The Geopolitical Weaponization of Supply Chain

Throughout 2023, we have seen supply constraints dissolve and inflation abate, but the current feeling among supply chain leaders is anything but serene. As the world’s largest economies continue to escalate nationalist industrial policies, the resulting regulatory barriers, import and export laws, and sanctions have effectively led to the weaponization of supply networks.

Earlier this year, we polled our COO and CSCO communities on the biggest risks they were concerned might disrupt their businesses and supply chains. Geopolitical escalation topped the list by a large margin.

In response, last month, Gartner held an event for our COO and CSCO communities that included a panel discussion with three geopolitical experts from Denton’s Global Advisors (Amy Celico, Alvaro Vertiz and Kevin Allison) to explore these risks.

The Denton’s experts cited the current geopolitical climate as the worst since the Cold War, as tensions rise in line with an ongoing shift toward multipolarity. Constructive political dialogue is very difficult given two of the largest poles, China and the United States, currently disagree on just about every conflict and world challenge. That includes their responses to the pandemic and their positions on the Russian invasion of Ukraine, Israel-Hamas war and Taiwanese independence.

The future of Taiwan keeps many supply chain leaders up at night, particularly any business reliant on semiconductors. Lately, China’s military drills in the region have accelerated and the United States has responded with increased military presence, both sea and air, in the region. The recent Biden-Xi meeting on the sidelines of the APEC summit seemed to stabilize near-term conditions, but upcoming Taiwan elections, in January 2024, are another potential flashpoint. The pro-independence DPP party is most favored to win and a recent attempt to unify more pro-Beijing opposition parties was short-lived.

When asked about the chances of a near-term invasion of Taiwan, the Denton’s team saw lower risk, with China distracted by a slow economy and outstanding questions on their ability to “win” militarily. In Denton’s view, the biggest medium-term (5 to 7 years) risk would be a military accident in the Strait which, with high presence on both sides, could quickly escalate. A blockade and takeover of offshore islands would be the most likely scenario. This would trigger a series of sanctions and regulatory restrictions — moves and countermoves. Global impact would spread beyond semiconductors. Independent of any Taiwan escalation, the Denton’s experts saw U.S./Western restrictions on technology ratcheting up, reducing access to cutting-edge technology and AI training models.

There were other interesting takeaways from the Denton’s panel discussion, including:

• With more than $30 billion of foreign investment, representing 30% year-over-year growth, Mexico is the main beneficiary of China-based manufacturing diversification. Interestingly, this applies to both global and Chinese-owned businesses.
• Risks to further expansion in Mexico include power infrastructure demand outstripping supply, high levels of criminal activity and a government driving populist priorities. Opportunities include economic conditions such as favorable foreign exchange rates, relatively low inflation and competitive labor costs and access. 
• India has an opportunity to become a true alternative to China’s manufacturing in Asia and companies are investing accordingly. On the security side, new alliances are working. On the commercial side, progress is slow. There are no clear signals that India has moved from words to actions to remove high barriers for trade and market access, and to resolve infrastructure challenges.
• In the context of the Middle East, China has sacrificed their near-term relationship with Israel, but still quietly influences Iran to contain the conflict. Concerns remain over unintended and accidental escalation of the Israel-Hamas war, impacting the energy sector.
• The European Union (EU) is focused on energy transition and boosting its stagnant economies. It has less urgency than the U.S. on confronting China, as many EU companies (e.g., German automakers) are highly dependent on exports to China. Still, the EU is growing impatient with China’s role in “propping up” Russia, which may trigger additional sanctions and regulations.
• So far, Europe’s focus on regulation in sustainability, semiconductors and AI has not translated into desired local innovation. These efforts require significant coordination, complex policies and large financial investments that are hard to implement.

So, what should supply chain leaders do in the face of today’s heightened geopolitical environment?

• Partner closely with your government relations team and industry consortia to shape regulatory policies and make them more executable.
•  Prepare to protect your people in potentially impacted regions.
• Continue to invest in business continuity and scenario planning as part of broader resilience strategies.

Thanks again to the Denton’s Advisory Services team and our broader COO/CSCO community for joining this informative session. This will be our last Beyond Supply Chain blog of 2023. We hope you all have a restful and joyous holiday season with friends and family!

Stan Aronow
VP Distinguished Advisor
Gartner Supply Chain
Stan.Aronow@gartner.com

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