THE THREATS AND OPPORTUNITIES OF THE NEW COLD WAR

Thirty years after the end of the US-USSR Cold War, which lasted forty years, a new one now appears to be developing between the United States and The People’s Republic of China. The new cold war, Cold War II, is likely to be long lasting and will have an impact on every industry. Companies in many industries will be faced with new threats and opportunities. Those that anticipate the changes and are flexible enough to adapt to the new environment will survive and may even thrive. 

Why agility is important

Various observers have identified three main factors contributing to Cold War II: the changing balance of power, differences in values and conflicting national interests. However, only one of these factors explains why the conflict is happening now and did not start not several decades ago. Two of these factors, interests and values of the US and PRC, have not changed significantly over the past sixty years, but the third factor, the power of the PRC relative to that of the US, has grown dramatically in recent years. Therefore, while interests and values are important underlying factors in Cold War II, the catalyst that triggered it appears to have been the shifting balance of power. 

The need to embrace failure

The four decades of Cold War I ended with the collapse of the USSR, whose economy could not support the cost of the conflict. Cold War II is likely to last longer because the PRC‘s economy matches its geopolitical ambitions, whereas the USSR’s did not. Just as the post Cold War I globalization had a pervasive impact on the business world, the impact of Cold War II will be felt by most companies as the world separates into two separate zones, each of which is globalized within itself, but increasingly unconnected to the other zone. Therefore, thousands of companies will need to adjust to the new reality for the foreseeable future. For example:

  1. Large technology companies will need to comply with US regulations to ensure a steady supply of semiconductors, or develop new sources.
  2. Pharmaceutical companies will need to cooperate with the PRC to ensure a steady supply of Active Pharmaceutical Ingredients (API’s), or find alternative suppliers.
  3. Startup e-commerce companies will need to source capital from non-PRC sources.
  4. Manufacturers of defense equipment need to expand capacity.
  5. Assemblers of consumer goods (e.g. shoes, toys, electronics, appliances) will need to develop new suppliers.
  6. Buyers of rare earth minerals (e.g. battery and electronic manufacturers) will need to find new sources or find a way to use alternative elements.
  7. Companies with large databases of customer information will need more robust cyber security systems to avoid sabotage or data theft.

Embrace the ‘rethink’

Given that the PRC was able to position itself as the factory of the world over the past several decades, the decoupling process driven by Cold War II will contribute to the expansion of manufacturing capacity in other low cost manufacturing locations in Asia, Eastern Europe, Africa and Latin America — a process that was already underway because of the PRC‘s rising labor costs.
For many countries, the formation of two major zones, the PRC-friendly zone and the US-friendly zone, will result in the existence of two distinct technology standards, the duplication of manufacturing infrastructure and the diversification of supply bases. This decoupling from PRC-based manufacturing will require significant investment, and it will be highly disruptive unless it happens gradually over many years. It will either lead to thousands of projects as companies adjust to the new reality, or it will lead to a series of supply shocks and crises. 
The thirty years between the end of Cold War I and the beginning of Cold War II were a period of global economic unification and high economic growth. As we enter a period of decoupling and the formation of two increasingly separated zones, there will be winners and losers in an era of lower overall growth. Cold War II will likely lack a third non-aligned bloc, as digital technologies will force companies and countries to pick either the standards of the PRC or the US.  The speed of this decoupling combined with the preparedness of individual companies will determine which companies are fast enough and flexible enough to prosper in the new environment, and which companies will be caught off guard.

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