Horizon Scanning: Global Supply Chain

Relationships are shifting between China and its rivals. Inverroy takes a look at how relations have evolved and the potential impacts the outbreak of war with China would have on the global supply chain.

 Tensions rising higher than a Chinese spy balloon….

The last month has seen tensions between the world’s two superpowers escalating with four ‘unidentified objects’ being shot down above the US and Canada. These were believed to be military balloons launched as part of a Chinese surveillance programme on strategic military sites. These balloons have also been spotted over at least four other continents, causing worldwide concern, although China has denied all malicious intent.

China has a deep history of air-based surveillance. The first recorded use of aerial warfare was in ancient China when surveillance kites were deployed to provide military intelligence.

In a recent statement, UK Prime Minister, Rishi Sunak, confirmed that the UK was poised to police its air space against ‘spy balloons’. Many other countries are also on high alert. The commander of the US Air Mobility Command (AMC), General Mike Minihan, has predicted that the US will be at war with China in 2025 and warns of conflict in the Taiwan Strait. If war does break out, supply chain issues will be a major factor to consider.

Relations between China and Taiwan have always been difficult, but has it reached a tipping point?

Whilst dozens of reports of spy balloons spotted in Taiwanese airspace in recent years have fuelled concerns of an invasion by Beijing, balloons are the least of their worries. A record seventy-one Chinese aircraft, including fighter jets and drones, entered Taiwan’s air defence identification zone in a 24-hour period from 0600hrs on 25th December 2022. This was the largest incursion to date, China claimed the ‘strike drills’ were conducted in response to provocation from Taiwan and the US.

Taiwan’s defence minister believes relations with China to be the worst they have been in 40 years. The imbalance of defence systems and military capability between the two countries puts a strain on Taiwan’s allies, such as the US. Taiwan’s reliance on US arms provision is having a knock-on effect on China–US relations.

Potential Supply Chain implications and Economic Fallout

The economic and supply chain impacts from the current conflict between Russia and Ukraine would be negligible compared to the devastating impact of a potential war between China and Taiwan, let alone China and the US.

Manufacturers are beginning to pay the price as the China/Taiwan supply chain becomes increasingly precarious. In December 2022, Apple followed Samsung and pulled out of manufacturing in China. Instead, moving to neighbouring countries such as Vietnam and India. In Taiwan, one of the world’s biggest exporters of bicycle parts, Brompton Bikes, is also pulling the plug. However, if war breaks out or sanctions are imposed, the biggest impact will be the supply of microchips. Taiwan produces 92% of the world’s most advanced logic chips. If production stops, there would be a critical impact on the global supply chain on a scale far more severe than the current war in Europe or during COVID. As these chips are required to run a range of electrical equipment, including fridges and cars, manufacturers need to start thinking about alternative solutions.

China has already faced backlash over its handling of the COVID outbreak, which has led to a loss of confidence in China’s tech sector. A lack of investment from companies using China as a supply source would have a severe knock-on effect on the global supply chain. Whilst still dealing with the long-term impacts of COVID and transitioning out of their zero COVID policy, a war of this scale would be catastrophic. 

According to the Rhodium Group, over 2 trillion USD of economic activity could be at risk if conflict breaks out between China and Taiwan, even before factoring in the impacts of international sanctions or military response. With most countries still facing the impacts of post-covid and inflation, the economic fallout would be monumental.

In terms of horizon scanning, the UK has begun preparing potential economic fallout scenarios in the event of a Chinese invasion of Taiwan. Recent events mentioned above have caused there to be increased awareness within the government of the threat level posed by China. Alicia Kearns, Conservative MP and chair of the foreign affairs select committee stated she “welcomed the recognition of the seriousness of the threats against Taiwan to global economic security”.

What are the impacts of another major war on you and your business?

  • Do you rely on a Tier 1 supplier with Chinese or Taiwan ownership, or within that region?

  • Do any of your Tier 1 suppliers rely on parts from this region from their Tier 2 suppliers?  For example: Suppliers may be based in Europe but cannot build items without parts from the area?

  • Does your project rely on finance or skilled staff from either China or Taiwan?

  • For all of these questions, do you have a workaround option identified? 

Cost benefit analysis may be seen as a “waiting game”, but if the worst happens and every business is scrabbling for the limited resources available, how can you make sure your organisation is as close to the front of the queue as possible?

To discuss resilience planning and how best to protect your organisation from local, regional, national, or global events contact Inverroy Crisis Management at enquiries@inverroy.com.

Featured photo credit: Teng Yuhong (Unsplash)

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