The geopolitics of procurement

National security concerns are influencing procurement decisions across a growing number of Australian industries. Anxiety about dependence on politically unreliable actors for the supply of critical goods – once a niche preoccupation for Defence officials – is now a broader phenomenon.

Australia enjoys self-sufficiency in many food and energy products, but other industries including healthcare, technology and construction rely heavily on overseas procurement. Because the definition of ‘critical industries’ has expanded, many of these sectors now find themselves considered important contributors to Australia’s national security.

Since 2021, the Department of Home Affairs has considered food and grocery outlets and universities to be part of the nation's critical infrastructure, and the same year Treasury significantly expanded the definitions of “national security businesses.” As they navigate these growing pressures, companies throughout the Australian economy can learn from how those in charge of Australia’s Defence supply chains manage geopolitical procurement risks.

Defence procurement: Cheaper is not always better

Chinese philosopher Sun Tzu highlighted the importance of secure supply sources: “…an army without its baggage-train is lost; without provisions it is lost; without bases of supply it is lost.” Governments have long been aware of the risks of relying on politically unreliable actors for procuring essential Defence items and Australia’s Defence officials recognise that cheaper is not always better. In today’s rapidly changing threat environment, even small supply disruptions can create immediate vulnerabilities.

A 2022 paper, Securing Australia’s Defence Supply Chains, noted three key sources of vulnerability in Defence procurement:

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?????? geopolitical demands, e.g., needing to remove suppliers due to deteriorating geopolitical relationships; and

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These sources of vulnerability are major preoccupations for governments. The Department of Defence’s 2020 Force Structure Plan noted how shifting geopolitical dynamics threaten Australia’s access to defence technologies, and called for more provision of these goods within Australia. The US Department of Defense has come to similar conclusions, this year releasing an ambitious strategy for Securing Defense-Critical Supply Chains. Key elements include a greater reliance on domestic supply, more procurement from allies, and mitigating foreign control of supply sources.

In this environment, companies that participate in defence supply chains increasingly need to decide whether to explicitly align with some nations over others, and if not, how to remain geopolitically acceptable to all sides.

What can other industries learn from Defence?

The geopolitical environment is becoming more mistrustful, and actors are seeking to safeguard national power and security. This geopolitical competition is not just about military confrontation. More and more governments are pursuing ‘geoeconomic’ objectives – that is, using economic levers to bolster their geopolitical power – and those economic levers rely on many parts of the economy. ?In line with this trend, Australia’s Critical Infrastructure Act highlights that more and more industries contribute to national security, and are therefore potentially vulnerable to geopolitical disruptions to their sources of supply.

Rather than thinking of Defence as an exception when it comes to analysing geopolitical procurement risks, other businesses should look to Defence as a bellwether.

Leading firms in many parts of the world appear to be doing just that. Following along the general lines of the US DoD recommendations, they are modelling the potential impacts on their supply chains of adverse geopolitical developments. For example, Japanese companies in the automotive sector are analysing the procurement disruptions that could emerge from geopolitical tensions. To this end, researchers have war-gamed the impacts on the Japanese economy if 80% of imported components were disrupted for two months. The US government has conducted a similar study on vulnerabilities in the Information and Communications Technology sector, and Australia’s Productivity Commission conducted a 2021 review of Vulnerable Supply Chains.

Geopolitical risk is of particular importance for technology companies and their clients. Technological strength is used by some governments as a tool for national security. Indeed, competition is so fierce that some analysts describe a ‘tech cold war’ as governments seek pre-eminence – or at least try to avoid being left behind. For example, the US has passed legislation restricting the supply of semiconductors to Chinese companies, and Canada and Germany have both restricted foreign investment into their lithium and semiconductor sectors, respectively.

The bottom line for Australian companies is that, as the 2021 amendments to the Critical Infrastructure Act highlighted, a growing number of industries are critical to Australia’s national security. The goods procured and made by these industries – from pharmaceuticals, to metals and minerals, to chips and switches, to groceries, to communications and medical devices – have strategic importance. Procurement of these goods could be contested. Companies that rely on these goods – whether they think of themselves as national security industries or not – need to put in place well thought-out strategies in preparation for potential disruptions.

Global procurement is not returning to ‘normal’ any time soon. Now is the time to put strategies in place.