Dependency risk is where you rely on a person, a process, a product, a supplier, a market, or any other factor, to a very high degree such that failure or disappearance of that person, process, etc, or simply a problem for that factor, can have a serious impact on your business.
Recently, Apple, Samsung, VW, and Jaguar LandRover have warned markets that they are being hit by a slow-down in China (the largest smartphone market in the world and the largest car market in the world), partly attributable to the trade war with the U.S. China has a population of 1.4bn and accounts for 16% of the global economy; however it has also accounted for 30% of worldwide growth over the past decade. A slow-down in China has been shown to have an immediate impact on the prospects of some of the biggest international brands.
The same occurs for countries. Australia is the most China-dependent country in the developed world (it’s North Korea in the developing world) with 35% of its exports going to China. Coal, metals, minerals, wine, tourism, and education (receiving students from China is worth A$ 9bn to the Australian economy each year) are big sales from Oz to the People’s Republic. But suddenly, fast-expanding overseas tourism by Chinese people is reversing, and the same is happening with studying abroad. So, Australia is starting to feel the pinch as China dependency risk kicks in.
The same may not be true for the source of the dependency. Whilst Western companies are subject to short-term share-price fluctuations that may affect their future, and the economic prospects of the governments of countries can determine the longevity of the parties in power, China follows a very long-term strategy (e.g. to be number 1 in scientific research, to be number 1 in electric cars, to be number 1 in fuel cell technology) that enables them to ride out these cycles.
Sources: The Financial Times, Bloomberg