Taiwan Tensions Add Further Impetus to Diversification

August 2022

The ongoing discord between China and the West over Taiwan, which produces two-thirds of the microchips essential to things like mobile phones and cars, has given rise to fears of renewed disruptions to critical supply chains. A new paper by German economic think-tank, ifo, commissioned by the Bavarian Industry Association (vbw) suggests what countries like Germany should and shouldn’t do.

Simplistic calls for deglobalization through reshoring and nearshoring, the paper concludes, won’t work because that would “inflict significant damage on the German economy.” China is, after all, Germany’s largest trading partner. Instead, the authors recommend “increasing the diversification of supply chains and trade relations.”

Germany has recorded remarkable recent successes in attracting international semiconductor producers, most notably Intel, to the country. But it takes years to build a chip production facility, meaning that none of this FDI, however impressive, will provide immediate solutions to current challenges.

“The lion’s share of semiconductors comes from Asia, primarily Taiwan, which makes it a major partner for Germany’s automotive and machine-building industries,” Achim Haug, director for Asia at Germany Trade & Invest, told the Passauer Neue Presse newspaper. “The chip shortage already affecting Germany because of general increased demand and the effects of the corona pandemic would of course be exacerbated by a further escalation of the Taiwan conflict.”

Broadening the pallet of partners

Haug offers a list of potential ways forward, which underscore the new possibilities for international companies to do business with and in Germany and the EU.

“Germany is becoming increasingly conscious of the need to reduce critical dependencies,” Haug explains. “One way of combatting over-dependence is diversification, which has previously only partially been possible with semiconductors because there haven’t been very many producers. The second option is simply ordering more components at a go and storing them. The third strategy is regionalization. By producing components domestically, for instance in the EU, business can circumvent long delivery chains and ensure reliable partners.”

That is very much in line with the recommendations of Germany’s leading business analysts, including ifo.

“Those who want to minimize the risks of supply failures should diversify their business partners and countries,” advises the institute in a briefing back in January. “That’s the way to cushion the blow of country-specific shocks.”

© Pixabay