Flash In The Pan: How does Xi treat Ukraine as a test bed for Taiwan?
Welcome to The Executive Perspective.
The world is very much focused on Ukraine these days but, Taiwan the "Chip Island" is at the epicenter of everything Vladimir Putin and Xi Jinping are cooking in 2022, including the pancakes they knock up together at the Beijing Winter Olympics.
I think that there is an important correlation in between Ukraine and Taiwan which creates an environment of mutual understanding between Vladimir Putin and Xi Jinping.
As the U.S. confronts Vladimir Putin about Russia’s military buildup along its border with Ukraine, Xi Jinping is watching with observant eyes. China, too, has a geopolitical grievance in his neighborhood—in his case over Taiwan, the microchip-rich island that Beijing insists is and always should be part of China as part of One-China Policy.
How Xi judges the fate of the Ukraine crisis could be decisive whether and how China tries to put her hands on Taiwan, and thus has implications for the security and stability of East Asia.
That makes the crisis in Ukraine a real test for U.S. led world order.
A stalemate persists over Ukraine’s potential membership in NATO—which Putin desperately wishes to prevent. At stake is the balance of power between the U.S. and Russia in Eastern Europe. The outcome, though, could reverberate well beyond the region.
Putin and Xi are seeing an opportunity here. Xi may believe that Taiwan is drifting in a direction harmful to China’s national interests, just as Ukraine has strayed ever further from Moscow’s orbit.
The problem for Biden is that China and Russia think they should test him at all times, and they are. But there is stark difference how Biden handles the job when compared to Trump. The Trump administration sent a Cabinet member to?Taipei in 2020, the highest-level American official dispatched there for more than four decades. Biden?invited Taiwan?to his Summit for Democracy in December as if it were any other country.
It is fair to say that swing in pendulum over Taiwan with respect to U.S. policy is emboldening Xi Jinping in supporting Putin over Ukraine.
I reckon if Ukraine falls prey to Russia, so might Taiwan experience a similar fate.
In essence, here are the key takeaways for decision making in this context:
Let's now carry on with putting global events in perspective.
Here are the latest developments on 8 global trends that I believe will shape the way we do business in 2022.
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1. Management Strategy
Hyper-Personalization: The next step in your CX strategy.
Customer experience (CX) is a concept that’s always evolving, and in the last two years, it’s developed faster than ever before. Greeting customers by their names in emails or remembering their birthdays definitely has a positive effect on customer experience.
But customers today are no longer impressed by that. They expect highly personalized experiences every time they engage with a business, and they already know that businesses have tools to achieve this.
Leveraging real-time customer data such as their website behavior, search results, purchase history, most active times, and past interactions with your business can help you develop a deeper understanding of their needs and hyper-personalize their experience.
However, the future of customer experience will not be restricted to one team or department, it will depend on collaborative, inter-departmental, and cross-functional teamwork. Sales, marketing, service, product, and other operational teams will need to work in harmony to deliver the unified experiences that customers want.
Remember that customer experience is a series of interactions throughout the customer journey and all the departments in your organization are connected.
As more companies start competing primarily based on CX, 2022 will see a gradual move towards hyper-personalized experiences and the brands that are able to provide those experiences consistently will stay relevant and increase customer happiness over time.
Achieving this shouldn’t be difficult with modern CX platforms with advanced AI and data analytics capabilities that help you slice and dice customer data and gather meaningful insights.
2. Geopolitics
Brace For The Impact: European banks might get caught in the crossfire.
European banks try to position themselves for sanctions on Russia, should Moscow decide to invade Ukraine and what they are concerned the most about is a possible Russian prohibition from widely used payment systems. Such a move will considerably damage the industry as it would prevent the repayment of debts. Although the SWIFT option seems to be off the table for the time being, depending on how aggressive Russia would handle the crisis in Ukraine, it will always remain as a nuclear option amongst others.
The impact of any sanctions would not be limited to Russian financial institutions and/or businesses but is likely to be felt across the world, especially by financial institutions who have significant Russian exposure. The main risk from sanctions would be the European bank’s investment banking operations.
Similar risks are likely to be prevalent for many financial institutions engaged in swaps, futures, forwards and other derivatives trades with any Russian counter-parties that become subject to sanctions designations.
Additional risks may include:
The precise impact on each of these areas will depend on what new sanctions are imposed. Nevertheless, a number of western banks are reported to be assessing their level of exposure to the above risks and considering how best to mitigate this in the immediate term.
This may in turn have longer term implications for broader de-risking depending on the approach taken by lawmakers and the market.
I believe a following step-by-step approach to tackle this issue might be useful;
Jawaharlal Nehru does have a point: "Crises and deadlocks when they occur have at least this advantage, that they force us to think."
3. Manufacturing and supply chains
The Wafer Wars: Semiconductor shortage may linger on and on...
Japan's Sumco Corp., a key supplier of silicon wafers for the semiconductor industry, said last week that it has sold out its production capacity through 2026. The announcement signals that shortages in the semiconductor industry may not be over in the short term.
Sumco is one of a small number of companies that provide specialized silicon slabs that chip producers use to create their designs. The Japanese company announced it has orders to cover all its output of 300 mm wafers for the next five years.
There are two types of semiconductor companies that manufacture chips in fabs.
Integrated device manufacturers (IDMs) design their own name-brand chips and manufacture them in their own fabs. And foundries, who make chips for other companies in their own fabs.
Both IDMs and foundries have 200mm and/or 300mm fabs. (200mm and 300mm refer to the diameter of silicon wafers, which are produced by various wafer makers.)
The statement by Sumco can be regarded as an early indication that the two main players in the semiconductor industry in terms of creating chips, TSMC and Samsung, are going to raise their prices between 10% and 20% based on optimistic estimates. This is given by a consequence of the rest of the industry, because both TSMC and Samsung depend on companies that provide them with wafers.
Sumco is one of them and has now provided data that shows a problem: the demand is overflowing?and the production is?reserved until 2026.
Not only are efforts being made to produce 24/7 in the existing factories where there is not enough to satisfy the demand, it is that the production is reserved even for the new ones that are created in these years to the point that, perhaps, it is not possible to supply the levels that are demanded in 2026.
But the issue here might be more serious than it seems since Sumco needs substrates and raw materials for its silicon rods, which are also in their own internal crisis!
Unimicron?is one of the largest PCB (Printed Circuit Board) manufacturers and they are with a?20% deficit looking ahead to next year, where its figures are worse for this 2022.
They have grown in sales?30% and their income is expected to triple by 2026, but this highlights another concern: they are not growing at the rate that the industry needs, since although they have 14 fabs producing both ABF (Ajinomoto Build-up Films) substrates and, as for raw materials throughout Asia, they cannot satisfy what companies like Sumco ask of them in terms of volume.
4. Energy Security
Chiming In With China: Britain grants funding for new nuclear project.
Britain will fund France's EDF for 100 million pounds to help the company build the Sizewell C nuclear plant in Suffolk. The British government also intends to encourage new investors in the project. In line with its zero carbon target by 2050, Britain tries to increase low-carbon power generation such as renewables, but new nuclear projects have been lacking in funding due to large upfront costs.
Sizewell C will generate 3.2 gigawatts of electricity, if completed, enough to power 6 million homes. The government's decision to fund the project also comes following record natural gas prices in Europe, which have driven the cost of electricity up.
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This investment builds on the 2020 Energy White Paper, which committed the UK government to the aim of bringing a new large-scale nuclear project to Final Investment Decision, subject to clear value for money and relevant approvals.
Energy white paper sets out how the UK will clean up its energy system and reach net zero emissions by 2050. While there is no mention of Sizewell C in the paper it does mention that "With the exception of Sizewell B and Hinkley Point C, which is under construction, all of the existing nuclear power plants are due to have ceased generating by the end of 2030."
You can reach the Energy White Paper here > Powering Net Zero Future
On the other hand, I think that Chinese partnership in Sizewell C will continue to stay as a national security concern for UK as EDF and China General Nuclear (CGN) are joint developers of Sizewell C taking 80% and 20% shares respectively.
China is invested in a number of nuclear projects in the UK, including Sizewell C, Bradwell B and Hinkley Point C. The US government has been applying pressure on its ally to blacklist CGN from its major infrastructure projects, citing national security concerns that CGN rejects.
The British government plans to sell a minority stake in a new nuclear power station to institutional investors or float it on the stock market, to remove China General Nuclear Power Group from the project but that has not happened yet.
5. Legislation
Catching Up On Chips: European Commission Proposes $49 Billion Bill to Boost Semiconductor Industry.
The European Commission proposed several days ago a set of measures to secure and develop the European Union's semiconductor manufacturing industry at a time when global chip shortage continues. The bill, dubbed the European Chips Act, proposes a $49 billion investment in the semiconductor sector in order to make Europe one of the global leaders in the industry and reduce its reliance on Asian supplies.
There is no doubt that the European Commission aims with this bill to strengthen areas such as research, development and manufacturing with the new legislation. It also wants to address some of the region's weaknesses.
And to tackle this problem, the envisaged European Chips Act will be brought to daylight to show that the EU has the necessary tools, skills and technological capabilities to become a leader in this field beyond research and technology in design, manufacturing and packaging of advanced chips, to secure its supply of semiconductors and to reduce its dependencies.
In this sense, the main components of European Chips Act are:
In my opinion, the chip production initiative in EU is not only an industrial necessity but also a sovereignty necessity.
Europe's share across the whole chip value chain has been decreasing lately, including design and manufacturing capacity, relative to the growing capabilities of other nations. Brussels fully understands that relying too heavily on semiconductors from China and other major players can severely impact the EU's sovereignty.
What makes the EU's ties with China so complicated is that while still?a cooperation partner, China is increasingly seen as a competitor and systemic rival, meaning that dependencies can also involve crucial security issues.
6. Sustainability Strategy and Decarbonization
The Hunt For Lithium: Does the world need a supply security convention on lithium?
The fact that lithium plays a crucial role in electric vehicle (EV) manufacturing gives automakers, miners and investors headache to figure out how much of it the world will need, and how much of it will get in the coming years.
The predictions so far vary greatly. Lithium prices have grown five times over the past year, and while technological improvement and amount of production have made EVs cheaper, rising costs of raw materials, including lithium, put that in jeopardy.
Looking at the future, battery grade lithium hydroxide demand is projected to increase from 75 kt in 2020 to 1.100 kt in 2030.
It takes two to three years to build and optimise a battery factory or an EV plant, but it takes between five and ten years to build and optimise a mine, and currently the EV sector is raising capital at much faster rates than the raw materials sector.
Efforts to develop additional lithium production and processing capacity will therefore be required this decade. The main issue in this regard is quality assurance between lithium suppliers and battery producers.
Lithium reserves are estimated at 17 Mt, whilst total lithium resources are thought to be around 80 Mt (c. 400 Mt LCE). These resources are concentrated in Argentina, Bolivia and Chile (brinebased), Australia, Canada, China and the United States of America (spodumene-based).
On top of that, new resources continue to be identified, including most recently in Germany, where lithium ore reserves are being developed in Saxony and geothermal resources in the Upper Rhine valley. Many other projects are under consideration in Europe in countries such as Austria, Portugal, Spain, the United Kingdom of Great Britain and Northern Ireland and Serbia.
The environmental footprints of both types of supply differ significantly and will require careful management as energy use and CO2 emissions in lithium supply rise, presenting an opportunity to deploy more low-carbon renewable energy.
I think that there is also a need for more transparency in this nascent industry to better understand potential supply risks, therefore, sufficient international co-operation amongst the key governments involved is required to ensure that lithium will not become a bottleneck for the energy transition.
7. Rare Earth Minerals and Mining
New Mineral Revolution: Can there be a "Lithium OPEC" in Latin America?
A proposal to nationalize Chile's biggest copper and lithium mines was passed in an environmental committee as part of the drafting of a new constitution. The passing vote is the first step of a long process before the proposal becomes law. It first needs the approval of two thirds of the parliament before being put into a referendum later this year. Chile has the world's biggest reserves of copper and lithium, both of which are critical materials for the world as it tries to fight climate change. There are a total of $70 billion worth of possible mining projects this decade.
However, the political tide in Latin America has turned decisively toward leaders who openly shun laissez-faire economics. A new generation of presidents and legislative leaders is advocating for greater government control of national economies, and with this trend, the specter of resource nationalism has once again gained a foothold in the region.
It’s not new. Pemex, PetroBras, YPF, PdVSA and many others are proof of the region’s ambition for nationalizing parts or the entirety of its oil and gas industries.
What’s different this time is that these new interventionist policies are not only focused on the traditional energy sector. Instead, the region’s attention is turning to increasingly valuable minerals that are key to the new green economy quickly gaining momentum across the world.
From Mexico to Chile, there is a new push for governments to exert more control over these resources. At the heart of this renewed resource nationalism in the region are the minerals key to high tech products and a growing green economy.
Minerals such as lithium, copper and zinc are key to the development of future technologies such as electric vehicle batteries, solar panels and wind turbines, as well as energy storage batteries. As demand for these green economy technologies grows, so too does the need for these key minerals.
Argentina, Bolivia and Chile are at the heart of this so-called "new mineral revolution". The countries form the Lithium Triangle, which analysts believe contains over half of the world’s lithium reserves.
There is even talk about the?creation of an OPEC-like lithium producers club as the lithium market may quintuple over the next 35 years.
But it’s important not to confuse this resource nationalism with predictions of a highly ideological leftward turn. Additionally, increased commodity prices have created an impetus for governments to try to reap profits from these minerals.
8. Defense and Armament
Guns of Navarone: Russia considers naval blockade option to potentially control Ukrainian trade routes.
The Foreign Ministry of Ukraine issued a formal protest over Russia's partial blockade of the Black Sea and the Sea of Azov under the pretext of naval exercises planned on February 13-19. According to the Foreign Ministry, the scale of exercises will make navigation in both seas virtually impossible.
Ukraine considers Russia's move is part of the ongoing "hybrid war" against the country and accuses Russia of disregard for international law.
Maps that were published online and attributed to the Ukrainian Navy showed Russian naval exercises planned in the zones through which ships would typically pass after loading wheat and corn from Ukraine’s Panamax ports of Odessa, Pivdennyi and Chornomorsk.
The same maps also showed the Kerch strait blocked as a result of the operations, which would bar Ukrainian ships from leaving the shallow water ports of Mariupol and Berdyansk in the Sea of Azov.
Corn exporters from Ukraine may be forced to consider changes to their shipping routes due to Russia’s plans for naval exercises from Feb. 13-19, amid fears of a blockade that could impede the country’s 33.5 million mt in exports of the feed grain this marketing year (July 2021-June 2022).
Even if NATO decides to intervene in the Black Sea, it will face a hurdle: The?Montreux Convention, which governs the transit regime through the Straits and limits the maximum tonnage of ships to 40.000 tons, which equates to 3-4 destroyers and 1-2 frigates.
Moreover, surface assets are unlikely to penetrate the Russian Anti Access / Area Denial (A2/AD) zone in the Black Sea, which is particularly empowered by bastion missile batteries on Russia’s Black Sea shore and improved Kilo-class submarines underwater. The U.S. would like to see its submarines to penetrate this zone, however, the Montreux Convention prohibits non-riparian states from deploying submarines in the Black Sea.?
What could Russia do then?
If the fight is considered imminent, Russia could most probably mobilize its Black Sea fleet. Blocking marine traffic to Kerch Strait and Odessa port would be one of the Russian Fleet’s first steps in such a circumstance, since a blockade of Odessa port, which is critical to Ukraine’s economy, would be a severe loss to Ukraine’s ability and will to fight on?
That's all from this edition of The Executive Perspective.
Hope to see you again next week.
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Cheers.