Companies with Chinese ties are facing the biggest escalation of risks in decades, as the race for clean energy combines with rising geopolitical tensions to undermine already fragile trade relations with Washington.
This is not just a squall that CEOs can hope to ride out while relations return to some normality. It’s part of a tectonic shift that is fundamentally changing the old economic order in which China was the world’s default factory floor and trade relations with the West were relatively smooth.
Significant new factors undermining trade are climate politics and military tensions in the Pacific. Companies with ties to China, especially those with operations and partners on the ground, should undertake a hard-headed reassessment of their risks in this environment and take action to mitigate. This could be the time for companies with a higher risk profile to leave China and rebase to another low-cost country, or take advantage of the growing incentives to operate in North America.
Both China and the U.S. have come to the realization they need to act decisively to secure the resources needed for the transition to clean energy. The Biden Administration’s newly passed climate legislation will devote about $370 billion to investments in renewable energy, tax credits, and incentives for companies to produce strategic components and materials in North America.
This underlines the race for clean energy's opening of a new front of competition between Beijing and Washington. The world’s two biggest economies are competing to secure the same finite materials and both want to dominate the enormous new markets that will emerge for electric vehicles and other renewable energy industries. China is increasingly trying to sell its technology into markets that are less U.S.-friendly, while the U.S. faces the choice of buying key minerals on open markets that China controls or creating a less efficient domestic mining industry from scratch.
Increasing Taiwan Tensions
The recent flare-up in tensions over Taiwan should awaken companies to the biggest risk of all — a military confrontation or conflict with the U.S. over the Chinese-claimed island. While the immediate crisis has eased, the long-term trend of an increasingly assertive Chinese military threatening vital U.S. interests in the Pacific is very much in place. Any conflict would dwarf the impact of the Ukraine war given China’s economic clout and its deep integration into global supply chains.
The mutually catastrophic implications of a conflict help to stop it from happening, but it’s a real and growing long-term risk.
Against this backdrop, any hopes that Washington would reverse tariffs on Chinese imports have evaporated and the White House is talking tough on China. While new tariffs are unlikely in the near term, we’re likely to see more customs enforcement actions on products and more actions against intellectual property from both sides. There’s plenty of room for things to get worse considering China has yet to impose any major new restrictions on U.S. imports.
Weighing China Risk
Companies with operations in China need to thoroughly assess their vulnerability and act accordingly.
The key point to consider is how a company is viewed by the Chinese government at both the national and local levels. It could be beneficial for an organization to downplay U.S. identity, perhaps through a different ownership structure, and to have strong partnerships with favored local firms that align your economic interests with their own.
CEOs should be leading this risk review with input from CFOs and COOs to analyze how to change the company’s investment profile while seeking new partnerships and continuing to meet customer demand. Even before the recent wave of tensions, supply-chain concerns had prompted more companies to leave China, at least partially, seeking some balance in countries like Vietnam, India, and Malaysia.
Now, the climate bill has helped put the U.S. at least in the game as a manufacturing destination for the first time in a generation. The bill’s incentives are likely to have a big impact in attracting local investments in new technology such as electric vehicle batteries. U.S. automakers like Ford and GM are already preparing huge battery-making plants to power their growing electric fleets.
The world’s two biggest economies are competing to secure the same finite materials and both want to dominate the enormous new markets that will emerge for electric vehicles and other renewable energy industries.
Reshoring existing strategic industries — such as the chipmaking factories that are heavily based in Taiwan — is a tougher proposition because of the huge costs and long lead times required, as well as the labor constraints in the U.S.
That’s where Mexico comes in and why many believe it is the real winner from the fracturing U.S.-China relationship. Party to over 20 free-trade deals, including the updated NAFTA, with a plentiful workforce and lower manufacturing wages than China, it’s an attractive alternative that more companies will have to consider as part of a more diversified, risk-adjusted supply chain.
Lou Longo is a partner and leader of the international consulting practice at Plante Moran.