The Risk of War on Taiwan and Its Impact on Supply Chains
The ongoing Covid-19 pandemic has exposed logistical weaknesses in the global supply chain, which was built over several decades of globalization. Geopolitical tensions, especially the risk of war on Taiwan, are putting even more pressure on tech companies to change the way they operate.
The nervousness surrounding the risk of war on Taiwan has led several smartphone and circuit board manufacturers to consider alternative manufacturing options outside of China and Taiwan. The executive at Unimicron, which supplies Apple, Intel, and other companies, stated that they decided to expand manufacturing capacity in Taiwan two years ago, due to customers’ demands for “outside of China” options.
However, Taiwanese companies are also becoming worried about the situation in the strait, where China concluded another round of military exercises in protest of Taiwanese President Tsai Ing-wen’s meeting with US House Speaker Kevin McCarthy. If there is military attrition in Taiwan, the entire global supply chain is sure to collapse.
Supply Chain Disruptions Due to a Possible War on Taiwan
Even without a full-scale war, breaking a Chinese blockade of Taiwan could cause major global unrest. An outage in logic chip production at contract chip makers in Taiwan could lead to nearly $500 billion in lost revenue for electronic device makers that depend on this supply, according to Semiconductor Industry Association’s estimate. A recent Rhodium Group estimate said a Taiwan conflict would set well over $2 trillion of economic activity at risk.
People underestimate Taiwan’s position in the supply chain. It’s not just about semiconductors. We have a very comprehensive supply chain from chips, components, PCBs, cases, lenses to be assembled. . . anything you can think of, said a senior executive at Compal, a major assembler of products for Dell, HP, and Apple.
Companies’ Response to the Risk of War on Taiwan
Since Pelosi’s visit to Taiwan, several technology companies requested manufacturing capacity outside of China and Taiwan, including Intel, AMD, Nvidia, Meta, Google, and Amazon. HP and Dell, the world’s second-largest and third-largest laptop makers, have also asked their suppliers to start building capacity in Southeast Asia. Dell is even aiming to phase out Chinese-made chips by 2024.
AMD said it has been working continuously with vendors to improve business continuity plans, including the “important” goal of geographic diversification. Intel said it has consistently supported its suppliers’ “longstanding” efforts toward diversification, which were unrelated to Pelosi’s visit to Taiwan. Nvidia declined to comment.
Dell has previously said it is continually exploring supply chain diversification around the world, while HP claimed to have a strong global supply chain. Meta, Google, and Amazon did not respond to requests for comment.
Companies looking to diversify their supply chains are doing so gradually due to the time it takes to build a semiconductor plant from the ground up, ranging from 3 to 10 years, depending on the country, according to Benjamin Hein, manager for China and Southeast Asia at Germany’s Merck, a materials, and chemicals group.
The US is trying to speed up the process by offering incentives to encourage companies like TSMC and South Korea’s Samsung to help build America’s semiconductor industry. TSMC’s Arizona plant, which will produce ultra-advanced 3-nanometer chips that can be used in supercomputers, smartphones, automobiles, fighter jets, and military equipment, is seen as a major result of this push.
Conclusion
The risk of war on Taiwan is not just a political issue, but it has far-reaching implications for the global supply chain. While companies are taking steps to diversify their supply chains, the process will take time. The prospect of a supply chain disruption due to the risk of war on Taiwan is a concerning and worrying thought for companies and investors alike.
Additional Piece: How Companies can Mitigate against Supply Chain Disruptions
With the risk of war on Taiwan causing supply chain disruptions, companies must take action to mitigate against any potential impacts. Here are some steps that companies can take to minimize the risks associated with supply chain disruptions:
1. Diversify Supply Chains – Companies can mitigate supply chain disruptions by diversifying their supply chains. This may require finding alternative sources of raw materials, components, or assembly services that are located in geographically diverse regions.
2. Identify Critical Components and Suppliers – Companies can identify critical components and suppliers and develop contingency plans to mitigate any disruptions. This may include identifying alternative suppliers or stockpiling critical components.
3. Invest in Technology – Companies can invest in technology that improves supply chain visibility, such as IoT sensors, blockchain, and AI. This can help to identify potential disruptions before they occur and allow for prompt remediation actions.
4. Strategic Partnerships – Companies can build strategic partnerships with suppliers and customers to foster long-term relationships that enable mutual support during periods of disruption.
5. Supply Chain Analytics – Companies can leverage supply chain analytics tools to monitor and analyze supply chain risks. This can help to identify potential disruptions early and mitigate the risk of supply chain disruptions.
By taking these steps, companies can mitigate the risks associated with supply chain disruption and better position themselves to weather any disruptions caused by geopolitical tensions or the ongoing Covid-19 pandemic.
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The Covid pandemic has highlighted the logistical weaknesses of the international supply chain, built over decades of globalization. Geopolitical tensions, especially the threat of war on Taiwan, are putting further pressure on tech companies to change the way they operate.
In an indication of the nervousness, a senior US Air Force general recently predicted that America and China are risk going to war over Taiwan in 2025.
“Two years ago, due to Trump’s trade war, customers told us they wanted ‘outside of China’ manufacturing options, so we decided to expand manufacturing capacity in Taiwan, our base,” said an executive at Unimicron, a circuit board manufacturer supplying Apple, Intel and others.
Then, while the company was in the midst of a multibillion-dollar expansion in Taiwan, Pelosi visited Taipei last August. An enraged Beijing, which considers the island part of its territory, responded by conducting live military exercises off the coast of Taiwan, and Unimicron’s customers grew nervous.
“Our customers later said they wanted some manufacturing alternatives outside of China and also Taiwan due to fears of war,” the executive said. “We were stunned and speechless, as were many of our peers. . . How can the supply chain be moved out of China and Taiwan? Most of the electronics supply chains are here.”
Since the middle of last year, Intel, AMD, Nvidia, Meta, Google and Amazon have all requested manufacturing capacity outside of China and Taiwan, several technology executives told Nikkei Asia and the FT. HP and Dell, the world’s second-largest and third-largest laptop makers, have asked their suppliers to start building capacity in Southeast Asia. Dell is even aiming to phase out Chinese-made chips by 2024.
“We have a corporate contingency plan – the so-called BCP – to prepare for supply chain disruptions, such as war,” an executive at Japanese chip test equipment maker Advantest told Nikkei Asia and the FT. “But if a military conflict really happens here in the Taiwan Strait, honestly, I think any border crossing will be totally useless. It would be doomsday for the chip supply chain and nobody ever wants to imagine that happening.
AMD said it has been working continuously with vendors to improve business continuity plans, including the “important” goal of geographic diversification. Intel said it has consistently supported its suppliers’ “longstanding” efforts toward diversification, which were unrelated to Pelosi’s visit to Taiwan. Nvidia declined to comment.
Dell has previously said it is continually exploring supply chain diversification around the world. HP claimed to have a strong global supply chain. Meta, Google and Amazon did not respond to requests for comment.
Even without full-scale war, breaking, say, a Chinese blockade of Taiwan could cause major global unrest. An outage in logic chip production at contract chip makers in Taiwan could cause nearly $500 billion in lost revenue for electronic device makers that depend on this supply, according to an estimate by the Semiconductor Industry Association. A recent Rhodium Group estimate said a Taiwan conflict would set well over $2 trillion of economic activity at risk.
“People underestimate Taiwan’s position in the supply chain. It’s not just about semiconductors. We have a very complete supply chain from chips, components, PCBs [printed circuit boards], cases, lenses to be assembled. . . anything you can think of,” said a senior executive at Compal, a major assembler of products for Dell, HP and Apple. “If there is military attrition in Taiwan, the entire global supply chain is sure to collapse.”
Such a scenario, in other words, would leave Apple with “Made in America” chips and no device to put them into.
The threat of conflict
Initially, fears of possible conflict came largely from Western customers. But now Taiwanese companies are also worried about developments in the strait.
Beijing has concluded another round of military exercises on April 10, encircling Taiwan in protest of Taiwanese President Tsai Ing-wen’s meeting with US House Speaker Kevin McCarthy in California. The three-day exercise included 91 raids in one day.
“We have grown hand in hand with China’s reform and opening up in the past decades, but now the good old days are over. It’s becoming obvious that Beijing puts politics before economic growth,” said an executive at an Apple supplier whose facilities in China employ hundreds of thousands of workers. “Our strategy is to keep a low profile, speed up production shifts [to south-east Asia and India]and gradually divest our money from China over the next few years.”
“Gradually” is the buzzword for many companies looking to diversify their supply chains, whether they want to or not.
“It takes at least three years in some countries and even five years [in others] to build a semiconductor plant from the ground up, and then it has to start operating,” said Benjamin Hein, manager for China and Southeast Asia at Germany’s Merck, a materials and chemicals group. “Sometimes there are some misconceptions that this [supply chain shift] it could happen overnight due to some geopolitical issue [but] it could take at least five years, and even more than 10 years, to see more fundamental change.
Washington is trying to speed up the process by focusing on chips. It is offering incentives to encourage companies like TSMC and South Korea’s Samsung to help build America’s semiconductor industry.
TSMC’s Arizona plant, which will produce ultra-advanced 3-nanometer chips that can be used in supercomputers, smartphones, automobiles, fighter jets and military equipment, is seen as a major result of this push.
https://ig.ft.com/taiwan-economy/
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