Starting in the early 1990s, the narrative that multinational companies were the pre-eminent actors in our world, more powerful than even nation-states, gained currency. Companies operated seamlessly across borders, benefiting from increasing trade and investment integration and the impact of technology.
They became, at least in part, ‘citizens of nowhere’, in the phrase used by former British Prime Minister Theresa May to criticise elites in the wake of the UK’s Brexit vote.
In the past decade or so, however, this has started to change as states reassert themselves. In country after country, issues of business economics, national security and values are being bundled together in new ways, posing fresh challenges to multinationals. At the same time, technology and data have become critical to business success. Yet both have security applications as well as commercial ones and raise issues of values.
Things have come to a head in the past few months, as geopolitical tensions and economic rhetoric between global powers such as the US and China have ratcheted up. India, the EU, Russia and others are also increasingly vocal.
These developments are increasing strains on the norms and institutions of global governance. They are also turning the tables on multinational companies. Companies find themselves pulled in different directions by the expectations of the different countries where they operate. They risk getting caught in the crossfire and being used as pieces in a game of global geopolitics.
Nationality as a risk factor
Indeed, a company’s nationality is now a risk factor in itself, regardless of industry. A company’s identity as a ‘citizen of somewhere’ outweighs attempts to be a ‘citizen of nowhere’. In the past, some multinationals, especially in extractive industries, faced challenges in emerging economies. Now that risk has spread to every sector and, in particular, to the world’s two largest economies, the US and China.
Notably, the Chinese government intervenes or threatens to intervene in commercial matters when it wants to show displeasure with some other aspect of bilateral relations with a country. Korea’s Lotte sustained large losses and shut most of its China business following Chinese government measures after Lotte provided the land for US missiles in Korea. Exporters from Australia and Germany have also recently faced restrictions in a range of agricultural products.
The actual impact though has not always matched the words. UK trade and investment with China increased in 2013, even after China voiced extreme displeasure over PM Cameron’s meeting with the Dalai Lama and put a chill on the bilateral relationship.
The focus of the US is more tightly drawn – Chinese internet and technology companies. The Trump administration has singled out Chinese internet companies such as ByteDance’s TikTok and Tencent’s WeChat for action, with a spotlight on data access and transfer. US sanctions on semiconductor sales to ZTE and Huawei have had far-reaching impacts on companies around the world, well beyond the effect on US suppliers and Chinese customer companies.
But is there a multinational today where data and technology does not play a critical competitive role? And over 100 countries have legislation covering data sovereignty.
How multinationals need to change
What does this changed world mean for multinationals? After all, their competitive advantage comes from replicating much of what they do in multiple countries and reaping value from sharing and connecting across countries.
For multinationals, geopolitics has always been there in the background. They have long recognised the need to adapt how they operate to the local political, institutional and social context. They explain how their actions support country priorities that the government has identified. Volkswagen, Philips, SK Group and SAP have talked of China as their ‘second home’.
Companies provide countries with connectivity to capital, expertise and shared investments through their global presence and often supply the infrastructure of globalisation itself in logistics, technology networks and financial services.
But now, greater differences and tensions between countries are driving the need for greater localisation and autonomy for country operations. Local business leadership needs both a more nuanced understanding of the local context, and the experience and judgment to make the right calls. An increased government focus on security in all its aspects—and especially cybersecurity—means business needs to take a more integrated view too. Risk identification, risk management and regulatory compliance take up more time.
It also means taking a fresh look at how the organisation connects its country organisations together. In a world of increasing frictions and barriers, there is a greater opportunity for those who keep connections open. But the mechanics and judgment involved become more complicated – the terms of data exchange; what technologies are located where; which people are transferred and placed in which roles; where, when and how to take what can be seen as political stances.
Global integration makes the challenges more complex than simply following local laws and regulations in each country. In response to China’s National Security Law in Hong Kong, the US has placed sanctions on certain Hong Kong individuals. That same National Security Law in turn makes it an offence to implement such sanctions. How to address this seeming contradiction?
Chinese banks in Hong Kong have moved quickly to ensure they complied with US sanctions, so as not to incur legal troubles there and potentially lose access to US dollar clearing systems. Financial institutions have so far taken comfort from expansive wording in the Hong Kong law that gives Chinese authorities discretion in how to act. The business benefit to all, of an international financial centre in Hong Kong keeps the problem at bay, at least for now.
Greater localisation can lead to the separation and spin-out of businesses. In China, companies such as Axa Insurance and KFC’s owner, Yum, started down this road over the past decade for business reasons including better distribution, access to new investors and regulatory considerations. Following Douyin’s success in China, Bytedance created TikTok for its international expansion, and TikTok is not available in China. Tesla has announced it will do ‘original engineering’ of its software in China. This creates localised know-how, less likely controllable by any US technology sanctions.
Global integration makes the challenges more complex than simply following local laws and regulations in each country. In response to China’s National Security Law in Hong Kong, the US has placed sanctions on certain Hong Kong individuals. That same National Security Law in turn makes it an offence to implement such sanctions. How to address this seeming contradiction?
Separate organisation and governance structures can help address questions of trust and oversight across markets. In the UK, Huawei set up a local UK board and also agreed to an independent cybersecurity assessment centre to report to the UK government on potential security issues. It was not enough to secure Huawei’s position in the UK’s 5G development. Would a truly separate structure, listed on the London stock market and with minority Chinese ownership, have worked? Or did US sanctions on semiconductor supplies to Huawei and geopolitical considerations simply create too much supplier risk? The new TikTok/ Oracle deal structure represents one more effort to reconcile conflicting stakeholder demands.
History suggests that businesses can take even more drastic action to separate and survive. In the wake of World War II, the optical company Carl Zeiss split into two entities – one in West Germany and one in East Germany – which recombined after the fall of the Berlin Wall. Coca Cola Germany operated as a separate company under the Nazis, unable to import cola concentrate from the US. These are moves of last resort that create costs for all.
Four questions to consider
Companies need to reflect on what this increasing politicisation of global business means for them. Four questions can help.
First, for operations in any country, what areas could be seen as having national security dimensions and what is the right approach to managing these?
The answer needs to recognise that governments and others doing the assessment will often look at extreme, low-likelihood scenarios in reaching their own conclusions or use the national security argument as competitive leverage or bargaining. During the 2019 Hong Kong protests, the Chinese government told Cathay Pacific that it saw their planes flying to China as a security risk if flight crew were not pre-cleared to show that they had not participated in the demonstrations.
Data access and oversight are a particular focus. China’s Kunlun Tech agreed to sell the US gay dating app, Grindr, after the US government voiced fears that Chinese ownership of the data could lead to blackmail.
Second, how many ‘second homes’ can a company have in different countries, and what does a ‘second home’ really mean?
When the emphasis is on ‘home’, the phrase highlights corporate commitment to contribute to the country and its people; to accept the country’s way of doing things; and to be there for the long haul.
But the emphasis can also be placed on ‘second’. Second home-owners can be controversial: Are they really present and contributing or only there part-time? Are they displacing local citizens? And, in the final analysis, it is ‘second’ not ‘first’. Where do loyalties lie when the chips are down? How many true homes can a company have in an increasingly adversarial geopolitical environment?
Third, where can a company continue to bring value by connecting countries and people together? And where is it too difficult or no longer of value?
Just as smaller countries want to avoid making binary choices between the US and China, so too do companies. Indeed, companies will have much of their businesses in countries that themselves want to maintain their own complicated, but active relationships with both the US and China. The connectivity that a multinational brings in these choppy waters can be more valuable than ever. But at times, it will be just too tough or too risky.
Finally, how can a company strengthen its shared purpose and values in a time of increasing divergence and adversarial relations between some countries?
The most successful multinationals are based on shared values that resonate with people across cultures and bring people together. Consumers are placing more importance on values, integrity and a social conscience in some sectors. Going further, Apple recently announced its own human rights policy. At a time of increasing nationalism, division and suspicion in some quarters, this is more valuable than ever.
But it can also be challenging to maintain in a world of divergent views. In the 1980s, British students boycotted Barclays Bank because of its operations in apartheid-era South Africa. Will some consumers in the West protest at companies operating in Xinjiang, or, indeed, in China? Will Chinese companies lose customers overseas in nationalist reactions similar to those that some foreign companies have experienced in China? At a time of India-China border skirmishes, how can a company best support the working together of its Chinese and Indian staff?
History suggests that businesses can take even more drastic action to separate and survive. In the wake of World War II, the optical company Carl Zeiss split into two entities – one in West Germany and one in East Germany – which recombined after the fall of the Berlin Wall. Coca Cola Germany operated as a separate company under the Nazis, unable to import cola concentrate from the US.
Management attention and investment to resolve these types of issues will help avoid problems and bring benefits.
Adapting to the new environment
Multinationals are embarking on their next stage of global development. The connection and integration that they bring is more important than ever for prosperity—and, indeed, security—around the world. But the geopolitical context and risk profile is changing, and companies need to change with it.
* A related piece on the growing challenges faced by multinationals in the face of the new geopolitics was published on Tuesday. It can be read here.
Andrew Cainey
Andrew Cainey is a senior associate fellow at the Royal United Services Institute in London and author of Xiconomics: What China’s Dual Circulation Strategy means for global business. Andrew has 30 years’ experience advising governments, companies and non-profit organisations across Asia and Europe. Andrew was previously the managing partner of Booz & Company’s Greater China consulting operations; the partner leading the Rt Hon Tony Blair’s Asian government advisory practice; and the partner in charge of Boston Consulting Group’s Asian financial institutions practice. He has also been a Senior Fellow with Fung Global Institute in Hong Kong; an Associate Fellow in Chatham House’s Asia-Pacific Programme; a Senior Fellow in the Security and Crisis Management Programme (International Centre) at the Shanghai Academy of Social Sciences; and a Policy Advisor in the Conservative Party’s Policy Unit.
