What do the Taiwan-China Tensions Mean for Supply Chains?

It’s worth paying attention to the issues between China and Taiwan, particularly if you operate a business in Australia.

Self-governed for 70 years, Taiwan has the globe’s 21st biggest economy and is home to almost 24 million people. It has about two-thirds of the globe’s market in semiconductor manufacturing, i.e. computer chips, which are essential for electronic devices and cars.

According to the Federal Department of Foreign Affairs, Australian exports to Taiwan were worth $16.1B in 2020, making it our 12th largest trading partner. Our nation exports coal, iron ores, natural gas, aluminium, and copper to Taiwan and a good proportion of the country’s residents travel to Australia for education.

Growing tension in East Asia

China views Taiwan as its breakaway province that “must” come back under Beijing’s control, and may force it to do so, President Xi Jinping has said.

It is increasingly showing this brute force with military exercises, particularly after US Speaker Nancy Pelosi’s recent visit to the island. This involved planes and ships infringing on Taiwan’s territory, says the BBC.

How it may impact supply chains

Half of the world’s fleet of container ships use the Taiwan Strait to carry goods:

  • From China to Japan
  • To Europe
  • From the US to Oceania (including Australia) and Asian countries.

Therefore, any bottlenecks are felt throughout global supply chains. The Lowy Institute says even a limited military conflict between China and Taiwan could decouple wholesaling “within a week”. Container ships with cargo for Bunnings (for example) would stop. The lack of computer microchips would halt a swathe of manufacturing.

How can companies safeguard their operations?

Your business may already have been revisiting your supply chain strategy for weak points due to the pandemic. Options include to:

  • Reorganise your supply chains
  • Develop near-shoring and onshoring
  • Avoid consolidating production in one location
  • Diversify your base of suppliers
  • Lift your inventory
  • Widen your sources of raw materials, even with substitutes.

Conducting a supply chain risk assessment

Be sure to identify internal and external risks; those you can control and those you can’t. According to the International Standards Organisation, businesses typically face these types of risks:

  • Operational threats
  • Physical failure including malicious damage, terrorist/criminal action, incidental damage or a functional failure
  • Disasters, weather or other natural environmental events
  • Security threats
  • Business continuity threats
  • Third-party threats
  • Geopolitical threats
  • Reputational risks
  • Financial risks (inflated costs, for example).

Analyse each of these risks to work out the causes and qualify the impacts. Rate the likelihood of the risks and define what risk your business would find acceptable. Next, aim to quantify the risks so you can determine how to manage them, if possible.

You can use these scales as a guide:

Probability: definite, very possible, possible, unlikely, very unlikely

Risk scoring: use a number scale so it’s easy for all staff members to interpret

Risk impact: catastrophic, high, moderate, low, trivia

Next, consider each risk and how prepared your firm is in dealing with them. For more insights into risk management for your supply chain, check out this McKinsey guide.