Are We Paying Enough Attention to Political Risk When Purchasing Technology?

April 12, 2019

I would like to pose the question: “Should we be more attentive to geopolitical risks when buying software and technology?” In other words: “Should the origin outweigh the cost?”
The Economist describes political risk as “In essence, political risk is the danger that the actions of governments might reduce the cash-flows that investors expect from their investments.“ Traditionally we have viewed political risk with regard to a country’s instability resulting from military takeover, change of government or major change in foreign policy.

It has taken a few years, but now purchasing technology from another country is fully in the spotlight of regulators in Europe and the US. China has been the recipient of the most scrutiny, which is no surprise considering their “Made in China 2025” policy with the aim of making China dominant in high-tech manufacturing.

In August 2018, the United States passed the National Defense Authorization Act for 2019 determining the level of defense budget funding and control over how it is spent. This bill effectively prohibits US federal government agencies from procuring telecommunications equipment or services from companies linked to the Chinese government. Any US government workers have to give up their phones if made by Huawei or ZTE, and federal agencies must remove any networking equipment made by the same two companies.

In December 2018, Meng Wanzhou was arrested in Canada on behalf of the US for violation of American sanctions against Iran. Later that month Donald Trump said that he might intervene in the trial if it could secure a trade deal with China, which appears to indicate that the prosecution is a political move.

More recently in March 2019, the UK’s Government Communications Headquarters was only able to provide limited assurance that long-term security risks can be managed in the Huawei networking equipment currently deployed in the UK. This comes after many governments around the world have blocked their telecoms companies from using Huawei equipment in the next generation 5G mobile networks.

Huawei is now suing the US government claiming that the NDAA restrictions against Huawei are unconstitutional and are seeking an injunction. American and Chinese military activity has increased in the South China Sea, the US and China trade wars are ongoing and now with increasing restrictions on Chinese made telecoms equipment this particular political technology risk should be re-assessed.

The result should be an increasing focus on where purchased technology originates rather than the final cost, together with a more robust assessment of cyber-security concerns. The two biggest economies in the world do have a major impact in what technology we buy and from whom and currently the relationship between the US and China is broken.

One obvious risk mitigation strategy is to buy local. Buying software or technology from South Africa ensures the same regulator governs both parties, we are investing in our own economy and you receive local expertise and support. After all, local is lekker!

Author – Warrick Asher