[Newsletter] Add Geopolitical Risk to the List of Concerns HR is Facing in Korea

If you are a reader of our friends at Erudite Risk’s daily reports on Northeast Asia, you’ll recognize the theme of today’s newsletter: geopolitical tensions are driving a reshaping of capital flows, goods trade, and sentiment regarding Asia—and not in a good way. You’ll recognize it because Rodney Johnson, the president of Erudite Risk, has been harping on that theme (for well over a year now) as a crucial component to understanding what is going on today in Asia. Supply chain reshaping, friend-shoring, and re-shoring is now part of the contextual background noise lying behind so many other trends. 

 The goal, Mr. Johnson says, is no longer to build resilient supply chains, but to avoid risk altogether. The COVID pandemic served as a traumatic wake-up call to many global companies who experienced painful disruptions in the supply chain. Those disruptions continue to haunt CEOs and are now seen in the light of even greater possible future disruptions that would arise in the event of a conflict between the US and China. The conflict has not started, but we are dealing with the ‘fears’ of conflict and those fears are driving change in very real ways. Russia’s invasion of Ukraine hasn’t helped in that regard. It has made the possibility of once unthinkable conflict much more imaginable. 

 The pandemic was a dry run for a geopolitical catastrophe in Asia, and no one liked what they saw. War is possible and any CEO who does not acknowledge that organizational survival is now just as important a strategic goal as financial or market-based success measures is likely to be accused of being asleep at the wheel. 

 So, the reshaping has begun, under the narrative of ‘de-risking’ or ‘de-coupling’. Either way, it means moving away from China and toward other destinations. In some cases those destinations are other places in Asia, in some cases they are not. How safe is manufacturing in Vietnam (and shipping from Vietnam) if a conflict over Taiwan breaks out? Will the impact be minimal or highly disruptive? How close to China is too close? This is not an academic question for those in Korea. 

 This is a hard pill to swallow if you are an old Asian-hand like I am. If you have been doing business during Asia’s rise, it is difficult to think of the future in any other terms than one of progress, development, and even eventual dominance. 

 Geopolitical risk related to a China conflict is just one more concern for companies in the Korean market. HR managers in Korea already deal with

•  The demographics time bomb, as fewer and fewer young people are available for employment
• Changing attitudes toward work and meaning among younger employees
• A rapidly retiring baby boom generation (approx. 800,000 per year over the next 20 years) that will take with them great amounts of organizational learning when they go
• Economic changes resulting from slower growth, and changes to asset price valuations, leading to changes in the expectations of Korea’s workforce. Misery is up; hope is down. 
• Higher inflation and interest rates impacting expected real wages and the perceived benefits from work
• Already crushing household debt levels (among the world’s highest)

 Korea will not be—is not—immune to the impacts of actions taken today related to fears of a future conflict with China. Some of the repercussions include:

•  Korea must export to import and Korea must import to survive. Any supply chain disruptions cause major economic upheaval. If companies refuse to use Korea as a base for supply, or use it less, Korea’s trade balances will change dramatically. In fact, they already are. Korea now runs a (probably permanent) trade deficit with China. 
• Policy changes in the US and Europe will shift more production to those markets. That leads to more Korean companies producing inside their target export markets rather than investing in Korea. This is already happening, driven, for example, by the US CHIPS Act and the US Inflation Reduction Act. 
• What’s good for Hyundai may not be good for Korea. Ironically, for Korean companies to survive and thrive in the new risk-averse environment, they will become more integrated with their customer markets, rather than less. But more integration may mean more investment overseas; more jobs shifted, more production shifted, and more internationalization. This is home, but the work will be done more elsewhere. It has nothing to do with patriotism and everything to do with survival. Beginning in 2011, Samsung Electronics had more employees outside of Korea than inside. Today it has almost double the number outside than inside. I expect that trend to accelerate even more in the future. 
• Western companies won’t go home, but how they think about Korea (and Asia) will likely change. It will now become “be in the Korean market for the Korean market” rather than be in the Korean market for everywhere else. That will change investment, hiring, and commitment levels. 

 For HR, all of this implies changes in how business is done that will drive changes in who we hire. Business Leaders in Greater Need of Agility and Adaptability Today. We’ll have to wait and see how it plays out, but the changes are already afoot. Stay nimble, with one eye on what’s happening today and one on what’s coming around the corner.

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Article originally published in Steve's LinkedIn Newsletter HR Asia August 9, 2023