Never the Same: Part 1 – Why the Supply Chain Will Never Be the Same After the Russian Invasion | Thomas Fox – Compliance Evangelist
After the Russian invasion of Ukraine, the business world will never be the same. Deputy Attorney General (DAG) Lisa Monaco recently stated that “the global geopolitical landscape is more difficult and complex than ever. The most striking example is of course Russia’s invasion of Ukraine. It is “nothing less than a fundamental challenge to the international norms, sovereignty and rule of law that underpin our society”. This is all the more true in the current economic climate.
In this five-part series, I’ll examine how business will never be the same again, and how a confluence of events changed business forever. I am accompanied in this exploration by Brandon Daniels, CEO of Exiger. We will explore irrevocable changes in the supply chain, trade and economic sanctions, anti-corruption, cybersecurity and environment, social and governance (ESG). In Part 1, we start with changes in the supply chain, as perhaps no industry has experienced the tectonic shifts that have occurred in the marketplace over the past couple of years than in the supply chain.
Daniels identified three main reasons for these changes. The first began with the realization of the unsustainable actions of the major player in the American supply chain, China. This awareness had started before the pandemic, when it became clear that the massive theft of American intellectual property by Chinese companies has led to a huge problem of counterfeit products from China. Daniels estimated that “70% of the global counterfeit market is led by China.” The second was the slave labor problem with China, especially the Uyghurs. This heavy use of slave labor gave China an economic advantage that in many cases could not be overcome. It was economic warfare by another name.
All of this has been exacerbated by the pandemic and we have seen what it means to have an economic and geopolitical adversary as one of your main suppliers during a real global health crisis. This confluence of events has led to several key shifts in supply chain thinking. First, supply chain efficiency isn’t about weather events, it’s not about logistics, it’s not about just-in-time. There are much larger sets of supply chain issues that had not been highlighted before but have come to light much more clearly, such as geopolitical tensions. According to Daniels, “we realized that the supply chain is multifaceted in terms of issues.”
Next comes recognition of the need for ever-increasing government oversight and regulation. The need to eradicate modern slavery led to the passage of the Uyghur Forced Labor Prevention Law. This law greatly expanded compliance requirements for companies to certify that goods made by forced labor in the Xinjiang Uyghur Autonomous Region of the People’s Republic of China are not entering the United States. Interestingly, the law created the presumption that all goods produced in Xinjiang were produced by forced labor, with the burden of proof on companies to demonstrate that materials, parts and goods originating in China were not mined. , produced or manufactured wholly or partly in Xinjiang. Business and government have also realized that many of the key rare earth elements and minerals widely used in the American manufacturing process came from China and now Russia.
Daniels put it all into perspective when he said, “You had this big earthquake during the pandemic, but then you had all these fault lines that we didn’t realize were on the brink of failure. a precipice. We were in these really fragile places and everything fell apart with the Russian invasion of Ukraine. Rare earth elements like neodymium which is used to attach an F35 to electric car batteries, metals and heavy metals used in standard manufacturing processes such as aluminum, iron and neon; supply chain disruptions have all been compounded by the Russian invasion of Ukraine on top of the ongoing disruptions from the pandemic and beyond.
Finally, there was a new element in the supply chain calculus, what Daniels called “the ethical conundrum.” Russia has engaged in a brutal and unjustified war that has disrupted the flow of goods and services from Russia and Ukraine. Neon, a key component for chip processing, is heavily concentrated in Ukraine, as are some of our largest outsourced engineering software companies. As the US and European governments have responded with a series of tougher and more robust economic and trade sanctions, pressures on the supply chain have increased. You need to consider greater and more continuous due diligence and greater sustainability.
These issues have gone beyond simple national security issues in the government and public sector. As DAG Monaco put it, “Increasingly, you and your customers are on the front lines of responding to these geopolitical realities…our goal is not just to hold people accountable, but to disrupt these threats by using all the tools at our disposal”. Private companies need to understand that they are now part of what Daniels called “continuing non-kinetic warfare.”
But on top of this new kind of warfare that every business is now a part of, everything is tied to the economic prosperity of the United States. While this was clear in the adversarial relationship between the United States and China before the pandemic; it accelerated during the pandemic and now after the Russian invasion of Ukraine. If you couldn’t get a mask so you could go to work during the pandemic, this health problem has become an economic problem. If you were doing business with a Russian oligarch, the reputational damage to your turnover will negatively impact your business, perhaps materially.
Tomorrow we will look at why economic and trade sanctions will never be the same again.