How Business Can Prepare for WarPublished: February 09, 2003 in Knowledge@Wharton
Hit by both the threat of war in Iraq and a lingering economic slowdown, companies in many areas of the world are reining in investments and postponing the launch of new projects, according to a webcast/teleconference organized by Wharton on February 12.
Titled “Business and the Pending War,” the discussion brought together Wharton faculty and members of the Wharton Fellows program, a network of global senior executives, who shared their views on how companies can prepare for a war that more and more people consider inevitable. This sense of inevitability has been heightened following the release of an audiotape this week attributed to Osama Bin Laden, which calls upon Muslims around the world to defend Iraq by attacking the U.S.
“A lot of businesses have put themselves on hold,” said Colin Crook, an adviser to the Wharton Fellows program and former chief technology officer for Citibank. “And the feeling of general economic malaise is worsening it. This is a … bleak situation, a double whammy. Nobody sees any positive signs of any sort.”
In the computer and software industry, for example, companies are deferring purchases to see how long the war will last and how messy it will be, said Joseph Msays, chief operating officer for IBM Business Consulting Services in Europe, the Middle East and Africa.
According to Msays, if the war is short, spending should rebound quickly. The Middle East, in particular, might see a net increase in information-technology expenditures. But if the war is long, companies will keep postponing purchases, probably into 2004. “That will hurt us,” Msays noted. At the operational level, IBM has made plans to rapidly move employees out of the Middle East in the event of war.
The tone of the Feb. 12 web conference reflected a heightened sense of vulnerability, particularly in the United States, following the release of the Osama bin Laden audiotape. Also this week, U.S. Federal Reserve Chairman Alan Greenspan said that uncertainty surrounding the war – when it will start, how long it will last – continues to be the biggest impediment to faster economic growth. His remarks came as he warned Congress about tax proposals that would further increase the U.S. deficit.
Concerns over possible war and renewed terrorist attacks have led companies such as American Express to put clauses into its contracts saying it has the right to postpone or cancel media buys in the event of war, said Wharton marketing professor Jerry Wind, academic director of the Wharton Fellows program.
In addition, a number of companies are trying to ramp up their activities in China “because they view it as the safest place in the world to do business right now,” noted Wind, who moderated the discussion. “Domestic consumption in China and South Korea remains quite strong,” added Marcus Thompson, who is based in Hong Kong as HSBC’s chief investment officer for Private Equity Asia, “but the exporting part of the economy is suffering.”
At Bank of America, top management has redoubled the efforts of its emergency-response team, according to Karen Fukumura, a senior vice president based in San Francisco. The Charlotte, N.C., bank is taking steps to guarantee that it will have enough currency if there is a run on banks. “And on the employee side, anxieties are building up, so we are making sure everyone knows what they should do if a [terrorist] event happens at their facility.”
But in general, what businesses do to prepare for war shouldn’t be that different “in a fragile time than it would be in a regular time,” suggested Boaz Ganor, director of the International Policy Institute on Counterterrorism in Tel Aviv. “Mainly, it’s a focus on alertness, defensive capabilities and connections with official bodies, especially intelligence-gathering bodies.” All companies should routinely analyze the risks that confront their officers, markets and factories and plan accordingly, he said.
Paul Kleindorfer, co-director of Wharton’s Risk Management and Decision Processes Center, emphasized that companies need to identify special vulnerabilities -- "when and where they will be triggered in the supply chain, in markets, in the customer nexus."
It’s not just companies in the United States that are grappling with worries of war. Every region of the world has been hurt in some way. Firms in oil-dependent countries in Latin America such as Chile, for example, are seeing exchange rates increase, said Claudio Engel, executive vice president of the F.H. Engel Group, a conglomerate in Santiago. “Our response has been to raise prices.”
But that might not be enough to offset weak consumer confidence in the United States and Europe. “If consumption goes down in Europe and the U.S., that will hurt our exports, which is the main part of our business,” Engel added.
A few sectors are poised to benefit from a war.
Msays’ group at IBM has shifted its emphasis to the network security and defense industries, particularly supply-chain logistics. “Companies such as Nokia and Ericsson have very good supply-chain support systems,” he said. “But the defense interests are far behind when it comes to tracking things like munitions and food to the troops.” For the longer term, IBM is investing in areas like grid computing, wireless technologies and offshore facilities to keep costs down in such places as China, India and the Philippines.
Likewise, oil producers in Latin America should see gains. “The question is, will it be short or long term,” Engel said. If much of Iraq’s oil production capacity is damaged in a war, the gains will likely endure.
In addition, some companies may find war-related niches they can exploit. At the Franklin Mint, for example, “we have part of our business oriented toward military enthusiasts, so to the extent that we’re spending, it’s in that business,” said Bruce Newman, president of the Franklin Center, Pa., maker of commemorative coins. Similar to American Express, the Mint has decided to halt its media spending for the next three months, Newman added.
If the prospect of war has damped economic prospects for 2003, what about 2004 and beyond?
IBM’s Msays predicted a long-term increase in information-technology spending in the Middle East, which now accounts for only 1% of that spending worldwide. Countries in the region probably will need to implement systems for national identification cards, passport control and the new identification technologies known as biometric recognition. They also might spend more on the enhancement and protection of their electric grid. “Maybe we can pump more of the money in the region into civilian advancement.”
As for Asia, “it’s in a better position than Europe but the domestic markets are still too undeveloped, too reliant on exports, to sustain the world economy,” noted HSBC’s Thompson.
Much of the discussion focused on a political analysis of the current situation. If, as expected, the United States invades Iraq, Ganor predicts that Saddam Hussein will retaliate via terrorist attacks, not aircraft or missiles. “That’s more comfortable for Saddam. He can attack distant targets, and he doesn’t have to take responsibility. He can use proxies – Al Qaeda, Palestinian terrorists. The motivation is there, and we believe the capabilities – both chemical and biological – are there, too. And unlike using airplanes or missiles, the technological needs are very primitive.”
In the years after the Gulf War, Saddam backed away from public support for terrorists. But that’s changed since early 2000, when the latest Palestinian uprising began. Since then, “he’s taken a leading role in supporting terrorism in our region,” Ganor said.
Even so, the war should be quick – that is, if you define it as changing the regime in Iraq. But it may last longer if you take a longer view. Noted Ganor: “There’s a big difference between a long-term American campaign against terrorism and a short-term campaign against Saddam himself.”