Risk is getting more political by the day

At least in the UK, it’s almost a given that any conversation over the stability of businesses is framed by the danger of commodity risk. I suspect much of the world hears the same – commodity risk is part of commerce these days. But perhaps it’s political risk that has the potential to surprise in 2011.

In fact, China started early by delivering on a threat to hold back exports of rare earth metals – a move that could have significant consequences for electronic products from iPods to missiles.

The story simmered away last year and it was only as I was putting together a feature on the topic (which will appear in Procurement Leaders magazine’s January issue), that I came across the possibility that many companies and governments simply didn’t have an answer to a resource problem that had been looming for decades.

While this export quota reduction was 35%, there’s plenty of speculation as to whether that will be the last this year. Which is telling: China continues to hold the cards here.

Political risk was a central theme in the Economist’s The World in 2011 – essentially an edition of the magazine about things that haven’t happened yet. Counter-intuitive though that might sound, the relationship between the US and China is drastically shaping business right now and procurement chiefs that haven’t outlined what the impact might be on their sourcing strategies will leave their organisations at a huge disadvantage to those that have.

Rare earth metals are a perfect example of that: there were warning signs, there were outcries of injustice, and there were examples of companies that got creative with their solutions.

But, as I say, this was just a taster. The relationship of western companies and eastern governments is changing fast, and that’s just one divide to consider. Currency manipulation, trade bans, environmental legislation, national security – there’s every indication that this year will see interventionist state activity on one side of the world shaping the economic environment on another.

Procurement has its predictions and plans for the year, but I’d argue that the shifting global economic and, crucially, political landscape means that these have to be more sophisticated than ever before.

Whatever 2011 brings, some organisations are going to come out on top. And it’s hard not to believe that for many industries, successfully negotiating political risk is going to be one of the factors in that.

Steve Hall is senior staff writer of Procurement Leaders. To find out more about the magazine, click here.