Three sectors highlight the vulnerabilities of US companies to supply chain disruptions originating in China; including pharmaceuticals, microchips, and energy. Aside from stable food supplies, these sectors are responsible for safeguarding the continuity of modern life. Disruptions in any of these sectors from geopolitical risks can create governmental overreach amid crisis, create government subsidies that pick winners and losers, risk customer reliability as displaced consumers seek alternative options and risk general upheaval.
The Covid pandemic brought the concept of “supply chains” to the popular consciousness and far beyond the confines of logistics. Shortages of toilet paper and personal protective equipment, and later, rising prices due to energy demands and inflation, brought supply chain fragility to the front and center of attention for small and large businesses alike.
Additionally, the US imports much of its pharmaceuticals from China. A report published by the Atlantic Council found that US reliance on China for pharmaceutical goods that include products ranging from vitamins and bandages to advanced cancer medications increased since 2020. In the three years since the height of the pandemic, US imports from China for the medical industry increased by 485%.
Global arguments over the origins of Covid and the reliability of Chinese data surrounding the disease and its handling of the response brought many US-based companies to reconsider their dependence on the People’s Republic of China (PRC) for manufacturing and production.
As tensions between China and the US and its allies continue to grow, the risk of disruption and war poses increased challenges to American companies operating there.
Pharmaceutical production is a central component of China’s command economy and is included in Beijing’s 14th 5-year plan for growth. China’s economic policies are government-driven rather than guided by markets. As such, Chinese production is built around geopolitical objectives rather than simply profit. The US Congress has noted that China has already created the legal grounds for its restrictions on pharmaceutical-related exports, posing a security risk.
In the event of a conflict with the US, China needs to simply deem US-based partners “unreliable entities” to sever the flow of pharmaceuticals to US buyers. China’s “unreliable entities” are similar to American “designated entities” targeted for economic sanction. In the event of open conflict, such a restriction follows a logic of hybrid warfare that underpins much of Beijing’s security planning and poses a risk to US businesses.
Microchips are no different, though China’s risk to the US is different. Microchips and semiconductors together amount to the cutting-edge dual-use technologies that are valuable for everything from the production of civilian electronics to advanced military technologies. Increasing geopolitical tensions are materializing into executive orders and legislative considerations in the US meant to limit China’s ability to access US-made technologies. In October 2022, the Biden administration issued a list of restrictions to prevent China from utilizing US made equipment to produce semiconductors. The US issued a deeper ban in August 2023, which created an outcry among CEOs from companies such as Nvidia, Intel, and Qualcomm, who claimed such restrictions would reduce their revenue. Yet, geopolitical risks prevail.
Technology supply chains would be severely impacted by a hot war between the US and China over Taiwan. Taiwan’s premier chip company, TSMC, accounts for 54% of semiconductors worldwide; major US companies, including Nvidia and Apple, rely on TSMC for their components. Should a war break out between the US and China, increased military demand for high-tech details and half of the world’s semiconductor supply operating in a warzone would skyrocket consumer costs for civilians and military buyers alike. The consequences for shareholders of American high-tech firms would similarly be catastrophic.
The warning indicators all point to the need for US companies to “de-risk” from China by seeking new alternative supply chains. Seeking out manufacturing options in the US domestically or alternative source partners in Latin America or India can help ensure that de-risking leads to an increased market share in the event of war or sustained links between producers and consumers.
US companies should develop a comprehensive China Escape Plan to ensure ongoing access to production facilities in the event of increased geopolitical risk tensions.
De-risking plans, at a minimum, should include intelligence screenings for source countries and due diligence investigations into potential partner companies abroad who can serve as suppliers.
A comprehensive intelligence assessment should include uncovering relevant risks in new locales and jurisdictions and regulatory and taxation profiles for the jurisdictions considered.
