The latest escalation over Taiwan has prompted global companies to ramp up their contingency planning and reassess their China operations.
And though most global businesses aren’t likely to pull up stakes in the foreseeable future, some money managers say investors aren’t yet accounting for the growing risks and potential costs as the U.S.-China relationship frays.
The relationship between the two countries has been deteriorating for years amid a trade war and export restrictions aimed at curtailing China’s access to critical technology.
Disruptions to far-flung supply chains from the pandemic and the war in Ukraine have fueled discussions about diversifying supply chains—often to places such as Vietnam or other pockets of southeast Asia, even India—though action has been largely on the margins.
But the discussion has taken on a different tone of late, strategists say. China objected to a visit to Taiwan by a U.S. congressional delegation and responded with live-fire military exercises that included shooting missiles over the self-ruled island, which China claims as its own and vows to reunify.
That stepped up the level of escalation in Taiwan, which is a critical semiconductor hub for the global economy and at the center of a geopolitical flashpoint.
Few strategists see a Chinese takeover of Taiwan as imminent, in part because of the catastrophic hit it would deal the global economy, including China.
But geopolitical strategists see a new status quo around Taiwan that opens the door to ongoing mini-crises. It also could potentially bring more military activity— not just from China and Taiwan but also the U.S.—that leads to a more militarized Asian-Pacific region.
The latest events have raised the Taiwan risk to a point that C-suites and boards can no longer ignore says Jude Blanchette, the Freeman Chair in China Studies at the Center for Strategic and International Studies.
“We knew it would be a flashpoint, but it’s firmly moved to smack dab in the middle,” he adds. “We moved from a period four to five years ago talking about what ifs to talking about when and how bad in the last six months.”
Dale Buckner, head of Global Guardian, a security consultancy that has helped companies with conflicts, including the war in Ukraine, has been getting increased queries from large companies about contingency planning for a conflict in Taiwan.
For now, much of the discussions are around allocating new investment elsewhere, building in some resilience into supply chains, thinking through risks to infrastructure on the ground, and thinking through talent issues. That includes possibly filling top positions in China or Taiwan with locals rather than expats.“In the short term, over the next 12 to 24 months, there is a good calculus for nothing happening. But if you are an investor and only looking at the next 18 to 24 months, you aren’t a good investor,” says Buckner, who sees the odds of a conflict growing over the near-term. “This is serious enough—and the trajectory is such—that you should start de-risking today.”The question, of course, is what that de-risking looks like for companies that have spent decades and billions investing in China.
“The question is if they can imagine under any circumstances that, despite hitting quarterly goals, they would consider leaving China before they are forced out. If the honest answer is no, then it changes the political risk assessment,” says Robert Daly, director of the Wilson Center’s Kissinger Institute on China and the United States.
That risk assessment varies by industry, with those at risk of falling under the broad description of national security more vulnerable. That includes not just technology but also pharmaceutical-oriented companies, rare earths, and renewable related companies.
Some companies, analysts say, are steering new investment elsewhere, shifting toward a “China plus one” type of strategy to diversify supply chains. They also are reassessing whether to renew partnerships—not just because of the Taiwan risk but also because of policy related changes in China and slowing growth.
For investors, this means global companies could see increased volatility from China-oriented disruptions—including ongoing mini-crises, potential retaliation or restrictions on their businesses. For example, the recently passed Chips Act restricts anyone receiving U.S. government money from expanding investments in China.
“You have to be mindful of your China exposure—and quite often it isn’t in China. A Chinese exporter locked out of the U.S. market could prompt a Chinese import from buying American,” says Harry Melandri, an advisor at independent macroeconomic research firm M12 Partners.
Boeing
(ticker: BA), for example, recently cited geopolitical differences for its loss of a Chinese order to European rival
Airbus
.
“We will see more of that,” he adds.
While Chinese companies have been battered by domestic policy shifts and the risks coming from the U.S., Melandri says U.S. stocks haven’t yet factored in some of the risks that could come from the deteriorating relationship between the two countries, even if it doesn’t lead to conflict.
While the MSCI China index is down 21% this year, the
S&P 500
is down less than half that at just 9%.
Write to Reshma Kapadia at [email protected]
