Risk Disclosures Reflect Concerns About Geopolitical Instability
Rounding the corner to 2024, corporate leaders and analysts are warning that geopolitical instability – driven primarily by ongoing conflicts, political uncertainties, and upcoming elections – will remain a significant economic concern.
In resoundingly grim comments in recent weeks, executives said current geopolitical tensions are contributing to the “most dangerous time the world has seen in decades,” creating a “dangerous juncture” for the global economy and mapping a future of “less hope and a lot more fear.” The alarm bells are sounding as an Oxford Economics survey of businesses found that companies see geopolitical tensions as the top risk to the global economy over the next two years.
Several companies in risk disclosures recently filed with the Securities and Exchange Commission cited worries that tenuous relations with China and Russia could adversely affect the operations and revenues of U.S. businesses. In remarks made by China’s leader Xi Jinping during his recent visit to the U.S., he did not mention trade, investment or the possibility of improving the difficult environment in China for U.S. businesses. One U.S. executive, echoing a common sentiment among attendees at Xi’s speech, called the comments “propaganda at its finest.”
Here are a few examples of how companies are portraying their concerns about geopolitical tensions in recent SEC filings.
In a Form 10-Q filed this month, Nvidia said its operations could be affected by China’s complex laws, rules and regulations. The technology company added that the political landscape and other actions may adversely impact its business.
Following new and updated licensing requirements for exports to China, Nvidia transitioned testing, validation, and supply and distribution operations out of China and Hong Kong. The company mentioned it is working to expand its data center product portfolio to offer new regulation-compliant solutions. Nvidia said the new U.S. licensing requirements have disproportionately impacted the company. Moreover, it indicated that the requirements have resulted in disadvantages against competitors that sell products that are not subject to the new restrictions or may be able to acquire licenses for their products.
Unity Software Inc.
In a Form 10-Q filed November 9, Unity Software, Inc. said adverse changes in the geopolitical relationship between the U.S. and China or changes in China’s economic and regulatory landscape could have an adverse effect on its business conditions. It added that an escalation of recent trade tensions between the U.S. and China has resulted in restrictions that harm its ability to participate in Chinese markets.
Unity said sustained uncertainty, worsening global economic conditions and further escalation of trade tensions between the U.S. and its trading partners could result in a global economic slowdown and long-term changes to global trade. Those include retaliatory trade restrictions that further restrict its ability to operate in China.
In a Form 10-K filed on October 6, electronics manufacturing company, IEH commented that fluctuations in exchange rates could adversely affect its business and the value of its securities. Due to an increase in tariffs imposed by China on products from the U.S., IEH said some of its customers might seek alternatives, which could have a negative impact on its sales.
To avoid these tariffs, the market has shifted towards an “uncertain era” including sourcing from other countries, according to the company. IEH noted its sales during this stage may also be negatively impacted by this shift in behavior.
Open Text Corp.
In a Form 10-K filed on August 3, Open Text said geopolitical instability, political unrest, war and other global conflicts, including the Russia-Ukraine conflict, may continue to affect its business. For example, in response to the Russia-Ukraine conflict, the Canadian software maker ceased all direct business in Russia and Belarus. It also cut ties with known Russian-owned companies.
As the regulatory environment evolves further, Open Text said it may adjust its business practices as required by applicable rules and regulations. The company pointed out that its compliance with sanctions and export controls could impact future revenue streams and the fulfillment of certain contracts with customers and partners doing business in the affected areas.
“While our decision to cease all direct business in Russia and Belarus and with known Russian-owned companies has not had and is not expected to have a material adverse effect on our overall business, results of operations or financial condition, it is not possible to predict the broader consequences of this conflict or other conflicts, which could include sanctions, embargoes, regional instability, changes to regional trade ecosystems, geopolitical shifts and adverse effects on the global economy, on our business and operations as well as those of our customers, partners and third-party service providers,” Open Text said.
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