https://www.telegraph.co.uk/business/20 ... rd-journeyBritish businesses brace for war as China rattles sabres at Taiwan
Xi Jinping's latest round of war games raise fears of a global supply chain upheaval
On a cloudy April morning, with the world’s media distracted by an explosive leak of highly sensitive documents from the Pentagon, more than 100 Chinese warplanes and ships circled Taiwan.
The three-day onslaught earlier this month was not the beginning of war, but rather the latest in a series of increasingly aggressive military drills dubbed “United Sharp Sword” in which Beijing rehearsed a full-blown invasion of its tiny democratic neighbour.
China’s military, it confidently declared, was now “ready to fight”.
Xi Jinping’s latest war games, which came as the Pentagon leaks revealed a warning that Taiwan was unprepared to fend off an attack by China, were a timely reminder of the threat of a conflict that would further destabilise an increasingly fragile geopolitical situation.
But worsening relations with Beijing aside, there are growing fears that a war in the region would upend global supply chains and leave the West scrambling to get hold of crucial technology. Now, British companies are being urged to act.
Alicia Kearns, chair of the foreign affairs committee, says bosses “shouldn’t ignore” escalating tensions in the Indo-Pacific.
“It is imperative that British companies begin a thorough review of their supply chain resilience strategies as they relate to China and Taiwan,” she adds.
Taiwan has long been a source of political tension as China attempts to assert its control over the small island nation. The threat from Beijing has intensified in recent months, with US military officials warning an attack could be imminent.
Admiral Philip Davidson, former head of the US Indo-Pacific command, has previously predicted that China will invade by 2027 – a timeframe now known as the “Davidson window”.
Dr Sidharth Kaushal, research fellow in sea power at defence think tank RUSI, argues that the Davidson window is overly alarmist, but adds: “I think it’s highly likely that there will be a clash in the Taiwan Strait at some point and that the Chinese will not defer this indefinitely.”
The threats are not only geopolitical, but also economic. Despite its population of just 24m, Taiwan has emerged as a powerful player in Asia, most notably through its status as the world’s microchip factory.
The country produces 65pc of the world’s computer chips – also known as semiconductors – which are used to power smartphones, laptops, telecoms networks and cars, among other technologies.
Taiwan Semiconductor Manufacturing Company, which is the world’s biggest contract chip maker and supplies tech giants including Apple and Qualcomm, operates four huge chip foundries, or “fabs”, on the island.
The West’s heavy reliance on the region’s chip sector was exposed during the pandemic, when lockdowns wreaked havoc through global supply chains. The prospect of war, however, poses an ever greater threat.
Mark Williams, chief Asia economist at Capital Economics, says: “The reality is that the world’s electronics production is concentrated in east Asia and a lot of it would be disrupted if China invaded Taiwan.
“In that scenario, China isn’t a viable alternative supplier, since it would probably be subject to sanctions.”
Even Korea and Japan may not provide insulation from a crisis given much of their trade passes through the Taiwan Strait, Williams adds.
As Kearns puts it: “The prospect of a conflict in Taiwan threatens to shatter both regional stability and global economic security.”
This looming danger means some British businesses are being forced to confront the issue.
Last year, BT held a two-day “war game” exercise to stress test its ability to deal with the fallout from any conflict in Taiwan. The drill, held in the telecoms firm’s Dublin-based procurement business, involved a scenario in which China sank a ship near Taiwan, the Financial Times reported.
Johan Gott, co-founder of US political risk consultancy Prism, which helped with the exercise, told the newspaper that participants were shown a series of fictional news flashes, putting them under stress and forcing them to “make decisions under time pressure”.
A spokesman for BT said: “Like many businesses, we regularly run simulations to stress test our business on a range of scenarios as part of our risk management and planning.”
For many in the chip sector, however, responsibility for mitigating the risks lies with the government.
Last year, US President Joe Biden unveiled the $280bn (£226bn) Chips and Science Act aimed at boosting domestic semiconductor production and reducing dependency on Chinese supply chains.
The EU has followed suit, this week approving its own €43bn (£38bn) plan, which it hopes will double the bloc’s share of global chip output to 20pc by 2030.
Yet Britain is lagging far behind. A long-awaited semiconductor strategy is expected to include an investment of at least £1bn, but details are yet to materialise.
An announcement had been pencilled for this week but has been pushed back again, with Politico reporting that the latest delay is due to uncertainty over who will cover Technology Secretary Michelle Donelan’s maternity leave.
The inertia has sparked fury among British chip makers, with MPs and UK semiconductor bosses warning of an exodus to the US if ministers fail to act soon.
Darren Jones, chair of the BEIS committee, last month said any further delay “would be an act of national self-harm”.
Kearns says the strategy is “long overdue”, adding: “Developing sovereign capabilities in this area will be a long-term endeavour and I hope that recent legislation in the US and EU will prompt British lawmakers to take action.”
But with a comprehensive strategy yet to materialise, many businesses are taking matters into their own hands.
Telecoms companies such as Virgin Media O2 have been stockpiling chips, a trend that began during pandemic-induced supply chain disruptions.
Car manufacturers, who rely on chips for electric vehicles, are also taking action. A spokesman for BMW said the German firm was adopting new long-term approaches to secure semiconductor supplies, including direct agreements with chip suppliers such as INOVA Semiconductors and GlobalFoundries.
Williams at Capital Economics says companies have two options for reducing their exposure to a conflict in Taiwan, although he acknowledges that both have their setbacks.
“[Companies] can work with governments to boost supply chains outside east Asia in the knowledge that these efforts will take time and could be expensive,” he says.
“Or they can hold bigger inventories of critical inputs to provide a buffer – which also is costly and only helps if disruption to supply is short-lived.”
A survey by Make UK, which represents manufacturers across the country, found that many companies are trying to bring their supply chains closer to home to avoid disruption, with 40pc re-shoring suppliers over the last year.
Verity Davidge, director of policy at Make UK, says: “Over the last few years there is clear evidence that companies are increasingly examining their supply chains to make them more resilient, including re-shoring where possible, a process which has accelerated in the last year in particular given rising geopolitical tensions.”
However, Davidge warns that the vast majority of companies are grappling with day-to-day challenges such as surging inflation and skills shortages, leaving them with limited bandwidth to worry about what is happening in the South China Sea.
But as the Davison window draws ever closer, and worries over Taiwan’s military preparedness mount, British firms may find themselves with no choice but to act.
“As government and military actors conduct assessments and attempt to de-risk I encourage the private sector to do the same,” says Kearns.