Taiwan Risk: What Companies Are Doing Right Now

The latest escalation over Taiwan has prompted global companies to step up their contingency planning and reassess their operations in China.

And while most global companies aren’t likely to increase their holdings for the foreseeable future, some fund managers say investors are not yet factoring in the growing risks and potential costs as the US-China relationship unfolds. unravels.

Relations between the two countries have deteriorated for years amid a trade war and export restrictions aimed at restricting China’s access to critical technologies.

Disruptions to distant supply chains due to the pandemic and the war in Ukraine have fueled discussions about diversifying supply chains – often to places like Vietnam or other pockets of Southeast Asia. , even India – although the action was largely marginal.

But the discussion has taken on a different tone lately, strategists say. China opposed a visit to Taiwan by a US congressional delegation and responded with live-fire military drills that included firing missiles over the self-governing island, which China claims as its own and undertakes to reunite it.

This has intensified the level of escalation in Taiwan, which is a key semiconductor hub for the global economy and at the center of a geopolitical hot spot.

Few strategists see a Chinese takeover of Taiwan as imminent, in part because of the catastrophic blow it would wreak on the global economy, including China.

But geopolitical strategists see a new status quo around Taiwan that opens the door to ongoing mini-crises. It could also lead to more military activity – not only from China and Taiwan, but also from the United States – which would lead to a more militarized Asia-Pacific region.

The latest events have taken the Taiwanese risk to a point that C-suites and corporate boards can no longer ignore, says Jude Blanchette, Freeman Chair of China Studies at the Center for Strategic and International Studies.

“We knew it would be a flashpoint, but he’s moved firmly to smack the key down the middle,” he adds. “We went from a period four or five years ago talking about what would happen to talking about when and how much over the last six months.”

Dale Buckner, director of Global Guardian, a security consultancy that has helped companies facing conflict, including the war in Ukraine, is getting more and more requests from big companies about contingency planning in the event of a conflict in Taiwan.

For now, much of the talk is about allocating new investment elsewhere, building some resilience into supply chains, thinking about risks to infrastructure on the ground, and thinking about talent issues. This possibly includes filling senior positions in China or Taiwan with locals rather than expatriates. “In the short term, over the next 12 to 24 months, there is a good chance that nothing will happen. But if you’re an investor and you’re only looking at the next 18 to 24 months, you’re not a good investor,” says Buckner, who sees the chances of conflict rising in the short term. “It’s serious enough – and the trajectory is such – that you should start reducing risk today.” The question, of course, is what does this risk reduction look like for companies that have invested decades and billions in China.

“The question is whether they can imagine under any circumstances that, despite meeting quarterly targets, they would consider leaving China before being deported. If the honest answer is no, that changes the assessment of the political risk,” says Robert Daly, director of the Wilson Center’s Kissinger Institute on China and the United States.

This risk assessment varies by industry, with those who risk falling under the general description of national security being more vulnerable. This includes not only technology, but also pharmaceutical, rare earth and renewable energy related companies.

Some companies, analysts say, are directing new investment elsewhere, turning to a “China plus one” strategy to diversify supply chains. They are also reassessing whether to renew their partnerships, not only because of the Taiwanese risk, but also because of policy changes in China and slowing growth.

For investors, this means global businesses could see increased volatility from China-oriented disruptions, including ongoing mini-crises, potential retaliation or restrictions on their business. For example, the recently passed Chips Act prohibits anyone receiving money from the US government from increasing their investments in China.

“You have to be aware of your exposure to China, and a lot of times it’s not in China. A Chinese exporter excluded from the American market could encourage a Chinese import not to buy American”, explains Harry Melandri, adviser to the independent macroeconomic research firm M12 Partners.

Boeing

(ticker: BA), for example, recently cited geopolitical differences for its loss of a Chinese order to a European rival

Airbus
.

“We will see more,” he adds.

While Chinese companies have been battered by domestic policy shifts and risks coming from the United States, Melandri says US equities have yet to price in some of the risks that could arise from deteriorating relations between the two countries. two countries, even if this is not the case. lead to conflict.

While the MSCI China index is down 21% this year, the


S&P500

is down by less than half to just 9%.

Write to Reshma Kapadia at [email protected]

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