How to shift strategy for a new geostrategic era in 2023

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.

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).

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.

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.

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.

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.

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.

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.