G7 Confronts China’s Designs on Semiconductor Supply Chain

G7 leaders meeting in Hiroshima, Japan this past weekend were hardly short of major global issues to discuss. From Russia’s unprovoked war in Ukraine and the proliferation of nuclear weapons to the steady march of climate change — the potential scope of the agenda was vast. So it was significant that the leaders devoted part of the summit’s agenda and communiqué to the risks facing critical supply chains and the need for greater resilience.

Nowhere is this more concerning for the world economy than in the case of Taiwan. We are at a time of heightened tensions between the United States and China. An all-powerful President Xi Jinping is intent on reuniting the two rival Chinese republics. Consequently, the concentration of semiconductor manufacturing in Taiwan is the biggest geopolitical risk facing supply chains today.

Taiwan-based companies control more than 90% of the world’s production of advanced microchips. These chips are used in everything from high-end smartphones to cutting-edge military hardware. One company, Taiwan Semiconductor Manufacturing Co. (TSMC), dominates this niche and owns more than half of global chip-making market share.

A Chinese invasion or blockade of its neighbor across the Taiwan Strait would have a devastating impact on the global economy one far greater in scale and longevity than the havoc wrought on food and energy supplies by Vladimir Putin’s aggression last year. So it is right that G7 leaders focused on the issue.

Taiwan’s Supply Chain: Powered by Semiconductor Exports

Taiwan exported $479.4 billion of products in 2022. The U.S. was the second biggest importer after China, with 15.7% ($74.9 billion) of the total. Japan was fourth with 7% behind Hong Kong, while the other five G7 countries Canada, Germany, France, Italy and the U.K. made up a combined 4.3% ($20.9 billion).

Many different products are shipped to these and other nations in Asia-Pacific and beyond (see chart). But it is electronic components, and especially “integrated circuits/microassemblies” in other words, semiconductors that dominate the list. The latter accounted for $183.5 billion, or 38% of Taiwan’s total exports by value last year. Despite a falloff in demand for chips in recent months, this figure was up 17.7% on 2021, which in turn was up 22.4% on 2020.

Taiwan Exports by Commodity, Q1 2023. Electronic components are the largest category.

Dependence on Taiwanese supply chains among G7 countries is, as you might expect, extensive. An analysis of Interos’ global database of business relationships shows that:

  • U.S. companies have almost 70,000 direct (tier-1) relationships with Taiwanese suppliers. Companies in other G7 member countries have almost 10,000 between them.
  • When indirect multi-tier relationships are included, G7 member companies have more than 315,000 tier-2 and 750,000 tier-3 connections to Taiwanese firms.
  • Although tier-1 relationships with the two major Taiwanese semiconductor manufacturers, TSMC and United Microelectronics Corp. (UMC), are relatively small in number (led by the U.S. with around 220), as tier-2 and tier-3 suppliers these two companies are present in hundreds of thousands of supply chains in G7 countries.


The Likelihood and Impact of China Invading Taiwan

Two key questions that arise from discussions around the China-Taiwan situation are:

  1. How likely is it that China will seek to take Taiwan by force, and when might this happen?
  2. What impact would Chinese action against Taiwan have on the global economy and supply chains?

Opinions among commentators and analysts on the first question vary widely. Some see an invasion occurring as soon as later in 2023, to sometime in the 2030s, to never. China’s official policy is one of peaceful reunification. However, U.S. intelligence reports suggest that President Xi has ordered the People’s Liberation Army to develop capabilities to seize the island by military force by 2027.

A geopolitical risk assessment of conflict between China and Taiwan by Interos concluded that the likelihood of an invasion in the next 2-5 years was “roughly even odds (45-55%).” The assessment also noted that “the majority consensus [among government policy makers and think-tank experts] appears to be that there will be an armed conflict over the island.”

On the second question, Interos’ analysis identified that a partial blockade or full invasion could disrupt ocean and air cargo shipments from Taiwan. Our analysis also raised the possibility that Taiwan could be completely cut off from international trade.

Potential Supply Chain Scenarios for Semiconductor Disruption

A tabletop exercise conducted last year among U.S. government and business leaders by the RAND Corporation centered specifically on the likely impact to advanced semiconductor supply chains. Participants were asked to consider two potential scenarios in which China imposed a “coercive quarantine on Taiwan”:

  1. Uncontested, China acquires a significant portion of global semiconductor capacity. This leaves the U.S. and other countries with a choice of continuing to buy from Taiwanese suppliers or imposing sanctions on China.
  2. China faces resistance in its attempts to take control of Taiwan’s fabs. This leads to a rapid loss of access to the country’s semiconductors, and triggers U.S. and other government action to ration limited supplies.

Unpalatable outcomes from these two scenarios included a fundamental change in the balance of global power in China’s favor, and an extended economic depression for most of the world. Unsurprisingly, given the impact on multiple industries (see graphic), business participants were keen on ensuring continuity of supply even if this meant relying on semiconductor firms such as TSMC under Chinese control.

How Loss of TSMC Would Impact Different Industries.

Military action against China, whether by Taiwan or the U.S. and its allies, was not considered in this simulation. But a recent assessment by The Economist laid bare the imbalance in military capabilities between China and Taiwan. The analysis also articulated the dire consequences of military conflict over the island state. This included “incalculable damage to the world economy” as a result of disruption to semiconductor supply chains.

The threat of war looms large over the Indo-Pacific region. Hence efforts in recent weeks by Japan and other G7 countries, including the U.S., to take some of the heat out of relations with China. In their communiqué, the G7 leaders emphasized that actions designed to boost economic and supply chain resilience were about “de-risking, not de-coupling” from China.

Some Major Players Begin Diversifying Chip Capacity Away From Taiwan

In practice, de-risking means diversification. Since their 2022 meeting in Germany, the response of G7 countries to semiconductor concentration risk has been to tempt advanced chip-making capacity away from Taiwan through vast public subsidies. The U.S. has led the way with its CHIPS and Science Act, but Japan, the European Union, and the U.K. have all followed suit, albeit with fewer billions of dollars to throw at the problem.

Over the next five years these industrial policies should result in new fabs, supply chains, and skilled workforces being developed in multiple geographies. However, Taiwan is set on keeping much of its domestic semiconductor “shield” intact, both in terms of manufacturing and R&D. Aside from contributing 15% of Taiwan’s GDP, the industry serves as vital leverage for Taiwan in its efforts to maintain independence from China.

Confidence in this strategy in waning in some quarters.  \Warren Buffett’s Berkshire Hathaway recently announced that it had sold the remainder of its $4.1 billion stake in TSMC. This is in spite of the fact that the shares were purchased as recently as November last year — and that TSMC is regarded as one of the world’s best-managed companies.

“I don’t like its location,” Buffett told analysts. “I feel better about the capital that we’ve got deployed in Japan than in Taiwan.”

Action CPOs Should Take to Prepare for Potential Disruption

To reduce the exposure of their organizations to semiconductor concentration risk, chief procurement officers should do the following:

  • Assess your dependence on Taiwan by understanding the relationships you have with Taiwanese suppliers. Include both the direct, tier-1 relationships and those at tiers 2, 3 and beyond. Chip makers such as TSMC and UMC are often present at this sub-tier level.
  • Evaluate the extent to which key semiconductors, electronic components, and other items you depend on from Taiwan-linked supply chains are single- or sole-sourced. Identify where you have viable alternative options already in place.
  • Develop a strategy aimed at diversifying your supply base to other geographies. Consider sourcing from new suppliers and/or by working with existing partners to utilize alternate and emerging capacity.
  • Conduct scenario plans and risk simulations – like the one run by British telecommunications group BT last year. These can gauge the impact that disruption to Taiwanese semiconductor supply chains might have on your business.
  • Continuously monitor your Taiwan-dependent supply chains for geopolitical, operational, financial, and cyber risk events.

Until new semiconductor capacity comes online in the U.S., Japan, Germany, South Korea, and elsewhere, companies will continue to over-rely on Taiwan-based suppliers. However, it is important to be prepared for, and to support the creation of, a more diversified global supply chain for microchips – as it is with other critical products and raw materials that are heavily concentrated in particular geographic locations.

First Republic, SVB: Why Bank Failures Disrupt Supply Chains

By Kate Anderson, Scott DeGeest and Teddy DeWitt

Amid the coverage of the evolving U.S. banking crisis that has claimed Silicon Valley Bank (SVB), Signature Bank, and First Republic Bank (FRB), and is now threatening PacWest, one aspect has remained largely hidden – the potentially massive supply chain impact of these failures.

Make no mistake, a banking crisis is also a supply chain crisis.

Interos data suggests that, thanks to the supply chain ripple effect, over 600,000 U.S. firms will be indirectly affected by the collapse of SVB and FRB alone.

Our research also indicates that, by considering banks as part of a larger supply chain and monitoring specific risk indicators, organizations – and especially their procurement leaders – can anticipate potential problems and banking failures well in advance.

So why are these banks failing? What does it mean for the broader supply chain? And what can organizations do about it?

The Banking Sector: A Supply Chain of Capital

As banks experience greater volatility, a tougher business environment and fleeing depositors, it becomes more difficult for them to obtain capital to distribute to their customers.

Much as supply chain disruptions limit access to vital goods, disruptions in the banking supply chain limit access to vital capital. This, in turn, impacts a whole range of day-to-day banking services that businesses rely on, including liquidity management, accounts payable services, lines of credit, foreign exchange services, and lending.

As with SVB, capital supply chain failures ultimately extend far beyond the financial sector and into the wider economy. Even companies not directly reliant on the bank’s capital were affected when they discovered that suppliers and service providers that banked with SVB were at risk. For example, users of Rippling a major payroll platform suddenly discovered that their operations were threatened by that supplier’s reliance on SVB.

Despite these impacts, companies seldom view financial crises through a supply chain risk lens. This is an oversight that, if corrected, could enable them to anticipate and prepare for these significant disruptions, rather than simply reacting after the event.

The importance of this kind of anticipation has become all too clear in the last few weeks and is likely to remain so given the prospect of additional volatility in the short to medium term – with regional bank stocks like PacWest continuing to slide.

So how can organizations use Interos’ data to understand the pinch in the capital supply chain that portended the collapse of FRB, for example?

Using Interos Supply Chain Data to Identify the Banking Capital Market Pinch

Volatility is a measure of how much a stock price moves over time. Increasing volatility indicates higher perceived risk, and can be an indicator that the overall risk, and potential vulnerability, of the business has increased.

Chart 1: Stock Volatility of Regional Banks

Chart showing the volatility of regional bank stocks from Mar 1 to April 26, with First Republic experiencing significantly higher volatility than others.

Source: Interos Analysis

In addition, an analysis of metrics from the Interos platform showed FRB’s liquidity access steadily decreasing from June 2022, driven by an increase in its use of non-financial trades (see chart 2).

Chart 2: Liquidity Access Score for First Republic Bank

Chart showing First Republic's declining liquidity access in the weeks leading up to its failure.

Source: Interos Analysis

Identifying the Ripple Effects on the Wider Supply Chain

Capital constraints ripple through the broader supply chain ecosystem, as was evident during the collapse of SVB, and now FRB.

Interos’ resilience platform documents 3,000 direct (tier-1) business relationships for SVB and FRB. But it also shows almost 600,000 indirect (tier-2) connections. These are companies that don’t bank directly with SVB or FRB but have a supplier that does.

For example, suppose Acme Corp. banks with SVB and provides IT services to Bravo, Inc. A failure in SVB would potentially disrupt payroll for Acme Corp., which might limit the services that Acme can provide to Bravo.

Without visibility into its extended supply chain, Bravo would be unable to anticipate the ripple effects of this failure.

Once a firm at the center of a capital supply chain disruption has been identified, the Interos platform enables procurement professionals to identify which tier-1 and tier-2 suppliers rely on that firm for vital goods and services.

How Organizations Should Respond to Potential Bank Failures

To respond to a capital supply chain disruption and get ahead of future problems, procurement organizations should do the following:

  • Identify essential tier-1 and tier-2 suppliers that use regional banks.
  • Coordinate contingency plans with these suppliers to address liquidity crunch issues and concerns about inventory management in the event that their banking partners experience a credit pinch.
  • Review the recent credit history of capital suppliers (regional banks) to look for signals of distress such as increases in non-financial trades.
  • Monitor the financial situation of your own banking partner(s) for any declines in access to liquidity.

Network effects, high volatility, and liquidity crunch issues will continue to be a problem for regional banks – with PacWest just the latest example – in the near term.

Owing to their smaller and often more concentrated deposit bases, regional banks are more susceptible to supply chain disruption from capital flight.

Interos’ approach to this type of risk, as described here, integrates financial data with supply chain network data and news alerts to flag potential problems in advance and provide guidance on navigating the aftermath of a crisis.

A long time ago in a supply chain far, far away…

The Millennium Falcon might look like a piece of junk but it can do point five past lightspeed and
– as they say in the bars of Tatooine – it’s got it where it counts.

Not bad for a bucket of bolts won in a card game.

In celebration of May the Fourth, Interos turned its artificial intelligence-powered supply chain
risk management technology on the company that makes the ship that made the Kessel Run in
less than 12 parsecs.

Our report is based on a detailed analysis of Star Wars lore with all companies mentioned
appearing in canon, the official collection of stories and history that Lucasfilm accepts as part of
the Star Wars saga. Our analysts dove deep into the available data, conducting a legitimate
analysis using the Interos platform.

What we found is a supply chain littered with risks as the Falcon operates in a universe with just a little bit of political instability, making it more than difficult to ensure the procurement of the
right part at the right time. This may go without saying, but it turns out an intergalactic war
fought between all-powerful space-wizards is bad for the widespread availability of necessary
parts and raw materials.

Let’s dive into our insights. Please note that none of our analysts died to bring you this
information, but there were algorithms and machine learning involved.

1. Koensayr Manufacturing (power converter): Medium Financial Risk

The Falcon uses a power converter from Koensayr Manufacturing, perhaps one of the top
makers of starfighters in the galaxy. However, Koensayr took a hit when the Empire took control
of the galaxy, losing out on several government contracts it held with the Galactic Republic. This
is not great news for Koensayr’s financial stability, so Han and Chewie may want to keep an ear
open for a new power converter supplier, just in case.

2. Torplex (deflector shield): Low Financial Risk | Medium Operational Risk

As partners with the Corellian Engineering Corporation (CEC) and later Sienar-Jaemus Fleet
Systems, Torplex deflector shields were quite common in a galaxy rife with competitors. That
gives them a low financial risk, but the company may find itself at risk for espionage with other
players in their field, so we tag them with a medium operational risk.

3. Coaxium (hyperfuel): High ESG Risk | High Operational Risk

A necessary part of a hyperdrive’s ignition chamber and sometimes used as fuel, coaxium
comes from planets like Kessel, known for its enslaved workforce and reputation for corruption.
After its rise, the Empire began to attempt to monopolize production of the substance as well.

4. Girodyne (sub-light engines): High Operational Risk

The company that makes engines for starfighters and other galaxy-traversing ships has a fairly
diverse product set. All these moving parts, though, require specialization and we worry
Girodyne finds itself at a high operational risk, since it leans so heavily on its own suppliers for

5. Phylon Transport (tractor beam): Low Political Risk | Low Financial Risk

The maker of the Falcon’s tractor beam emitter found itself in a good spot, thanks to
relationships with CEC and the Kuat Drive Yards, two major ship producers.

6. Cloud City (gas mining colony): High Political Risk

The Falcon likely used tibanna gas to cool its hyperdrive, which would be abundantly available
in Cloud City. Sadly, Han and Chewie’s last trip there ended… poorly. Cloud City remains on
many intergalactic restrictions lists as of this writing, so the Corellian Engineering Corporation
may want to look for suppliers elsewhere.

The Official Interos i-Score™

The Millennium Falcon’s supply chain certainly has its challenges. The galaxy is filled with
spaceships and spaceship parts, meaning that if Han and Chewie cannot get a replacement
part directly from a supplier, there are certainly secondary options available.

However, and this should go without saying, an intergalactic economy that includes the
presence of the Death Star can never be completely safe. (Our system is not calibrated to
calculate how vaporizing an entire planet like Alderaan impacts intricate supplier models, but we
safely assume it’s high.)

For these reasons, we will give the Corellian Engineering Corporation, makers of the Millennium Falcon, an Interos i-Score™ of 77, indicating medium overall risk. If Han or any other pilot is
worried about their ship’s supply chain and ever wants to improve their operational resiliency, they
can find us at the cantina in Mos Eisley.

Special thanks to Lucasfilm for its input on this project. All information was sourced through
official, canonical, Star Wars sources.