Taiwan tensions force multinationals to rethink China risk

Multinational companies are drawing up contingency plans in the event of a US-China military conflict after Beijing launched an unprecedented series of exercises around Taiwan this month.

The intensified planning by business leaders in the US, Europe, Japan and elsewhere is a signal that investors in China no longer consider an invasion of Taiwan to be merely a low probability “black swan” risk to the world’s second-biggest economy.

“There’s a lot of scenario thinking going on. . . all the way to: ‘What shall we do in case there is a war? Should we close our China operations? How can we sustain our business and overcome possible blockades?’” said Jörg Wuttke, head of the EU Chamber of Commerce in China.

“This little island that was always kind of simmering. . . all of a sudden is perceived in many headquarters like it’s going to be the next Ukraine,” Wuttke said.

Even before tensions soared over Taiwan this month, multinational companies active in China faced increasing reputational risk and pressure from Washington and its allies to diversify away from the mainland market.

Business leaders said the lack of an exodus by foreign companies highlighted the dearth of alternatives to the world’s biggest consumer market and most important manufacturing base. But some US companies are among those considering moving parts of their operations out of China, threatening economic ties between the superpowers.

Eric Zheng of the American Chamber of Commerce in Shanghai said that for many US manufacturers with global supply chains, the Taiwan crisis added to the “material” impacts of souring US-China relations such as trade tariffs, and was compelling them to seriously consider building factories in other countries.

“The popular thinking is ‘China plus one’ or even ‘China plus two’ — meaning China will still be the primary base for manufacturing but you have an alternative south-east Asian country, just in case,” he said.

Another US business executive, who asked not to be named, stressed that the contingency planning did not reflect an “anti-China” position but rather a prudent response to the realities and potentially catastrophic ramifications of the increased risk of military conflict.

President Xi Jinping’s decision to conduct military exercises in response to this month’s visit to Taipei by US House Speaker Nancy Pelosi has dramatically altered the status quo in the Taiwan Strait.

The episode also came against a backdrop of western criticism of China’s refusal to condemn the Russian invasion of Ukraine, as well as its crackdowns in Xinjiang and Hong Kong. President Joe Biden, who has said the US would defend Taiwan if China invaded, was already rallying allies to counter Beijing’s regional assertiveness.

Still, Zheng said many large US companies, including Disney and Elon Musk’s Tesla, had made long-term commitments to be “in China, for China”, and remained highly dependent on access to its 1.4bn consumers.

The most serious confrontation over Taiwan in nearly two decades has also increased political pressure on companies that relies on exports to China.

David Mahon, a western investment manager and adviser based in Beijing since 1985, said that for groups such as New Zealand dairy exporter Fonterra, diversification away from their most important market would not be easy.

“They’ve been advised to diversify. The question is ‘where?’ Do I just stop taking profit for the next five years? There’s nowhere to go,” Mahon said.

Fonterra said it closely monitored geopolitical developments and that “China continues to be a profitable market with excellent prospects”.

Reiji Morooka, chief financial officer of Japanese trading house Sumitomo, told reporters in an earnings briefing that the company would “consider its next steps” as it monitors the fallout from the Pelosi visit.

“It’s a big issue for us as to how we address the risk of global decoupling as geopolitical tensions rise,” Morooka said, adding that Sumitomo had not changed its business strategy in China.

Noriaki Yamaga, managing executive officer at shipping company Kawasaki Kisen Kaisha, questioned the extent to which economic and trading ties between the US and China could be weakened despite the temporary disruption to business from events such as Pelosi’s visit.

“Is it realistically possible for the global economy to have a US-China decoupling?” he said.

James Zimmerman, a China lawyer at Perkins Coie, said the pace at which companies might shift operations out of the country could hinge on the upcoming 20th Chinese Communist party congress, at which Xi is expected to be reappointed as head of the party and its Central Military Commission.

“If [there are] no policy changes on multiple fronts — and I don’t expect there to be — we might be seeing an accelerated level of strategic reshoring, nearshoring or offshoring to more friendly countries,” Zimmerman said.

Such shifts could also be partially driven by Xi’s “zero-Covid” policy, which has battered China’s economy, as well as by Beijing’s “relationship with Russia, treatment of Hong Kong and militant overreaction to Pelosi’s visit to Taiwan”, he said.

The head of Asia execution at a Wall Street investment bank said investors had been asking about strategies to hedge against Taiwan risk since Russia’s invasion of Ukraine.

“People are not at all certain that there will be fallout. It’s more about understanding what the escalation points are,” the person said, adding that two important areas of concern were how to hedge against foreign exchange moves and the impact of potential US sanctions on China in the event of a conflict.

Analysts warned that Beijing and Washington considered themselves to be reacting to aggression and threats to the status quo from the other, creating an “escalatory dynamic”.

Andrew Gilholm, head of China analysis at consultancy Control Risks, pointed out that past crises over Taiwan were typically driven by events in Taipei and carried less risk of sparking a conflict because the US previously held a far stronger military advantage.

“China looks at [US policies challenging Beijing] and doesn’t consider them reactive, deterrent moves. They consider them provocative status quo-threatening moves, and it feels the need to respond to those with its own deterrent action,” Gilholm said.

Zheng of AmCham Shanghai said tensions could only be eased once Xi and Biden were able to meet in person, which he expected to take place after the party congress this year.

“You don’t want to see decoupling happening. You don’t want to isolate China. And you don’t want to see these countries going totally separate ways,” he said. “The bottom line is the US-China leaders have to work out their differences.”

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