Western companies wake up to China risk

Taiwan crisis has shown the need to hedge exposure and draw up contingency plans

A global pandemic, a major war in Europe — both were risks that seemed almost unimaginable, until they happened. Now the tensions with China provoked by US House Speaker Nancy Pelosi’s trip to Taiwan last week, coming just months after Russia’s invasion of Ukraine, have forced businesses to confront the possibility that a danger long seen as similarly distant could yet come to pass: a US-China conflict, or something close to it.

Companies face a rapid shift in mindset. In the post-cold war era, and after Beijing’s 2001 accession to the World Trade Organization when the belief persisted that deepening commerce with the west could pull China into the liberal world order, businesses grew used to operating in a largely benign global environment. Purely economic considerations — where it made most commercial sense to build a factory or source supplies — could take priority.

With Beijing’s emergence as a geopolitical rival, security considerations again trump economic ones. Western governments now view it as vital to build supply chains that rely less on potential foes such as China and are instead based around strategic allies — so-called friendshoring. The corporate world, which has a great deal invested — in all senses — in the previous status quo, has under-appreciated the extent of the change in government thinking.

In reality, Donald Trump’s trade tariffs on Beijing, China’s clampdown on democracy in Hong Kong and its persecution of Uyghurs in Xinjiang had prompted many companies to begin reviewing reliance on China years ago. The pandemic, too, prompted them to reconsider dependence on single suppliers for critical components, and work on making supply chains more robust.

The pressure to pull out of Russia after its assault on Ukraine has now forced nearly every US company to confront the question of what it would do if China invaded Taiwan. McDonald’s withdrawal from Moscow — where its arrival in 1990 was a pivotal moment in the advance of globalisation — was heavy with symbolism. Western companies have understood a crisis over Taiwan could similarly lead to investments being stranded, unwound or written off and throw supply chains into chaos, but on a vastly larger scale.

Unlike Russia, China, together with Taiwan — which makes 90 per cent of the world’s most advanced semiconductors — is both a crucial production hub and a vast market. Anything that forced western business to freeze or withdraw from operations there would be a punishing double blow.

As many companies have already discovered, it is difficult to replace China in many industries. Attempts to create supply chains within specific blocs have also run into problems; even simple products can involve hundreds of global inputs. Wholesale “decoupling” of western companies from China, for fear of future frictions or conflict, is unachievable and undesirable. It would push up costs and weaken western economies.

But multinationals should not simply conclude reducing China exposure is too hard and hope Beijing finds a peaceful resolution with the US over Taiwan. The Kremlin’s attempt to redraw European borders has shown the perils of wishful thinking. Companies that derive a significant part of their revenues and profits from China do need to find ways, where possible, to hedge exposure to this market. Investors should demand more disclosure on their vulnerability.

Boards should also be devoting more time to geopolitical risk assessment and contingency planning — for evacuating staff or relocating operations. As Ukraine and the Taiwan stand-off have shown, not only can the unthinkable happen, it can do so very suddenly.