Content, Features, Opinion

Managing Political Risk: Playing the Long Game

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Looking to China and beyond Simeon Mellalieu advocates that business should take a longer term view of political and policy change

Risk

This year has been an important year in politics. Many of the world’s largest economies went through an election or leadership change this year: China – including Hong Kong and Taiwan – USA, Russia, France and most recently Japan.

Campaign statements are designed to capture headlines, but can also cause alarm in the business community locally and internationally. Political change often leads to a period of uncertainty, while new leaders (and even re-elected ones) settle in and attempt to bring to bear their election promises. Some may never become a reality. Some may take time to fulfill. Old policies may be reversed. Others provide fresh ground or new impetus for lobbying efforts. With international relations becoming more complex in the region, political risks on business performance seems to be on the rise.

In June, US political commentator and Ketchum consultant Nick Ragone said in this column that “it’s unlikely that we’ll see China emerge as a ‘stump’ issue” in the U.S. presidential election. But before the race was over candidate Mitt Romney was banging the old Republican drum that China is a currency manipulator and rival Obama was promising to be tough on China. From the perspective of whether talk on Sino-US relations influenced votes in the presidential election, Ragone was right – it was a non-issue. But these comments were registered in China.

At the same time, Sino-US relations were further nuanced by statements from the US House Intelligence Committee warning US companies against dealing with Huawei and another Chinese telecoms firm, ZTE. It suggested their products and services could pose a long-term security threat to the US Shortly after, Canada invoked a national security exception on bidding for construction of its communications network. This allows it to block those firms it sees as a security risk. Many thought the move was again aimed at Huawei. Both statements put a cloud over broader Chinese business interests in North America.

The US economic stance on China is clearly not going to change overnight and certainly not in an election year. Nor will its protectionist position on Chinese overseas acquisitions, particularly in the energy sector. At the time China was and continues to be more concerned about its own leadership transition. But after the US election was over, Xinhua stated that “China bashing” must stop now, clearly reflecting the sentiment of China’s leadership. The inflection in US foreign policy that is increasingly Asia focused is also being closely followed by Beijing.

Meanwhile, Japanese Prime minister-in-waiting Shinzo Abe ran a hawkish position throughout his recent election campaign, with a tougher stance on China than his predecessor. This left China analysts concerned about the effect Abe will have on international relations. On winning the election he underlined his stance on the disputed Diaoyu Islands in the East China Sea that both countries lay claim to. Abe’s campaign statements have added fresh fuel to the dispute over the islands that has been smouldering since riots erupted in several Chinese cities in August, protesting against Japanese claims on the island chain.

The resulting anti-Japanese sentiment in China has impacted bilateral trade between the two countries with Japan’s consumer electronics industry, tourism, airlines and auto manufacturers being particularly hard hit. In response to the situation, Toyota China rebranded itself China Toyota in December to position itself as a company for China rather than a foreign company in China. It is worth noting that European and Korean car makers in China are benefiting tremendously from the current anti-Japanese sentiment with increasing sales. For Korean brands this is ironic as Korea too has an ongoing territorial dispute with China over another island chain.

Risk is nothing new

Despite the recent headlines, the Diaoyu Islands have been disputed for decades. Major flare ups happened in 1996, which resulted in the drowning of Hong Kong activist David Chan in a protest on the island; again in 2005 when 50 Taiwanese fishing boats staged a protest in the area and also in 2010 when Japan seized a fishing trawler that collided with coastguard vessels. While Japanese brands are currently suffering in China, they have built up sizeable and highly competitive businesses in the country against a political and cultural backdrop that has included both the Diaoyu Islands and the legacy effect following Japan’s occupation of China during World War II.

While Abe’s statements on the islands may be grabbing the headlines this week and could be a concern for the future, it is worth bearing in mind that he is Japan’s seventh prime minister in the last six-and-a-half years and that his last tenure as PM lasted only a year. China will continue to be resolute on its position on the islands, but it may not have such a vocal protagonist for very long. While it will always be highly sensitive, the prominence of the Diaoyu Island dispute will diminish over the long term allowing Japanese companies in China to get back to business as usual.

In Hong Kong, the political risk for business leaders is much more of a slow burn. Since taking the leadership in July, new Chief Executive CY Leung has been bombarded with questions over his credibility, calls of no confidence and his electoral policies bogged down by filibustering. The SAR’s business community is clearly fed up with the stalling tactics of self-centred, attention seeking lawmakers preventing the progression of the political agenda.

Many are concerned that Hong Kong is losing its competitive edge. The lack of international school places, air pollution, high rents and tax incentives that are looking increasingly uncompetitive are all contributing to the territory losing its international standing to arch-rival Singapore. Even in one of the freest economies in the world, the business community requires some nurturing. But what hope is there of that when CY can’t even get a consensus on one of his initial policy changes, additional financial support for the elderly?

Take a long-term view

So what can we learn from recent events in managing political risk? The old adage says that a day is a long time in politics. Well it certainly is if you are a politician. But for most of us working in corporate affairs, where politics shapes business agendas and vice versa, it is the long term game that counts. Headlines are forgotten quickly, but political opinion takes much longer to shift.

It is essential for corporate affairs practitioners to evaluate political challenges through the lens of history in context rather than merely the superficial urgencies of the present. In-depth research, comprehensive stakeholder mapping and scenario planning is essential to plan for the unexpected – and this should not necessarily be focused on the negative. One company’s loss could be another’s gain so good planning allows for a nimble change of strategy to quickly take advantage of shifting opinions.

Asia Pacific is going to become increasingly politically sensitized as rapidly developing and powerful economies rub shoulders. It is best to demonstrate long term commitment and not get derailed by bumps in the road.

Simeon Mellalieu is the general manager of Ketchum Hong Kong

business China Cities Japan Opinion politics Shinzo Abe Singapore

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