Hardware Supply Chain & Sourcing POST 12 OF 16

In 2021, a drought in Taiwan threatened semiconductor production because fabs need enormous quantities of ultrapure water. Climate, geopolitics, logistics, and manufacturing infrastructure are all supply chain risks. They just don’t appear on a BOM.

Geographic concentration risk is the exposure that arises when a disproportionate share of a company’s supply chain is concentrated in a single country, region, or facility. It is not a new concept, but the events of 2020 to 2023 — the COVID lockdowns that closed factories and ports, the container shipping disruptions that created months-long logistics backlogs, the geopolitical tensions that raised the salience of Taiwan semiconductor dependency — made it one of the most widely discussed topics in hardware supply chain management. The challenge for investors and executives is separating the substantive risk from the noise, and understanding which geographic concentrations represent real exposure versus which are simply facts of the global component market that cannot be practically avoided.

The Taiwan semiconductor concentration is real and significant. Taiwan Semiconductor Manufacturing Company — TSMC — manufactures approximately 90% of the world’s most advanced semiconductor nodes. A large proportion of the less advanced but still critical components that go into consumer and industrial electronics are also manufactured in Taiwan. The risk of a conflict over Taiwan’s sovereignty, or a major natural disaster affecting the island, is not a fringe scenario in risk management discussions — it is actively modelled by governments, military planners, and insurance companies. A hardware company whose product contains advanced semiconductors has, to a significant degree, unavoidable concentration in Taiwan. What distinguishes companies that manage this risk from those that don’t is not whether they have TSMC-manufactured chips in their products — most do — but whether they understand which of their components have this dependency, what the lead time and inventory implications are, and what their contingency plans are for a disruption scenario.

China manufacturing concentration is a different type of risk. The majority of global electronics manufacturing happens in China — PCB fabrication, PCBA, mechanical assembly, display production — and this concentration has both cost and risk implications. The cost implications are well understood: Chinese manufacturing is generally cost-competitive for electronics production. The risk implications became more concrete during COVID, when factory lockdowns in Chinese manufacturing hubs created production stoppages that rippled through global supply chains with weeks of advance warning, if that. The geopolitical dimension — tariffs, export controls, and the broader decoupling trend between Western and Chinese technology sectors — adds a regulatory layer to the operational risk. Companies building products for regulated sectors, or that contain components subject to export control, need to understand how their manufacturing geography interacts with these regulatory requirements.

For hardware companies, the practical response to geographic concentration risk is not to eliminate all concentration — that is neither possible nor economically rational — but to map it, quantify it, and manage it. Mapping means knowing, for each critical component, where it is manufactured and which single points of failure exist in its supply chain. Quantifying means calculating, for defined disruption scenarios, what the production impact and financial exposure would be. Managing means holding appropriate safety stock for the most concentrated, highest-risk dependencies, maintaining qualified alternative sources where they exist, and having contingency plans for sourcing from alternative geographies when primary sources are disrupted.

For investors and executives, geographic concentration is a portfolio-level risk question as much as a company-level one. Ask hardware companies in your portfolio or pipeline to identify their top five geographic concentrations — components or manufacturing operations where they have significant single-region dependency — and to describe the scenario in which that concentration becomes a production constraint. The quality of that analysis — whether it is specific and quantified or vague and qualitative — tells you a great deal about how seriously the company takes geopolitical supply chain risk.