Could your supply chains survive a China-Taiwan conflict?

Quietly, businesses are doing the unthinkable: war-gaming how they would respond to the supply chain disruption that might result from a conflict between China and Taiwan.

Such a conflict might have many different ramifications. Shipping routes from Taiwan might be blockaded by China, for instance. Military activities might damage Taiwan’s semiconductor industry: the country has over 60% of the world’s outsourced chipmaking capacity. And the aftermath of a conflict might see China itself subject to Russia-style global trade sanctions.

Naturally, such war-gaming isn’t something that businesses want to especially publicise. When the Financial Times revealed that UK telecoms giant BT’s procurement function had carried out such a simulation, neither of the external advisers involved in the exercise wanted to talk about it, and BT itself said only that such simulations were a routine part of its risk management processes.

Maybe no longer such a smart option

What such simulations also reveal is just how far the China pendulum has swung. Not so many years ago, China was the default option in sourcing and outsourcing decisions: a ‘go to’ low-cost economy that was not only capable of supplying the West’s factories and markets, but doing so at scale. Those businesses which eschewed the China option inevitably lost out to nimbler competitors who headed East.

No longer: long before the current spate of Taiwan sabre-rattling, the gloss had started to come off the China option. Ironically—for China, at least—it was the country’s own success as a sourcing destination that began to diminish its appeal. That success translated into an enormous trade surplus, prompting China hawks such as Donald Trump to ratchet up trade tensions, and slap tariffs on Chinese imports.

“Trade wars are good, and easy to win,” he boasted. So how’s that working out, Donald?

Covid-19 came next. Western manufacturers sat impotently as Chinese cities—and their factories—were put into harsh lockdowns. Western assembly lines shut, and shelves emptied, and desperate searches began for alternative sources of supply. Adding to the pain: even when export shipments had left the factory, whole ports could be shut. And adding even further to the pain: on-off, on-off lockdowns continued in China long after they ceased to be imposed in the West.

Tension ratchets higher

But is China once more the agent of its own undoing? Granted, invading Taiwan—or even threatening to—won’t endear it to the West. But proactive punitive policies aimed at Western businesses will discourage trade even more.

And that’s exactly what appears to be happening, with a raft of sanctions, executive arrests, fines, so-called “hostage diplomacy”, and raids on Chinese offices of foreign companies. Lockheed Martin, Raytheon, chipmaker Micron, audit assurance firm Micron, Japan’s Astellas Pharma, audit and consulting firm Deloitte—the list goes on.

How worried should businesses be? With already-crowded boardroom agendas, is it time to shoehorn China into the risk-assessment mix?

Probably, in my view. And at the very least, businesses should invest time in understanding their exposure. A case in point: boards have risk registers. Is China even mentioned in yours?

Alternative sourcing options

As I’ve observed before, the glib solutions trotted out by politicians and armchair sourcing ‘experts’ don’t really work. The West’s industrial base is too hollowed out for large-scale reshoring to work. Factories have been shuttered, and suppliers have decamped to Asia.

Sure, in specific, strategic instances, reshoring is an option—especially if backed by reshoring-friendly government policies and public sector funding. Both Germany and the USA, for instance, are ramping up their domestic chipmaking capacity.

That’s fine for hi-tech, but if what you want is more prosaic—standard industrial fare such as cogs, castings, cables, plastic components, and wiring, for instance—don’t look to politicians for assistance.

Even so, the highly-focused nature of the problem is helpful. It’s specifically China and Taiwan that businesses should be concerned about, rather than Asia generally. And in the case of that standard industrial fare, as opposed to high-tech semiconductors, China specifically.

So there are other sourcing options to consider: Thailand, India, Vietnam, South Korea, Indonesia, and so on. And Asia isn’t the only game in town—if we’re talking near-shoring, there are more options, especially for those of us in Europe, as opposed to North America.

You need data. Now.

But before any of these other options can be explored, businesses need to know what they’re looking for—specifically which categories, components, and materials are vulnerable to China-Taiwan supply chain vulnerabilities. Only then can the planning and exploration of other sourcing options be considered.

Which is where those war-gaming exercises come in. If China-Taiwan conflict does disrupt your supply chains, what are you actually going to do?

Don’t wait until conflict occurs to find out. Decide now.