Geopolitical Risks

Companies normally plan for things they can influence themselves: costs, demand, competition. Geopolitical risks are the dangers that emanate from states and their conflicts. These include wars, trade disputes, sanctions, or suddenly imposed export bans. Even the mere threat of such measures counts, since it already changes decisions. The term is made up of 'geography' and 'politics': it is about how location, resources, and borders generate political power. For a tech company, this means, in concrete terms: a decision made in a foreign capital can render a business model useless overnight.

Why the chip industry in particular is so vulnerable

Almost all modern technology depends on semiconductors, the tiny computing components found in phones, cars, and data centers. These chips are not manufactured everywhere, but in very few places. The world’s most advanced chips are produced for the most part in Taiwan, by a single company called TSMC. The machines needed to even expose such chips are built worldwide only by the Dutch company ASML.

This concentration is economically efficient, but politically risky. A conflict over Taiwan or a blockade of sea routes would affect the supply of half the world economy. That is why Taiwan is often referred to in the debate as a 'silicon shield': the country is so important that an attack would be costly for everyone involved.

A second point concerns raw materials. Rare earths and some metals used for batteries and magnets come predominantly from China. Whoever withholds such materials can slow down foreign industries without firing a single shot. This is precisely what makes geopolitics a topic for stock prices today, not just for political science class.

How politics turns into a drop in share price

The path from political decision to economic damage usually runs through three channels. First, export controls: a state prohibits the sale of certain products abroad. Since 2022, the US has significantly restricted the sale of especially powerful AI chips to China this way. Nvidia subsequently had to develop stripped-down special variants, and a multi-billion-dollar market shrank.

Second, tariffs and sanctions: they make goods more expensive or exclude companies from trade entirely. Third, the supply chain itself. If a single intermediate product is missing, the entire production comes to a halt. This became evident during the coronavirus period, when car factories had to stop the assembly lines due to a lack of cheap chips.

It is important to distinguish this from normal market risk. A market risk can be estimated using historical data, because demand and prices can be observed over years. Political decisions do not follow any statistics. They occur rarely, but then hit suddenly and at full force. This is exactly why they are so difficult to price in.

In quarterly reports, the news, and your own phone

Publicly traded companies are required to disclose their risks. In these reports, geopolitical risks now fill entire pages, often with direct mention of Taiwan, China, or export controls. Anyone reading economic news also encounters the term with every major conflict: after Russia’s attack on Ukraine, energy prices and defense stocks rose within days.

Politically, this has become a trend of its own. The EU and the US are using multi-billion-dollar programs to promote the construction of their own chip factories, for example through the European 'Chips Act'. The goal is less dependency, even if this makes production more expensive. Experts call this de-risking: not all connections are cut, only the most dangerous ones.

A common misconception is that geopolitical risks are purely a news topic with no relevance to everyday life. In fact, they are embedded in the price of phones, game consoles, and cars. If a new graphics card model is delayed or an app is blocked in a country, a political decision is often behind it.