What is your Strait of Hormuz?

 I saw in passing that someone wrote a post on LinkedIn, indicating that all businesses have a weakness, a "Strait of Hormuz" issue.  I did not read the post, but the idea stuck with me.  So, like all great artists, I am borrowing and stealing but not plagiarizing.

The US has a Strait of Hormuz problem because with very little effort, the Iranians (or several other countries along either coast) can shut down the Strait, thus shutting down oil shipments.  This is asynchronous and guerilla warfare at its finest - find a weakness that your opponent cannot protect and attack or enlarge that weakness.  In this instance, the strait itself isn't really a weakness the US faces, but since 1) oil is a global commodity and pricing is global and 2) many of our key allies rely on oil from the Middle East (Japan, South Korea) and 3) even our competitors rely on oil from the Middle East (China) and 4) Iran has demonstrated that with a few threats and a few mines it can shut down a major transport route and disrupt oil supplies globally, the Strait of Hormuz calls into question our commitments to allies, the stability of the global markets and our ability to project power when all Iran needs is a few mines.  No matter how strong the US may be, as long as someone remains in Iran and is willing to drift a few mines into the shipping lanes, Iran has control over the Strait, which has severe knock-on and ecosystem impacts.

This particular situation is unusual but not unique.  Almost every business has gaps or weaknesses that could be stronger or the company relies to a great extent on a third-party solution or infrastructure that is far more important than it seems.  Take, for instance, the internet.  While no one controls the internet, if a hacker could disable or block access to Amazon Web Services (as an example) then thousands of software applications and services will instantly become unavailable, until or unless they can switch to another backup provider.  The real question is:  what forms your strait of Hormuz, either as a direct threat, or, as in the case of the US and Iran, a threat to partners and economies that the US wants to support.  

Governments vs Businesses

Now, governments aren't necessarily like businesses.  The US wants to be a dominant player in the Middle East, so projecting power, protecting allies and keeping shipping moving is important to the US and its ability to attract and retain partners and allies.  With this thinking in mind, it's clear that larger, global businesses are more likely to have a Strait of Hormuz problem, because there are secondary and tertiary partnerships, distribution lanes and ecosystem players that could be dependent on multiple partners and their ability to operate.

Take, for example, the Covid epidemic.  We learned in that instance that the US had a long, stable but very brittle supply chain with China.  If the ships don't cross the Pacific, then the stuff we need in order to operate as a nation becomes dramatically more expensive, and consumers start looking for alternatives.  A very long, brittle and narrow supply chain is an example of a Strait of Hormuz problem, and can be disrupted by natural disasters like Covid, but can also be disrupted by human action, a competitor taking out supply capacity and other activities.

TSMC, the manufacturer of most of the valuable semiconductor like the GPU chips for Nvidia, has a Strait of Hormuz problem, or more precisely a Taiwan Strait problem, in that the majority of its manufacturing is on the island of Taiwan.  China could very easily blockade the island, reducing or eliminating Taiwan's ability to ship semiconductor parts.  However, the companies that acquire the GPS chips and the consumers who use the AI created by the GPS chips, also have that problem.  If the Chinese decide to take over Taiwan, the knock-on effects are drastic and widely distributed.  The really interesting question is:  what is TSMC doing about its Strait problem and how are its customers diversifying to mitigate the obvious risk? 

Identifying your Strait of Hormuz

Every business has a Strait of Hormuz gap or weakness.  They aren't always easy to identify, but they are out there.  Ask yourself:  what are the factors that my business cannot live without?  If I were to lose the (Internet, water, specific class of people, funding) how would I survive as a business?  Then, ask yourself, what's my sensitivity to losing that particular attribute?  If I lost access to the internet and I run an internet business, I'm down for the count.

Then, what's the alternative?  If you have significant areas of sensitivity, what can you do?
When there was reasonable peace and the shipping wasn't overly impacted in the Strait of Hormuz (leave aside the Red Sea for a second), Japan and South Korea did not need alternative supplies for oil.  However, once the Strait is blocked, their choices are exceptionally limited and their economies are highly dependent on imported oil.  Now, they are war gaming how to obtain alternative sources, and whether or not to go back to almost total dependence on oil originating from the Strait.

It's important to note that efficiency and market economics often create the conditions for the Strait to emerge.  Japan and South Korea don't need secondary oil markets, or to move as aggressively on nuclear power or solar conversions, as long as the Strait remains open.  And, once the Strait problem presents itself, a lot of the alternatives require massive investment and infrastructure to address, so there aren't good short-term solutions.

You may argue that you've got redundancy in your internet provider, have access to fresh groundwater if the municipal source fails, and secondary financing sources if (as happened in 2008) liquidity dries up.  If so, all good.  However, that doesn't mean that you've fully assessed and addressed all of your risk factors.  With the advent of more ubiquitous AI, people are becoming a commodity, except when they aren't.  Some employees will have tremendous value and losing even one or two of them could be your Strait of Hormuz issue.  

"As long as..."

The key question might be - which factors are almost insignificant, don't seem variable or risky, as long as X keeps happening or Y does not happen.  Then you begin to define your Strait problem, and no matter how unlikely the factor is to occur, it will occur.  We learned this in 2008 in the housing crash, and learned it again in 2020 with Covid.  Some people will call these "black swans" but I've named two easily identifiable black swans from just the last 20 years.  

These factors are increasing and accelerating

As the global economy becomes more interdependent, as we take increasing advantage of comparative advantage, as our economy is driven by energy and data, the Strait of Hormuz challenges grow and increase in diversity.  Lowering costs through efficiency may lead to single source contracts or overreliance on a single vendor or channel.  It may be that companies need to consider more redundancy in their suppliers and operations and in their ability to reach customers and prospects.