What happens to global supply chains if China attacks Taiwan? An interview with Ashray Lavsi
Tensions between China and Taiwan—two of our country’s biggest trading partners—are escalating, raising the specter of a full-scale invasion of the island. What would that mean for today’s hyperconnected global supply chains? We asked Ashray Lavsi that question and more.
Ashray Lavsi, principal at the global procurement and supply chain consultancy Efficio
David Maloney has been a journalist for more than 35 years and is currently the group editorial director for DC Velocity and Supply Chain Quarterly magazines. In this role, he is responsible for the editorial content of both brands of Agile Business Media. Dave joined DC Velocity in April of 2004. Prior to that, he was a senior editor for Modern Materials Handling magazine. Dave also has extensive experience as a broadcast journalist. Before writing for supply chain publications, he was a journalist, television producer and director in Pittsburgh. Dave combines a background of reporting on logistics with his video production experience to bring new opportunities to DC Velocity readers, including web videos highlighting top distribution and logistics facilities, webcasts and other cross-media projects. He continues to live and work in the Pittsburgh area.
Taiwan has essentially acted as an independent nation since 1949, when the nationalist government under Chiang Kai-shek retreated to the island following the communist takeover of mainland China. Yet China has made no secret of the fact that it wants to bring Taiwan back under its authority—ambitions that were brought to the fore earlier this year when China launched military drills that simulated an attack on the island.
If China were to invade Taiwan, it could have serious political and social consequences that would ripple around the globe. And it would be particularly devastating to our supply chains, says consultant Ashray Lavsi, who cites semiconductor shortages, disruptions to a crucial shipping lane, and increased ocean freight costs as a few of the potential consequences.
Lavsi is a principal at the global procurement and supply chain consultancy Efficio, where he specializes in solving complex supply chain, operations, and procurement problems, with a special focus on resilience. Prior to joining Efficio’s London office in 2017, he worked at XPO Logistics in the U.S. and the Netherlands.
Lavsi spoke recently with David Maloney, DC Velocity’s group editorial director, about what might happen if China moves to annex Taiwan—what shortages would likely arise, the impact on shipping lanes and ocean freight costs, and what managers should be doing now to prepare for potential disruption ahead.
Q: It’s no secret that China has ambitions on Taiwan. If China were to attempt to seize control of Taiwan, how would that affect the world’s supply chains?
A: There would be wide-ranging disruptions around the world. The United States does a lot of trade with both China and Taiwan. For example, the U.S. imports about $470 billion worth of goods from China, while China imports about $124 billion from the U.S. Meanwhile, Taiwan is the number-nine trading partner for the U.S. So all of this trade could come to a halt, depending on the level of conflict. Supplies would likely be disrupted, and trade routes could be affected, resulting in delays and higher shipping costs.
Furthermore, there would likely be disruptions to trade not just between the U.S. and China, but also across the board. It could very well be that the NATO members get involved, that South Korea gets involved, that Japan gets involved, the Philippines get involved, so it could very quickly spiral into widespread disruptions.
Q: We’ve seen big changes in the way businesses in Hong Kong operate since Britain handed control of Hong Kong over to China nearly 30 years ago. If China were to succeed in bringing Taiwan under its authority, would we see a similar outcome?
A: Indeed, I would expect so. I read recently that since around 2020, foreign direct investment in Hong Kong has dropped by nearly 50%, from $105 million to $54 million. The drop was primarily because of increased regulatory oversight. There are now a lot of restrictions on freedom of speech as well as tighter control over business operations. Something similar could very well happen in Taiwan if China were to succeed in taking over the island.
Q: As you mentioned, the United States conducts a lot of trade with both Taiwan and China, and both countries have become strategic supply chain partners. Beyond the diplomatic considerations, what would a military or economic conflict mean for the United States?
A: There is a lot of trade in goods like agricultural products, aircraft, electronics components, and machinery, and our access to many of those items could be cut off. On top of that, China controls 70% of the world’s rare earth minerals [which are crucial for the production of a wide variety of electronic devices]. So any conflict in the region would almost certainly result in many disruptions, particularly in critical sectors like technology and electronics—disruptions that would lead to shortages and increased costs.
Trade routes would also be affected, resulting in delays and higher shipping costs. U.S. companies would need to seek out alternative suppliers for critical materials or components they currently source in China, if they haven’t already. And if they haven’t lined up alternative suppliers, any hostilities could result in a complete halt in production.
Q: What effect would such a move have onthe global economy?
A: It’s been quite a few years since economies have just been localized. Any disruption now has widespread ripple effects across the world. As we discussed, any conflict between the United States and China naturally pulls in countries like Japan, South Korea, the Philippines, and the NATO countries, and it can very quickly spiral out.
Look at the semiconductor, or chip, shortages. If you recall, back in 2021, those shortages led to almost a half-trillion-dollar loss for the automakers, who lost out on sales of 7.7 million vehicles because they couldn’t meet demand. We could see a repeat of that situation—maybe even on a larger scale.
I found this statistic interesting—we often talk about the semiconductor shortages during the pandemic, but if you look at true production numbers, the actual production of chips went up from 2020, to 2021, to 2022. The shortage was driven not by a drop in production, but rather, by a surge in demand for PCs from people working from home. That demand has since dwindled, but we could still face a major semiconductor shortage [if much of our supply were cut off]. So that’s going to be a very big change, a very big disruption.
Q: Of course, the United States, along with a number of other countries, has taken steps to reduce its exposure to risk by bringing some semiconductor production back to its own shores. But it will take time to get those operations up and running, and their output would still be just a drop in the bucket compared to what’s needed. So what would a takeover of Taiwan mean for the overall semiconductor flow?
A: It essentially stops, right? Let me paint a picture that illustrates the importance of the Taiwanese semiconductor industry to global manufacturing. Semiconductors go into everything from cars to military equipment to computers to data centers to microwaves—they are in everything around us. Taiwan produces 60% of the world’s semiconductors and more than 90% of the advanced chips. Just let that sink in: More than 90% of all the advanced chips produced worldwide come from Taiwan, primarily from a big fabrication company called TSMC.
So the complexity and the precision required to make advanced semiconductors, combined with the limited number of companies around the world, make Taiwan’s position unmatched. The second-largest producer after TSMC is South Korean-based Samsung, which produces 18%, so that’s the gap that we are talking about.
As you rightly said, there are efforts by governments across the world to reduce their reliance on Taiwan. For example, TSMC is building three fabrication facilities in Arizona—the third with funding from the U.S. government. The first plant is set to go live next year and the third by 2030. But even once all three plants are up and running, the production volumes won’t be close to what TSMC produces in Taiwan. It’s going to take years to reduce our reliance on production in Taiwan. If that supply is cut off, the ripple effect will be tremendous.
Q: Setting aside the historical and political claims China has made on Taiwan, is Taiwan’s dominance in the semiconductor industry a main reason why China has set its sights on it?
A: It could be. China has been investing heavily in chip production—for instance, today, most, if not all, of the chips in the latest Huawei phones are locally produced in China. But China is still quite a few years behind TSMC. So that’s definitely going to be one of the big factors, right? One article that I found very interesting declared that chips are the new oil. If you control chip production, you control the global market.
Q: Let’s talk about the implications for shipping lanes. If you take a look at the map, you realize that the Taiwan Strait is a very important shipping lane for containerized goods coming out of both China and Taiwan. If China were to institute a military blockade, how would that affect the world’s container flows?
A: That flow would be affected tremendously. The Taiwan Strait plays a crucial role in global shipping, particularly for goods moving between Asia and the rest of the world. It is one of the busiest shipping lanes, and any blockage would severely disrupt global container flows.
Now let me put that into perspective. Fifty percent of the world’s containerships pass through the Taiwan Strait—50%. That’s a huge number. By comparison, the Suez Canal handles about 20% of global trade. Or to use another measure: 88% of the world’s largest ships by tonnage passed through the Taiwan Strait in 2022.
I’ve been reading up on this in the past few months and it seems that a military blockage is a very likely scenario—one that would cripple Taiwan’s economy without a full-scale invasion. So instead of a mounting a full-on attack, China might just block the strait, which would lead to delays in the delivery of goods, affecting global supply chains and causing shortages across Asia and the U.S.
Q: Given the escalating tensions between China and Taiwan, should shippers and manufacturers be preparing today for a potential conflict?
A: Businesses have to begin preparing today. If businesses were to say, “OK, I’m going to wait until conflict breaks out and then figure out what I’ll do,” it will be too late. You’re done. Your production comes to halt. You can no longer satisfy your customer requirements. So proactive measures are an absolute requirement.
Q: What should they do to prepare?
A: I would urge manufacturers and shippers to take what’s essentially a two-pronged approach.
First, you need to segment and identify your critical components, based on how crucial they are to your production operations and the risk associated with their sources, where they’re coming from. After you segment them, you list your top-priority items—the critical components that you absolutely cannot do without. You then split your supply chain into two, so that you have a much more redundant supply chain built for those critical items and then a second supply chain for everything else.
To build redundancy, you establish multiple suppliers and diversify them geographically. You also build in stringent contingency measures, which could include strategic stockpiling, nearshoring, and friendshoring, which is where you store inventory with an ally or in a friend consortium, as well as buying alternative components wherever possible. So all of those measures need to be put in place for the components that you’ve identified as absolutely critical for your production.
Q: What is the second prong?
A: The second prong is the need to manage increased costs. There’s no getting away from higher costs, right? If you’re holding more inventory, you have higher inventory carrying costs. And if you’re diversifying your supply base, that means you don’t have as much leverage [with individual suppliers]. You’re also going to be managing multiple supply chains, which requires an increase in human capital because you’ll need more people to manage the more complex supply chains that you’re putting in place.
One of the ways to manage costs could be by implementing strategic sourcing programs across the board that are aimed at mitigating some of the expenses. By taking these steps, manufacturers can safeguard their operations against potential disruptions and ensure continuity.
Q: A lot of U.S. companies have been nearshoring to Mexico, which has now become the United States’ leading trade partner. Is that a simple solution for companies looking to reduce their reliance on Asia?
A: It is one of the solutions. But you won’t be able to replace your Asian supply base immediately—as with semiconductors, it may take a few years to build out that capacity.
So you need to start stockpiling essential components now—particularly if you won’t be able to find alternatives. You want to make sure that you’re holding the right amount of inventory of the components that you absolutely need. So nearshoring is an option, but you need to be careful what you move to Mexico.
Q: Is that because moving production to Mexico will raise your costs compared to sourcing in Asia?
A: Yes, production costs will be higher compared to a place like Vietnam, where wages are currently lower than in Mexico. It might reduce the logistics cost, but I think there’s still a net increase overall because you’ll have higher expenses for things like regulatory compliance. Plus you’ll have the one-time cost of setting up the facilities.
Ideally, you’ll never have to face these problems we’ve been talking about, but it’s always better to be prepared.
The logistics process automation provider Vanderlande has agreed to acquire Siemens Logistics for $325 million, saying its specialty in providing value-added baggage and cargo handling and digital solutions for airport operations will complement Netherlands-based Vanderlande’s business in the warehousing, airports, and parcel sectors.
According to Vanderlande, the global logistics landscape is undergoing significant change, with increasing demand for efficient, automated systems. Vanderlande, which has a strong presence in airport logistics, said it recognizes the evolving trends in the sector and sees tremendous potential for sustained growth. With passenger travel on the rise and airports investing heavily in modernization, the long-term market outlook for airport automation is highly positive.
To meet that growing demand, the proposed transaction will significantly enhance customer value by providing accelerated access to advanced technologies, improving global presence for better local service, and creating further customer value through synergies in technology development, Vanderlande said.
In a statement, Nuremberg, Germany-based Siemens Logistics said that merging with Vanderlande would “have no operational impact on ongoing or new projects,” but that it would offer its current customers and employees significant development and value-add potential.
"As a distinguished provider of solutions for airport logistics, Siemens Logistics enjoys a first-class reputation in the baggage and air-cargo handling areas. Together with Vanderlande and our committed global teams, we look forward to bringing fresh impetus to the airport industry and to supporting our customers' business with future-oriented technologies," Michael Schneider, CEO of Siemens Logistics, said in a release.
The initiative is the culmination of the companies’ close working relationship for the past five years and represents their unified strength. “We recognized that going to market under a cadre of names was not helping our customers understand our complete turn-key services and approach,” Scott Lee, CEO of Systems in Motion, said in a release. “Operating as one voice, and one company, Systems in Motion will move forward to continue offering superior industrial automation.”
Systems in Motion provides material handling systems for warehousing, fulfillment, distribution, and manufacturing companies. The firm plans to complete a rebranded web site in January of 2025.
I recently came across a report showing that 86% of CEOs around the world see resiliency problems in their supply chains, and that business leaders are spending more time than ever tackling supply chain-related challenges. Initially I was surprised, thinking that the lessons learned from the Covid-19 pandemic surely prepared industry leaders for just about anything, helping to bake risk and resiliency planning into corporate strategies for companies of all sizes.
But then I thought about the growing number of issues that can affect supply chains today—more frequent severe weather events, accelerating cybersecurity threats, and the tangle of emerging demands and regulations around decarbonization, to name just a few. The level of potential problems seems to be increasing at lightning speed, making it difficult, if not impossible, to plan for every imaginable scenario.
What is it Mike Tyson said? Everyone has a plan until they get punched in the mouth.
It has never been more important to be able to pivot and adjust to challenges that can throw you off your game. The report I referenced—the “2024 Supply Chain Barometer” from procurement, supply chain, and sustainability consulting firm Proxima—makes the case for just that. The company surveyed 3,000 CEOs from the United Kingdom, Europe, and the United States and found that the growing complexities in global supply chains necessitate a laser-sharp focus on this area of the business. One example: Rightshoring, which is the process of moving business operations to the best location, means companies are redesigning and reconfiguring their supply chains like never before. The study found that large numbers of CEOs are grappling with the various subsets of rightshoring: 44% said they are planning to or have already undertaken onshoring, for instance; 41% said they are planning to or have undertaken nearshoring; 41% said they are planning to or have undertaken friendshoring; and 35% said they are planning to or have undertaken offshoring.
But that’s not all. CEOs are also struggling to deal with the rise of artificial intelligence (AI) and its application to business processes, the potential for abuse and labor rights issues in their supply chains, and a growing number of barriers to their companies’ decarbonization efforts. For instance:
Nearly all of those surveyed (99%) said they are either using or considering the use of AI in their supply chains, with 82% saying they are planning new initiatives this year;
More than 60% said they are concerned about the potential for human or labor rights issues in their supply chains;
And virtually all (99%) said they face barriers to decarbonization, with 30% pointing to the complexity of the work required as the biggest barrier.
Those are big issues to contend with, so it’s no surprise that 96% of the CEOs Proxima surveyed said they are dedicating equal (41%) or more time (55%) to supply chain issues this year than last year. And changing economic conditions are adding to the complexity, according to the report.
“As inflation fell throughout last year, there were glimmers of markets stabilizing,” the authors wrote. “The reality, though, has been that global market dynamics are shifting. With no clear-set position for them to land in, CEOs must continue to navigate their organizations through an ever-changing landscape. Just 4% of CEOs foresee the amount of time spent on supply chain-related topics decreasing in the year ahead.”
Simon Geale, executive vice president and chief procurement officer at Proxima, added some perspective.
“It’s fair to say that the complexities of global supply chains continue to have CEOs around the world scratching their heads,” he wrote. “The results of this year’s Barometer show that business leaders are spending more and more time tackling supply chain challenges, reflecting the multiple challenges to address.”
Perhaps the extra focus on supply chain issues will help organizations improve their ability to roll with the punches and overcome resiliency challenges in the year ahead. Only time will tell.
Investing in artificial intelligence (AI) is a top priority for supply chain leaders as they develop their organization’s technology roadmap, according to data from research and consulting firm Gartner.
AI—including machine learning—and Generative AI (GenAI) ranked as the top two priorities for digital supply chain investments globally among more than 400 supply chain leaders surveyed earlier this year. But key differences apply regionally and by job responsibility, according to the research.
Twenty percent of the survey’s respondents said they are prioritizing investments in traditional AI—which analyzes data, identifies patterns, and makes predictions. Virtual assistants like Siri and Alexa are common examples. Slightly less (17%) said they are prioritizing investments in GenAI, which takes the process a step further by learning patterns and using them to generate text, images, and so forth. OpenAI’s ChatGPT is the most common example.
Despite that overall focus, AI lagged as a priority in Western Europe, where connected industry objectives remain paramount, according to Gartner. The survey also found that business-led roles are much less enthusiastic than their IT counterparts when it comes to prioritizing the technology.
“While enthusiasm for both traditional AI and GenAI remain high on an absolute level within supply chain, the prioritization varies greatly between different roles, geographies, and industries,” Michael Dominy, VP analyst in Gartner’s Supply Chain practice, said in a statement announcing the survey results. “European respondents were more likely to prioritize technologies that align with Industry 4.0 objectives, such as smart manufacturing. In addition to region differences, certain industries prioritize specific use cases, such as robotics or machine learning, which are currently viewed as more pragmatic investments than GenAI.”
The survey also found that:
Twenty-six percent of North American respondents identified AI, including machine learning, as their top priority, compared to 14% of Western Europeans.
Fourteen percent of Western European respondents identified robots in manufacturing as their top choice compared to just 1% of North American respondents.
Geographical variances generally correlated with industry-specific priorities; regions with a higher proportion of manufacturing respondents were less likely to select AI or GenAI as a top digital priority.
Digging deeper into job responsibilities, just 12% of respondents with business-focused roles indicated GenAI as a top priority, compared to 28% of IT roles. The data may indicate that GenAI use cases are perceived as less tangible and directly tied to core supply chain processes, according to Gartner.
“Business-led roles are traditionally more comfortable with prioritizing established technologies, and the survey data suggests that these business-led roles still question whether GenAI can deliver an adequate return on investment,” said Dominy. “However, multiple industries including retail, industrial manufacturers and high-tech manufacturers have already made GenAI their top investment priority.”
Regardless of the elected administration, the future likely holds significant changes for trade, taxes, and regulatory compliance. As a result, it’s crucial that U.S. businesses avoid making decisions contingent on election outcomes, and instead focus on resilience, agility, and growth, according to California-based Propel, which provides a product value management (PVM) platform for manufacturing, medical device, and consumer electronics industries.
“Now is not the time to wait for the dust to settle,” Ross Meyercord, CEO of Propel, said in a release. “Companies should approach this election cycle as an opportunity to thrive in the face of constant change by proactively investing in technology and talent that keeps them nimble. Businesses always need to be prepared for changing tariffs, taxes, or geopolitical tensions that lead to unexpected interruptions – that’s just the new normal.”
In Propel’s analysis, a Trump administration would bring a continuation of corporate tax cuts intended to bolster American manufacturing. However, Trump’s suggestion for spiraling tariffs may benefit certain industries, but would drive up costs for businesses reliant on global supply chains.
In contrast, a Harris administration would likely continue the current push for regulatory reforms that support sectors like AI, digital assets, and manufacturing while protecting consumer rights. Harris would also likely prioritize strategic investments in new technologies and provide tax incentives to promote growth in underserved areas.
And regardless of the new administration, the real challenge will come from a potentially divided Congress, which could impact everything from trade negotiations to tax policies, Propel said.
“The election outcome is less material for businesses,” Meyercord said. “What is important is quickly adapting to shifting policies or disruptions that address ‘what if’ scenarios and having the ability to pivot your strategy. A responsive manufacturing sector will have a significant impact on the broader economy, driving growth and favorably influencing GDP. One thing is clear: the only certainty is change.”