The United States’ decision to impose a new set of restrictions on the export of leading-edge semiconductor chips and equipment to China will significantly impact growth and earnings prospects for many companies. More importantly, the ripple effects will be felt far and wide.
The geopolitical backdrop to such measures is a complex tapestry of tensions, trade wars, and global conflicts. As tensions rise in different regions, the implications of geopolitical decisions are no longer confined to diplomatic circles.
Instead, they reverberate throughout the business world, forcing companies to adapt swiftly. The geopolitical winds of change close market opportunities, create new ones, reshape supply chains, and incentivize / disincentivise different players in various markets.
This underscores the necessity for companies to factor in policy and geopolitics more than ever before. This applies even more to startups.
Why Startups Win
Startups win against incumbents on nimbleness, agility, and fresh starts. They typically have better alignment in RPPs (resources, processes, and priorities) and are quicker to realign these with changing circumstances.
This combined with their ability to innovate from the ground up and focus on new markets (normally unserved or over-served customers), provides opportunities for disrupting industries.
It is critical that startups extend this agility and nimbleness to factoring geopolitics and policy in their decision making. An expanded consideration set should encompass not only their immediate ecosystems (of customers, suppliers, employees etc.) but the larger narrative and headwinds / tailwinds.
Identifying Levers of Policy
To factor the influence of geopolitics and policy, it is essential to understand the levers that governments deploy to influence / alter markets. These levers can be broadly categorised into six key areas:
Incentives: Governments often offer incentives linked to particular activities (e.g., exports, investments, employment) or sectors (semiconductors, advanced cell manufacturing etc.)
Public Procurement: Government procurement decisions adapt to global trade dynamics, domestic supply capabilities etc. potentially favoring domestic or preferred suppliers.
Tariff and Non-Tariff Barriers: Global trade dynamics and industrial policy lead to alterations in trade and tariff barriers, directly impacting cost and availability. For instance, governments may impose tariffs on imports of particular goods, creating market advantages for domestic industries in specific sectors.
Taxes: Tax policies are adjusted in response to evolving industrial policy, fiscal position etc. and can influence investment decisions, foreign capital, profitability, and competitiveness of industry.
Standards: Revisions in standards and regulations shape industries by encouraging innovation, restricting outdated practices, and regularising industries.
Trusted Value Chains: Governments may emphasise/enforce trusted value chains particularly for critical infrastructure to increase supply chain resilience and security, opening doors for companies that meet specific criteria.
Opportunities In India
We can apply this framework to the Indian context and see how policy has shaped market opportunities in the recent past.
With the global realignment of supply chains (China Plus One) and the aspiration to develop domestic capability and capacity (Atmanirbharta), the Indian Government has deployed these policy levers at different stages in a bid to create domestic design and manufacturing ecosystems.
While tariffs, standards and public procurement have been leveraged to disincentivise imports, incentives and favorable tax policies have been deployed to incentivise domestic goods. This has been most prominent in consumer electronics, electric vehicles, pharmaceuticals, and green energy.
With these ecosystems being built ground up while being anchored by global majors, there are opportunities across the value chain in design, manufacturing, recycling etc.
A few low-hanging fruits include the software defined vehicle (SDV) stack, power electronics for industrial and automotive, IDH for consumer electronics, and grid forming systems for RE.
In Conclusion
In a world where geopolitics and policy significantly impact business operations, startups must adapt to survive and thrive.
By understanding the levers of policy used by governments, startups can identify white spaces in the market and seize emerging opportunities quickly.
To remain competitive, startups must not only act swiftly but also be forward looking, anticipating future course of policy. In doing so, they ensure continued success in a dynamic, ever-evolving world.
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