China and Taiwan have both been conducting live-fire military exercises over the past fortnight © Photo by Ceng Shou Yi/NurPhoto via Getty Images
China and Taiwan have both been conducting live-fire military exercises over the past fortnight © Photo by Ceng Shou Yi/NurPhoto via Getty Images

What does the threat of war between China and Taiwan mean for procurement?

Procurement professionals are being urged to flex supply chains as tensions ratchet up between China and Taiwan.

China has conducted its biggest-ever military drills around the island following a high-profile visit by Nancy Pelosi, speaker of the US House of Representatives.

John Manners-Bell, chief executive of Transport Intelligence and founder of the Foundation for Future Supply Chain, told Supply Management the move will “really ratchet up tensions” and procurement teams need to ensure they are looking into alternative sources of supply.  “It’s going to have a real impact on supply chains,” he said.

“There is certainly a threat there, and it would be ridiculous if western politicians and western manufacturers weren't actually cognisant of that and weren't flexing their supply chains to take that into account. China is sending a very clear message, and that could result in more disruptions in supply chains.” 

He said China was sending out a “very clear warning” to the west to “not poke the hornet’s nest”. He warned: “There may well be disruption over the next week or so as China flexes its muscles. It's almost saying to the west, 'And this is the sort of thing that you can look forward to, unless you tow our line'.”

He warned the global semiconductor industry – and any sector that relies on chips – is vulnerable to any disruptions in the region, which controls 63% of the global market.

With the automotive and tech industry already impacted by global shortages of the chips following increased demand during the Covid-19 lockdowns, any disruption to Taiwanese supply chains would further place pressures on an already stretched industry. 

Manners-Bell said: “Taiwan is fundamental in the semiconductor industry, and any sort of blockade of Taiwan has the potential for a massive impact on semiconductor supply chains and other high tech supply chains as well.”

In the long term he said the tensions in Taiwan will consolidate trends towards friendshoring as procurement teams factor in the politics and security implications.

“The tensions between the west and China are growing, I can only see them growing,” he said. 

Research by Gartner has found supply chain teams are already looking to diversify away from China as political tensions rise. 

It found 75% of supply chain leaders are evaluating or executing changes to their China sourcing and manufacturing strategy, and 55% of those had already acted on their plans.

Kamala Raman, vice president at the Gartner Supply Chain practice, said: “There’s clearly a supply chain redesign underway, but not everyone is moving in the same direction or even to the same extent.

“Supply chain leaders have been modifying networks in a number of ways, be it with expansions, consolidations or simply modifications to buffers – which are more reversible than footprint decisions.”

She told SM: “In order to respond to a dynamic landscape, procurement leaders must put in place diversified strategies for sourcing that balance global, regional or local suppliers in an ecosystem that optimises cost against the need for resilience.”

She said investments in other parts of Asia outside of China can coexist with expanded investments into developed markets.

To reduce long-term dependence on China Raman recommended:

1. Begin now. Incorporate diversification strategies by using a variety of approaches – a China Plus One, regional sourcing, or nearshoring approach are all to be tested.

2. Diversification is not an all or nothing strategy. Complete supply chain reconfigurations are not necessary and moving small quantities away from China will still reduce risk.

3. Create effective scenario plans that include clear assumptions and trigger points for actions. Update them often to provide guidance on what diversification strategies need to be enabled and when.

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