If China goes to war, the electronics and global manufacturing supply chain will be completely muddled up. It will lead to the worst of all worst case scenarios; logistics disarray and crippled production that will certainly drive the global economy into a nasty recession. Of course, we all hope (and think) this will never happen but just to be sure this is a clarion call to political and business leaders to do all they can to avoid such a crisis.
There are so many eventualities to the possibility of a war between China and its neighbors that the prospect should be giving the region’s governments a fright. Even political leaders far removed from the potential battlefields should be having nightmares – any intense and drawn out military confrontation between China and any of the other countries in the Far East will be costly to everyone and have global implications.
Business executives globally should understand the depth of the catastrophe that could result from such a war. It’s understandable that they may not be able to speak out publicly about the disputes over territories in the Asia Pacific region involving China and its neighbors but they should be talking quietly with their national leaders and reaching out to both the Chinese government and people. The time for action is now. They also need to have alternate plans in place in case China decides it can secure its objectives only by going to war.
China is involved in numerous disputes over territories with most of its neighbors, including Japan, India, Korea, the Philippines and Vietnam. It had previously been involved in skirmishes with India and Russia while its occupation by Japan decades ago remains a sore point with the political leadership and ordinary Chinese. What’s new is the direction these disputes have taken in the last year and in November.
The country recently established what it called a new Air Defense Identification Zone in the East China Sea and warned civilian aircraft flying through the region to notify it of their flight plans. The area covers the group of islands known to Japan as Senkakus islands (Diaoyu to China). In response the U.S. government flew its bomber planes through the area to indicate it won’t accept Chinese sovereignty over the islands but at the same time it asked American airlines to notify China whenever they route planes through the region. (See: Beijing warns Washington not to “meddle” in territorial dispute and U.S. Sends B-52s on Mission to Challenge Chinese Claims).
This blog won’t dabble in the details of the dispute or attempt to evaluate the merits of the various claims. Rather, it’s more important to warn of the implications to the global economy and especially the electronics industry. China is by far the world’s biggest manufacturer of electronics products. Many other industries also produce a large percentage of their goods in the country, making it the world’s most important manufacturing center.
Here are some facts to drive this point home. In almost all market segments, China is now the No. 1 market for semiconductors; the products are often exported to consumers in other parts of the world. IHS Corp. reported recently that the world’s purchase of industrial chips used in “building and home control, energy generation and distribution, manufacturing and process automation, medical electronics, military and civil aerospace, and test and measurement,” has begun shifting to China and Asia Pacific.
“In the Americas, share of OEMs purchasing industrial chips will dwindle from 36.35 percent to 35.49 percent, equivalent to a loss of 0.86 percentage points during the five-year period,” IHS said in the report. “Meanwhile, China will emerge as a powerful new force, enlarging its portion of the OEM spend market from 12.91 percent to 15.74 percent, or a gain of 2.83 percentage points.”
I could trot out other data that point to the significance of China to the electronics world but suffice it to say that industry executives continue to emphasize how their companies plan to expand sales in China. All of them are pouring resources not just into China but also into regional markets. Future Electronics Inc., for example, sees all of Asia-Pacific as important to its future growth, according to Lindsley Ruth, a senior executive with the Montreal-based components distributor.
China’s role is even bigger outside of the electronics market and many economists now expect the country to become the world’s biggest economy within the next decade or so. To safeguard that future and the billions in investment dollars that nations and businesses have put into the country, corporate executives must not be silent as China confronts the thorny issue of its territorial disputes with neighboring countries. That’s only the first thing they need to do, however. More importantly, they need to understand that despite its promises – and the hefty rewards it has so far delivered – China is still a country in transition.
It has the potential to become even greater economically and politically than it is today. That road is tortuous and filled with numerous internal and external dangers. If China goes to war with its neighbors the entire world will feel the impact and so will manufacturers in the country. That’s why your company’s second action – in addition to speaking up and pointing out the dangers identified above – is to put in place contingency plans.
If your company’s “China strategy” plan is on a dusty shelf, please update it immediately. China is giving us all enough warnings.