assessment in which perpetrators and their motivations are identified, particularly those from nation states.

Lastly, make preparation the key. Risk managers need to regularly review and test their crisis management and business continuity plans to ensure they remain relevant to the current political environment.

Don’t Panic

Organisations must concede that preparing for every crisis is futile. More often than not, the crisis that happens is the one that has never been war-gamed, says Baghdadi. “In my experience, organisations that are well-equipped to deal with a crisis have a brief crisis management plan, not more than three or four pages, that is up to date and regularly exercised.”

“In those organisations, teams and roles within them have been identified, terminology and crisis definitions are tightly defined, escalations procedures and communications channels are rehearsed, response protocols and scenario planning are carefully considered and stakeholders are identified. Importantly, supply chain managers must be included in crisis management teams.”