Insights from wargames
|Chris Oates||Jun 25|| 2|
Last week, I facilitated a series of matrix games with Country Acuity Advisors about supply chains in Southeast Asia. For more about what a matrix game is, here’s a past issue of the newsletter about them, and here’s a blog post about how they’re useful for political risk.
By hiding their narrative function, we’re robbing wargames of what makes them uniquely powerful for informing policymakers. Cognitively, humans are “hard–wired for storytelling,” for communicating and making sense of the world around us. This is why, for example, “The Cobra Event” stimulated President Clinton’s interest in bioterrorism, and prompted the creation of the US Strategic National Stockpile. Likewise, President Reagan became interested in computer hacking after watching the movie “Wargames.” Some historians and quantitative analysts may recoil at the influence of narrative on our thinking, but if the object is to inform policy, it’s better to work with human nature, rather than fight it. Like war, policy is a human endeavor.
Wargamers should lean into the narrative aspect of games to tell a compelling story rather than issue bland insights via PowerPoint.
This is great advice. I’ve seen the importance of memorable narratives in scenario planning, where four competing versions of the future threaten to all blend together and become useless. If risk analysis is to be useful, it must be remembered when decisions are made.
So, with the caveat that this is just one narrative, drawn from one game, here is a story of how a US manufacturing company dealt with its supply chains over the next three years.
Map of the region we used for our game. Actors were Vietnam, Indonesia, Malaysia, American firm, Chinese firm, and Singaporean firm.
China gains a step - July 2020
We’ve been talking about what to do about our supply chain reliance on China for months. The novel coronavirus pandemic has shown just how fragile our business has become. Too much of our products come out of China and just one thing - be it a trade war or a virus - can cripple our ability to source our goods.
Corporate HQ in New York has been on our case to look for countries in Southeast Asia we can move into. Our major competitors - one Chinese company and another based in Australia - are probably looking at the same problem. Our dilemma is not just a business one. We’re looking at what country to move into at the same time that those countries are dealing with COVID-19 and changing policies to deal with the economic and public health fallout. It’s like choosing where to eat while the restaurants are rewriting the menu.
Unfortunately, we seem to have waited too long. The Chinese company is beginning to move to Indonesia and Malaysia and Indonesia, with a series of acquisitions and joint ventures being announced. We hear that the Australian company is looking at acquisitions as well. We can do little more than cut the prices on a few products to continue selling.
Second wave hits - January 2021
This month’s inauguration of President-elect Joe Biden should reduce tensions between the US and China, which is good news for us. Unfortunately, the second wave of the coronavirus, simultaneous with a rough flu season, has led to another round of lockdowns. Malaysia is announcing plans to lock down the country, Vietnam is reopening quarantine centers, and Indonesia is closing non-essential businesses.
We’re able to put together a solid risk analysis of our supply chain, but we’re still fragile. We’re very worried that if the second wave shuts down trade we’ll be in the same position we were a year ago when our products sat in idled factories.
Meanwhile, our Chinese competitors are doubling down on their moves throughout the region and even the Australian firm is buying small suppliers that could have helped us build resilience.
Chaos in KL - July 2021
Well, it turns out that we lucked out not going into Malaysia yet. Their prime minister just lost a vote of no confidence after his attempt to lockdown the country for a second wave failed and an infrastructure package couldn’t make it through Parliament before getting bogged down with accusations of corruption.
We are in phase 1 of a relocation plan. Vietnam is getting 25% of our top-tier component supply and Indonesia gets 10%. Our Chinese rivals are dealing with their own problems after their push into Southeast Asia ran into significant headwinds. They fired their Indonesia and Malaysia CEOS and now are in the middle of a PR campaign.
We’re a bit more concerned with our competitors from down under. Now that there’s a coronavirus vaccine, government officials are making diplomatic sprints around the world. The Australian PM is planning a swing through ASEAN that’s an obvious plan to position them as the non-China preferred partner for any country worried about Beijing’s influence. They might become a serious threat if it works.
Special economic zones - January 2022
We’re a little bit concerned that our plan to increase resilience by moving out of China is backfiring. Our CEO has mandated that another 10% of production should go to Vietnam to take advantage of the new SEZs that they’re creating. It’s a great way to boost profitability, but are we opening ourselves up to another crisis if something happens to Vietnam? They’re not a geopolitical rival like China, but they’re caught in the middle of US-Chinese positioning. I can see another trade dispute coming our way.
Meanwhile, the Chinese firm has bounced back and is clearly the dominant player in the market now. They’re going head-to-head with us when it comes to robotics and scooping up firms at bargain prices that were battered by the COVID crash.
Aussie moonshot - July 2022
Our friends in Five Eyes are more daring than we thought. They’re moving 20% of their manufacturing and splitting it among all the ASEAN countries. It makes their supply chains incredibly resilient - whatever happens, they’ll have a factory running - but I have to imagine that they’ve spent down all their cash reserves.
We’re looking more favorably on Jakarta now that they have invested more money into internet infrastructure. It’s not much yet, but it’s tipped the balance for us when it comes to ensuring long-term growth. We’ve left most of our low-skilled work in China, but our high-end work has moved entirely elsewhere. It’s just too worrying. Even though President Biden ended the trade war as soon as he got into office, his administration also immediately launched a series of intellectual property cases at the WTO. It seems as if the global economic order is global for not much longer.
Indonesian push - January 2023
With the cost of labor in Vietnam rising, we are hoping that Indonesia follows through in their rising potential. Luckily for us, our Australian rivals have found it difficult to navigate the geopolitical tensions and moving so much of their production out of China at once turned out to be a flawed idea. They have opened up talks for a merger and we’re hopeful that they lawyers manage to work it out.
However, we still are looking at Malaysia with worry. Their government has barely been able to act these past three years without the plan failing at the implementation stage. Our CEO had said that they were the future and urged us to move there quickly way back during the pandemic. It was a risky strategy to take time to look around the region, but it’s certainly paying dividends now. Now we only have to worry about what the recent devaluation of the yuan will mean for our sales prospects in China for the coming year…
Of course, this is only one simulation of the next few years and tailored for a specific region, industry, and question.
The purpose of this narrative is not to be a wholly correct forecast. With the amount of uncertainty that exists, there is no way to perfectly predict what happens, and a good forecast would be probabilistic anyway rather than following a single thread.
Our goal here was threefold.
First, we wanted to explore the issue space. We knew that countries’ responses to COVID-19 would shape where we relocated our supply chain, but it wasn’t until we got into specifics about each country that we saw what mattered to us (lockdowns much more than social distancing, for example).
Second, we wanted to experiment with our plans. Our MNC had a variety of options on where to locate new production. Are any of these options good? Other than guessing, there’s no way to know. This narrative lets them stress test their strategies without having to make the investment first.
Third, we wanted to educate. There’s no way that anyone knows everything there is to know about Southeast Asian politics, their own firm’s capabilities, and the strengths and weaknesses of all their competitors, even if some of the bosses might pretend to. This game functions as an intellectually compact 4-hour seminar that people will actually enjoy.
Whether we accomplished this is up to the participants to decide. But I certainly had much more fun than a usual half-day of work. That alone is enough for me to recommend it far and wide.
About Two Lanterns
Two Lanterns Advisory is a political risk consultancy based in Boston, Massachusetts. For information on training courses in political risk, hiring a consultant, or commissioning reports, check us out at http://www.twolanterns.co.