The Fire Next Time

In the wake of Russia’s invasion of Ukraine, Western businesses abandoned Russia in droves. There was little pain, since investments in Russia’s economy have generally been modest. But the London Times asks a good question: what if China invades Taiwan? The headline is, “Western companies face ‘existential crisis’ as fears grow of Chinese invasion of Taiwan.”

Days after the Ukraine conflict erupted, Apple, BMW, McDonald’s and other Western giants lined up to announce they were quitting Russia in protest.

“This moment calls for unity, it calls for courage,” declared Tim Cook, Apple’s chief executive.

That it only caused a relatively small financial hit must also have helped. The decision reportedly cost the iPhone maker less than 1pc of its global sales, while some foreign businesses, including France’s Renault, chose to sell off their Russian operations for a symbolic one rouble. Oil giant Shell, which made almost $300bn (£254bn) in sales last year, said its losses would not top $5bn.

But what if China invades Taiwan?

Yet experts fear another diplomatic crisis will soon be looming where the calculation will not be so simple: a forced Chinese subjugation of Taiwan.
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Whether attempted with military force or other means, this would pose a nightmare scenario for boardrooms who have spent years – and vast sums – trying to woo the dragon.

Many of the West’s biggest businesses take a huge chunk of their profits from China, dwarfing what was at stake in Russia, and will be far more reluctant to give them up.

Apple made $68bn or 19pc of its revenues in Greater China last year, while one in three German cars are reportedly sold in the mainland. AstraZeneca, the British drugs giant, now relies on China for 16pc or $6bn of its annual sales.

Taiwan itself has also become a lynchpin of global supply chains, particularly in digital technologies, with the island’s foundries producing half of the microchips used in everything from smartphones to washing machines and cars.

That is a stunning fact.

It means that a standoff over Taiwan between the West and Beijing threatens far more collateral damage than the confrontation with Russia.

That is putting it mildly:

“Most companies that have been doing business in Russia have been able to take the hit, write off their investments and walk out of Russia,” [Dr Michael Reilly, a senior fellow and China expert at the University of Nottingham] adds.

“To write off their investments in China would have a much, much bigger impact.”

It is not for nothing that China is known as the workshop of the world, with many foreign businesses relying on the factories in the country for part of their production process.

A sprawling complex run by Foxconn in Zhengzhou, dubbed “iPhone city”, employs more than 300,000 people and produces half of the world’s iPhones on behalf of Apple.

Pegatron, a Taiwanese company with operations in Shanghai and nearby Kunshan, separately assembles around one quarter of the handsets.

Apple also relies on a long list of China-based suppliers for components – as do other tech giants such as Microsoft, Google and Intel.

Meanwhile, a host of fashion retailers, including H&M, Zara, Gap and Calvin Klein, rely on a string of material suppliers in the country, which is the largest producer of cotton in the world.

Many Western companies have gone even further and invested in having their own operations in China, or created joint ventures with a domestic company – long a condition for entry into some industries.

Nike has 102 factories in China, employing more than 123,000 workers, while JCB, the British manufacturer of tractors, diggers and other machines, operates a plant in Pudong, near Shanghai.

German car makers including BMW, Volkswagen and Mercedes-Benz all have joint ventures that produce and sell millions of cars each year.

VW, by far the biggest and the first foreign manufacturer to set up shop in China four decades ago, sells a car in China every 10 seconds and reportedly relies on the country for around half of its profits. It has 33 Chinese plants spread across the country, employing more than 100,000 workers and producing five million vehicles per year.

So if China does move against Taiwan, whose side will big business be on? Based on what we have seen in recent years, my guess is that kowtowing to the CCP will continue. And that can only impact American and European policy, especially if the party of big business, the Democrats, are in power in Washington.

Some are sanguine that the deep economic connections between China and Western powers will keep Taiwan safe. But realistic calculations may suggest otherwise:

[T]he amount of Western capital tied up [in China] remains enormous – and for some companies there is simply too much at stake.

A crisis over Taiwan akin to Ukraine would cause an “existential crisis” for German car makers, an adviser to the firms told the Financial Times earlier this year.

Former diplomat Parton says this will complicate the response taken by the West, particularly if China’s actions cannot be easily categorised.

Instead of invading or blockading the island, he believes Beijing will use “smarter” tactics that blur the lines of acceptability – making it harder to establish whether red lines have been crossed.

“And so there will be foreign companies putting a lot of pressure on their home governments, saying ‘Are you really going to make a stand here, with all the losses it will entail?’,” he adds.

And we all know how steadfastly Western governments stand up to their countries’ corporate interests. Perhaps the most optimistic scenario is that Western corporations disengage from China over the next few years, so that when the CCP starts to apply serious pressure to Taiwan, Western governments will feel free to resist. Is that scenario too optimistic? Your guess is as good as mine.