One other week, one other wave of Elon Musk headlines. Probably the most attention-grabbing of those to emerge not too long ago, nevertheless, doesn’t contain Twitter, the social media platform that Musk now owns. As an alternative, it pertains to the revelations that executives at Tesla, the electrical car producer that Musk based, thought of taking a stake final 12 months in Glencore, the commodities dealer.
The deal was by no means concluded. However the truth these discussions even occurred underscores an important level: Musk is more and more nervous about supply chain dangers round battery metals.
Tesla depends on minerals corresponding to cobalt and lithium to make vehicles, and China controls round 80 per cent of worldwide processing of those. Consequently Musk desires to diversify his supply, in case of a future China export ban. To place it in engineering phrases, Tesla is confronting a “single level of failure” downside. And it’s not alone. When future historians look again at 2022, they might body it because the 12 months when company executives turned obsessive about Spof.
Take into account this, if you happen to like, the pure corollary of one other four-letter acronym that crept into the C-suite over the previous decade: Vuca, brief for “volatility, uncertainty, complexity and ambiguity”, a phrase coined by the US navy to explain an more and more unstable, terrifying world.
To be truthful, worrying about factors of failure is just not fully new. Engineers have at all times fretted about Spofs in industrial machines. So have navy leaders who deal with logistics. And monetary regulators confronted the problem in the course of the 2008 financial crisis, not simply inside separate banks, however throughout your entire banking ecosystem.
For an instance, have a look at AIG Monetary Merchandise. Earlier than 2008 quite a few banks used derivatives to hedge their credit score portfolios with AIGFP, which appeared like a smart danger mitigation technique when seen from the angle of a person financial institution.
However when the 2008 disaster erupted, it turned clear that so many corporations had hedged with AIGFP, in precisely the identical manner, that it had created new concentrations of danger — or a type of Spof. The important thing concern, as Andrew Haldane, then head of monetary stability on the Financial institution of England, noted, is that when networks lack variety they turn into susceptible to a single shock.
This was a bruising expertise for monetary regulators. However what’s placing, looking back, is that the non-financial world appears to have learnt so little from it.
Till Vladimir Putin’s invasion of Ukraine in February, for instance, there was solely restricted public debate amongst German industrial giants in regards to the folly of their collective reliance on Russian fuel. A decade in the past, there was equally little dialogue amongst American tech corporations about their dependence on Taiwan for the provision of superior pc chips. It was a surprising collective blind spot.
Equally, previous to the Covid-19 pandemic, few western company leaders ever talked in regards to the diploma to which their healthcare methods trusted Chinese language manufacturing for key medical provides. The truth that the world’s delivery methods have been so closely reliant on the Suez Canal remaining open was additionally extensively missed — till a ship acquired caught on this choke level in 2021.
Or, to quote one more instance, there was remarkably little coverage debate lately in regards to the diploma to which international locations from Greece to Ethiopia depend on a tiny, concentrated assortment of underwater cables for his or her web connections. That is unnerving, because the mysterious recent attack on the Baltic underwater Nord Stream pipelines exhibits.
A belated rethink is now underneath manner in company boardrooms, because it has turn into clear that the trifecta of protectionism, battle and local weather change can threaten provide chains. The phrase “diversification” is instantly all the fad amongst danger managers, each on a micro stage (with Tesla in search of new sources of lithium, as an illustration) and a macro stage (together with Washington’s strikes to incentivise extra various provides of chips).
One other phrase, “redundancies”, can be in vogue, as corporations attempt to construct spare capability to assist diversification. And a 3rd idea that’s being embraced is fragmentation, as championed by the author Nassim Nicholas Taleb in his e book Antifragile.
As Taleb notes, the issue with working methods which might be tightly interconnected, within the identify of streamlined effectivity, is that these create contagion in a disaster. Electrical energy grids are a living proof. Thus one approach to construct resilience is to create methods that may fragment into separate elements if catastrophe hits.
It might be good to suppose that these shifting preoccupations will create a extra resilient world. It might be even nicer to hope this may happen earlier than the geopolitical shocks worsen (significantly provided that figures like Ray Dalio, the hedge fund luminary, at the moment are loudly warning that we’re sliding in direction of world battle).
However this shift has one apparent large draw back: executives’ need to embrace redundancy, fragmentation and diversification will invariably create new prices. In different phrases, anybody who thinks the present wave of worldwide inflation can simply be blamed on central banks must suppose onerous about Vuca and Spof. After which plug them into their valuation fashions — and never only for electrical vehicles.
