China Zero-Covid Policy Supply Chain Impacts

By Daniel Karns and Alberto Coria

A sharp increase in Covid cases and zero-Covid policies implemented across China resulted in massive shutdowns of city, ports, and business operations in Shanghai and surrounding cities. These shutdowns have impacted the movement of goods out of ports into mainland China where those goods are processed into consumer products. The implications of China zero-Covid policy supply chain disruption are immense. With no movement of goods, prices increase, labor shortages occur, backlogs at ports increase, and manufacturing operations stall as inventories deplete. 

The Impact of China’s Zero-Covid Policy on Domestic Supply Chains: An Overview

Road freight constitutes one of the key infrastructures and transportation services in China. Approximately 76% of all cargo and goods are moved from ports into mainland China via truckers. Despite being a key industry, trucking in China is only operating at about 20% capacity due to zero-Covid policies and city shutdowns in Shanghai, further compounding the fragmentation and inefficiencies already within the trucking industry. About 90% of truckers operate independently, meaning the driver owns their own truck and operates on contracts from companies needing goods transported to and from their facilities. 

Several economic factors result from such heavy market fragmentation. First, this creates an information/communication problem between truckers, suppliers, and manufacturers. Open-source intelligence indicates that truckers have no way of knowing where the demand is since there is no sole coordinating agent. This leads to inefficiencies and long lead times when sending and receiving goods. Different regions of China have different rules and regulations, further complicating coordination. 

For long-distance freight truckers, transporting goods has become considerably more arduous as Covid-related protocols now include negative Covid tests that are only valid for 24 hours and special permissions and licenses, and limited routes to travel. Truckers are also not allowed to travel to ports and cities experiencing Covid-19 outbreaks, which would include the busiest ports in China. Additionally, drivers now intentionally avoid high-contamination areas since contracting the virus would result in two or more weeks of no income. Second, wages for truckers decrease since drivers possess no bargaining power due to their independent operating status. Additionally, drivers will consistently underbid each other to win contracts to secure consistent work, further decreasing wages. 

The national average salary for a trucker in China lies just under 20,000 USD. Although it is above the national average of 15,000 USD, independent truckers have to incur all the costs when transporting goods. Toll roads in China rank as the most expensive in the world and pose additional costs on the transportation of goods. This further lowers the profit margin for drivers and impedes the delivery of wares. Drivers also must cover their own fees and costs incurred from meeting all regulations and being compliant, costing up to half of what the trucker would make.

In terms of sea freight, the impact of China’s zero-Covid policy on the supply chain is not much better. Globally, about 20% of the world’s roughly 9,000 active containers are anchored outside congested ports. Seven of the ten largest ports in the world are in China, indicating major consolidation risk in the event of shutdowns. Vessels waiting outside of Chinese ports account for about 27.7% of all vessels waiting outside ports globally. The number of vessels outside Chinese ports increased by 195% since February 2022, almost doubling its congestion in the span of two months. As of February 2022, Chinese ports had 260 vessels waiting outside the ports, jumping up to 506 vessels in April 2022. 

Backlogs and port closures also spurred a shortage of shipping containers since imports were no longer coming in with the empty containers. As a result, Chinese exporters are having to pay two to three times more than pre-pandemic costs to ship anything. The Freight Rate Index measures market rates for freight for different shipping lanes. Displayed by the visual below, the freight rates out of China are much higher than the global average and the highest among other shipping lanes.

Rail freight is also affected by the shipping shortage as well as restrictions and limited alternatives to move goods. There are two main routes for rail freight out of China: one goes through northern China into Siberia to get to Europe, and the other goes through Kazakhstan to get to Europe. However, trade restrictions and a myriad number of sanctions placed on Russia render both these routes obsolete as shipments coming through Russia to neighboring countries face severe hindrances and restrictions because of the ongoing war in Ukraine. If rail shipments move out of China, there are several dependencies that can prevent shipments from returning. This would in turn result in a loss of shipping materials/containers and raw materials required for the manufacturing of end-user products. Like sea freight, movement of goods by rail closely depends on the availability of shipping containers. Currently, the backlog on ports due to closures and backlogs have left many rail freight companies without any way of shipping or moving goods, highlighting a vulnerability within rail freight. 

Most airports in key ports and towns reached capacity or have suspended operations of air freight due to Covid restrictions and capacity limitations. Airports are also pausing movement of goods through the air and keeping cargo from being unloaded. Freight is being diverted from Shanghai into neighboring ports and airports but capacity in the surrounding cities is quickly filling up. 

  • Guangzhou and Xiamen airports have already suspended trucking services to Shanghai, Ningbo, and Hangzhou airports. 
  • Nanjing airport suspended import operations while Zhengzhou currently experiences seven days of backlog and takes three to four days to turn around processing. 
  • Shanghai airport has suspended all truck services, air cargo services, and most flights as well as requiring a government permit to travel to other locations.

The Impact of China’s Zero-Covid Policy on International Supply Chains: An Overview

Much of the impact of China’s zero-Covid policy on supply chains will likely come from China’s 2022 Shanghai lockdown, and will have long-lasting effects on the world’s supply chains. The lockdown will likely exacerbate inflation issues by reducing the supply of consumer goods and raising the rates on cargo shipments from China to western ports. The lockdown will also overwhelm ports in the United States and Europe with a surge of shipments once it is lifted. Additionally, the ongoing lockdown in Shanghai, as well as the movement restriction orders elsewhere in China, have reinvigorated the desires of many western procurement teams to better understand and diversify their supply chains. These effects are likely to continue being absorbed by the global economy up to through the first half of 2023. 

Shanghai’s port is expecting a surge in shipments once it reopens, as there are currently over 500 ships stranded at its gate. In addition to the shipping disruptions the Shanghai lockdown is creating, European and American companies are reporting that half of their logistics, warehousing, and supply-chain operations are being adversely impacted by the lockdowns occurring in China. Furthermore, nearby manufacturing hubs in Vietnam and Cambodia are suffering from a shortage of Chinese components for their electronic and textile manufacturing industries, and pharmaceutical companies in India such as Abbott India Limited and Mankind Pharma Limited are facing limited supplies.  

An important reference to analyze is last year’s lockdown at the Yantian port of Shenzhen, and how it caused logistical disruptions for the United States and Europe. In May of 2021, over 100,000 shipments were not allowed to enter or exit the Yantian port, which resulted in containers accumulating in factories and warehouses. Several weeks after the port opened in Shenzhen, ports in the United States and Europe experienced severe congestion and backlogs, which have only been cleared since the end of Q1 2022. The Shanghai lockdown is likely to have an even stronger effect on ports in the United States and Europe, as Shanghai is the biggest container port in the world and this year’s lockdown is much more heavily enforced by Chinese port authorities and the central government. Furthermore, Shanghai’s lockdown is affecting all forms of transportation and manufacturing in the city, causing the effects to be more widespread than the Yantian case which was primarily isolated to the port and production hubs.

When the Shanghai lockdown is lifted and resumes normal port operations, then ports in the United States and Europe will likely see a drastic surge in imports, potentially overwhelming their intake systems and procedures. Major American ports such as Long Beach and Los Angeles are already at full capacity due to lack of equipment, labor negotiations, and existing backlog from Covid-related supply chain issues. 

One of the most prominent long-term effects that will manifest as a result of the Shanghai lockdown will be further price inflation on goods that are heavily reliant on Chinese sourcing and shipping, specifically those that rely on commodities such as copper and aluminum to be manufactured. As manufacturers in industries such as electronics or automobiles are deferring purchases of raw materials due to Shanghai’s lockdown, commodities have temporarily become cheaper, but will become more expensive as a surge in orders returns at the onset of Shanghai’s economy opening. 

The lockdown of Shanghai has also caused delays estimated to be at least several months for shipments going to semiconductor manufacturers and automakers in the US and Europe. The full impact is yet to be known, as 45 cities are under lockdown measures of varying severity. It is estimated that 1.3 trillion USD worth of Chinese inputs are used in the electronics and automotive sectors by the rest of the world, with Japan, South Korea, Vietnam, India, and Germany being the most exposed countries.

While the Shanghai lockdown is having a drastic effect on shipping logistics worldwide, China still has seven of the world’s ten biggest container ports (Shanghai, Ningbo-Zhoushan, Shenzhen, Guangzhou, Qingdao, Hong Kong and Tianjin). While slow to react, the other major Chinese ports listed are beginning to coordinate to import and export containers that have been diverted from Shanghai.

While many of the effects of China’s “zero-Covid” strategy are already being absorbed by the global economy, they are likely to continue for the remainder of 2022 and into the second quarter of 2023. It will be crucial to continue monitoring China’s domestic restrictions on the movement of goods and its primary port activities or traffic. 

Download our white paper to learn more about this topic: Second Order Disruptions China COVID Lockdown Analysis – Interos

The US Government’s Cyber Supply Chain Warning

By Stuart Phillips & Geraint John

The U.S. Cybersecurity & Infrastructure Security Agency (CISA) has urged government and commercial organizations to patch vulnerable software and IT systems more rapidly in response to a flurry of malicious attacks against the cyber supply chain.

Last week, CISA issued an emergency directive requiring all federal civilian agencies using VMware’s Workspace ONE Access and other products to either patch or disconnect these systems by 5 p.m. ET this past Monday.

Separately, CISA also warned that hackers were actively targeting unpatched versions of F5 Network’s BIG-IP systems used to manage network traffic.

These new alerts join several others issued in recent weeks regarding cyber supply chain risks.

Earlier this month, CISA and other national cybersecurity agencies warned that managed service providers and their customers were at a heightened risk of attack. In late February, CISA issued a wide-ranging “Shields Up” advisory in the wake of Russia’s invasion of Ukraine, warning that malicious cyber activity was likely to increase.

VMware and F5 vulnerabilities exposed

Commenting on one of these vulnerabilities, CVE 2022-22954, cybersecurity firm Mandiant said: “An attacker could exploit this vulnerability to perform a server-side template injection… An attacker would need to send a specially crafted request to the vulnerable system. A failed attempt at exploitation could potentially cause a crash of the application, resulting in a denial-of-service condition.” 

On April 13, VMware confirmed the exploitation of this vulnerability in the wild. On April 25, The Hacker News reported that a threat actor known as “Rocket Kitten” actively exploited this vulnerability to deploy the Core Impact penetration testing tool on vulnerable systems. 

Mandiant Threat Intelligence wrote that they consider this “a high-risk exposure due to the potential for arbitrary code execution with no user interaction required.”

VMware issued patches for this and other vulnerabilities in April and released additional fixes last week. CISA’s emergency directive suggests that many organizations have not quickly updated their systems.

And it’s not just government agencies that are at risk from these supply chain risks. 

“We also strongly urge every organization – large and small – to follow the federal government’s lead and take similar steps to safeguard their networks,” CISA said late last week.

Vulnerabilities extend into the cyber supply chain 

There are many reasons why organizations fail to update their software and hardware fast enough, but budget and staffing shortages are primary.

Proactive Chief Information Security Officers (CISOs) can quickly discover if they have an installed vendor with security issues and schedule patches or updates to mitigate the problems. 

The real challenge is knowing whether their cyber supply chains have critical suppliers or partners using compromised systems and then taking steps to address those vulnerabilities. 

An analysis of Interos’ global relationship mapping platform data reveals the scale of the challenge: 

  • 1,239 companies were identified using VMware’s Workspace ONE Access or F5’s BIG-IP products.
  • 88 of these companies use both vendors.
  • Of the top five direct buyers, more than half (58%) were U.S.-based and more than one-quarter (29%) were in the IT software and services sector.
  • The U.K., Canada, Australia, and India are also home to major direct buyers, with banks, consumer services firms, and healthcare providers.

Looking further upstream into the extended cyber supply chain:

  • The 1,239 companies using the affected VMware and F5 products directly supply more than 98,000 customers in the U.S., U.K, Germany, Canada, and other countries.
  • These 98,000-plus firms, in turn, do business with more than 600,000 firms at Tier 2. 

Mandiant’s 2022 M-Trends report, published last month, found that supply chain intrusions were the second most prevalent form of attack in 2021.

Almost one-fifth (17%) of intrusions involved a supply chain compromise – up from just 1% in 2020. The vast majority of these attacks were related to the SolarWinds breach

Last week, cybersecurity firm SentinelOne published an analysis of a new supply chain malware attack against the Rust development community.

CISOs must monitor supply chain risks

Predicting the next supply chain cyber-attack or disruption is a dark art. However, being aware of all your suppliers and their connections may give you a better chance to understand weaknesses in your cyber supply chain and mitigate risks. 

Gone are the days when sending a survey to a supplier every two years and asking only about cyber risk was a practical approach. 

The best CISOs actively contribute to operational resilience by continuously monitoring their entire supply chains for multiple types of threats – including vendor financial weakness – using a risk mapping and scoring solution such as the one developed by Interos. 

To learn more about Interos, visit Interos.ai

Redesigning Global Supply Chains to Build Greater Resilience

By Geraint John and Margaret D’Annunzio

The ongoing litany of supply chain disruptions is prompting many organizations to redesign their global supply networks to build resilience. New research published this week by Interos found that almost two-thirds (64%) of executives said their organizations planned to make “wholesale changes” to their supply chain footprints.

And it’s not only business leaders that are focusing on the need for greater supply chain resilience.

Heavyweight economic and political institutions are also weighing in on the issue and proposing a variety of (sometimes conflicting) solutions – as evidenced by two recent reports from the International Monetary Fund (IMF) and the U.S. government.

The latter’s “Economic Report of the President,” (Economic Report) published in April, devotes an entire chapter to “building resilient supply chains.”

This portion of the Economic Report robustly analyses the evolution of modern supply chains and discusses some of the failures associated with firms’ and countries’ increased reliance on outsourcing and offshoring.

The Economic Report suggests that some of main reasons for supply chain globalization since the early 1990s are: Greater access to foreign suppliers through IT advances and lower trade barriers; government subsidies for key manufacturing sectors; and short-term financial incentives for top executives.

It argues that although COVID-19 exacerbated supply chain risks and made them more obvious, the pandemic did not create the majority of vulnerabilities, nor will its end abate them.

“Because of outsourcing, offshoring, and insufficient investment in resilience, many supply chains have become complex and fragile,” the report notes.

Shining a Light on Concentration Risk

Interos’ own research found that concentration risk is of particular concern to senior supply chain executives. Almost 9 out of 10 of the 1,500 procurement, IT and IT security professionals surveyed by Interos in the first quarter of 2022 agreed they had too many suppliers located in one area of the world.

Concentration is a Big Concern

“My organization has too many suppliers concentrated in one area of the world and this is of concern to us”

n=1,500; Source: Resilience 2022: The Interos Annual Global Supply Chain Report 

The White House report cites several examples of highly concentrated supply chains:

  • Taiwan (and its dominant manufacturer Taiwan Semiconductor Mfg. Co. [TSMC]) produce 92% of the world’s supply of advanced semiconductors
  • China manufactures 73% of lithium-ion batteries and has a 97% global market share of ingots and wafers used to make solar panels
  • China also has a dominant position in the battery raw materials: lithium and cobalt, of which it refines 60% and 80% of global supply, respectively

Recent analysis of Interos’ global relationship mapping database found that while TSMC, as a contract manufacturer to the semiconductor industry, has a relatively small number of direct customers in the U.S. and Europe (Apple being the largest), its importance at tiers 2 and 3 is enormous.

And a new Interos report on rare-earth elements (REE) – which are also important inputs to computer chips and electric vehicles, among other products – noted that China controls 84% of the global market, with over 100,000 U.S. companies and more than 50,000 European firms having the top 21 Chinese REE suppliers in their extended supply chains.

Will Reshoring Really Bring Resilience?

One potential solution to fragile and concentrated global supply chains that gets plenty of airtime is reshoring production back to “home countries”.

Respondents to Interos’ annual survey said that, on average, they expected to reshore or nearshore around half (51%) of foreign supplier contracts in the next three years.

The White House’s Economic Report argues that “at least some domestic production of critical goods” such as semiconductors and batteries is required – in part for national security reasons.

However, the IMF, in its equally detailed analysis, takes a somewhat different view, noting that, on average, 82% of Western firms’ intermediate inputs are already sourced domestically. It argues that “policy proposals to reduce dependence on foreign suppliers, especially in strategic sectors… may be premature, if not misguided.” Instead, the IMF advocates greater diversification in international sourcing – that is to say, increasing the number of suppliers and locations used.

Interos’ survey findings appear to support this view, with more than 60% of executives saying their organizations plan to increase the number of firms in their supply chains over the next three years, compared with 15% or less that expect to reduce them.

Supplier Diversification is Happening

How the number of companies in organizations’ supply chains will change

n=1,500; Source: Resilience 2022: The Interos Annual Global Supply Chain Report 

 

Even if managers do successfully make the business case for bringing product manufacturing back onshore, they still face a number of challenges – not the least of which is developing a local supply base.

French sportswear brand Salomon is a case in point. It decided to make its running shoes in a highly automated plant in France after many years operating in Asia, but found it was still reliant on suppliers of soles and other parts in China and Vietnam.

Improving Supply Chain Visibility & Resilience

Despite their differences, the IMF and White House reports do agree on some things. Chief among these, perhaps not surprisingly, is the need for government policy to support companies in their resilience-building efforts.

Interventions include:

  • Improving transportation infrastructure, such as major ports
  • Reducing international trade costs, and in particular non-tariff barriers
  • Convening and coordinating firms to develop standards and find industry-wide solutions
  • Aggregating and disseminating data that help companies better understand their supply chains

On this latter point, both reports emphasize the importance of supply chain visibility.

“Visibility into supply chain relationships is necessary to identify vulnerabilities in supply chains, so that firms can properly plan for disruptive events,” notes the White House report.

Interos’ survey found overwhelming support among executives for technology to solve this problem.

Although less than a fifth said their organizations were already using intelligent, automated solutions to understand interdependencies at multiple tiers, three-quarters expected to have such technology in place within the next 12 months.

To download a copy of Resilience 2022: The Interos Annual Global Supply Chain Report, click here.

Impact of European Dependence on Russian Natural Gas

Ripple effects from the war in Ukraine continue to threaten global stability and expose European dependence on Russian gas. 

Last week, Russia officially halted natural gas exports to Poland and Bulgaria, a major turn of events given Europe dependence on Russian gas. The two countries declined to meet President Vladimir Putin’s mandate that customers pay with rubles held in Russian-owned banks in order to continue receiving Russia natural gas.

This is seemingly a tit-for-tat continuation of ongoing economic warfare. Poland had just extended sanctions on 50 Russian oligarchs and companies, including Gazprom, which informed the countries of the natural gas suspension. 

As the humanitarian catastrophe in Ukraine continues unabated, this is simply the latest example of the second-order effects stemming from Russia’s invasion that will continue to propagate across the globe.

Russia Natural Gas Concentration Risks

Russia supplies more than 90% of Bulgaria’s gas needs. Poland is less dependent, having invested in infrastructure in a liquified natural gas (LNG) terminal years ago. Later this year, the “Baltic Pipe” will open, bringing Poland more natural gas from Norway and helping to reduce Europe dependence on Russian gas. 

Russia accounts for 40% of EU natural gas, a dependence that has prompted many European countries to begin weaning off Russian gas to various degrees. In March, the European Commission announced a plan to cut Russia natural gas imports by two-thirds by the end of the year. As European Commission President Ursula von der Leyen explained, “We simply cannot rely on a supplier who explicitly threatens us.”

Russia has thus far only “suspended” gas delivery to Bulgaria and Poland. Still, these initial suspensions haveraised the alarm across the region that Russia may continue to make good on its threats. This concern – and dependence – varies significantly across Europe, as Europe dependence on Russian gas is not uniform across the continent. 

Poland and Bulgaria rank sixth and twelfth among European buyers of Russian natural gas. Germany, Turkey, Italy, France, and Austria were the top recipients during the first half of 2021. European allies and those Putin has labeled “unfriendly countries” have prioritized resilience in expectation of future suspensions.

Collective Resilience in the Face of Europe Dependence on Russian Gas

Part of the European Union’s ongoing plans to diversify its natural gas supply chain includes importing from reliable sources, such as strengthening imports from Norway, where it gets 16.4% of its natural gas, and expanding natural gas imports from the U.S. In March, the Biden administration announced that the U.S. would ship an additional 15 billion cubic tons of LNG to Europe through the rest of the year. While questions remain on accomplishing the logistics behind this commitment, it is yet another sign of the deepening unity across Europe, the U.S., and global democracies in light of Russia’s invasion of Ukraine.

This increase in unity will likely be necessary to offset the unintended ripple effects of Russia’s foreshadowed cutoffs. While Bulgaria and Poland are not considered essential global trading partners by many metrics, a closer look at global supply chains reveals more about American and European dependence on Russian gas.

Interos analyzed U.S. and European (EU+UK) reliance on Bulgaria and Poland, mapping connections to those countries. While direct (Tier 1) connections were unsurprisingly low, Tier 2 and Tier 3 connections expanded into the hundreds of thousands.

For comparison, our analysis of U.S./EU reliance on Russia and Ukraine found that more than 190,000 firms in the U.S. and 109,000 firms in Europe have Russian or Ukrainian suppliers at Tier 3. Many EU and U.S. firms rely on Poland and Bulgaria once accounting for sub-tier supply chains. This suggests that cutting off Russia natural gas may have wider-ranging implications than expected. 

As is true across the broad range of supply chain shocks over the last few years, the challenges are too widespread and complex for any single organization or government to solve on its own. Bulgaria has been in talks with Greece and Turkey to cut its dependence on Russia for LNG, with Greece publicly offering recent support to Bulgaria. While the gas suspension intends to weaken resolve across Europe and its allies, it likely will continue to have the reverse effect. With Germany halting the Nord Stream 2 natural gas pipeline earlier this year and dropping opposition to a Russian oil embargo, this latest gambit by Russia likely will only deepen ties and accelerate efforts to phase out dependence on Russian natural gas and other commodities.

Looking Ahead: Global Ripple Effects

Despite these efforts, there are concerns of stockpiling that could drive up natural gas prices across the globe, prices that are already spiking. In the U.S., natural gas prices hit a 13-year high in April. At the same time, European gas storage hit a five-year low at the end of the winter and continues to rise following Russia’s suspension of Bulgaria and Poland. In preparation for winter demand, energy rationing could also stunt economic growth, persist inflation, and potentially instigate a recession.

Many are forecasting continued volatility in the natural gas market throughout the year, due in part to Europe dependence on Russian gas, and concerns over additional supply chain disruptions continue to grow. 

For instance, a brief analysis of U.S. companies with Tier 1 suppliers in Bulgaria and Poland quickly highlights almost 8,000 companies, which quickly expands to well over 200,000 companies with Tier 3 connections to those countries. 

Those numbers are slightly smaller for European companies, with almost 4,000 companies having Tier 1 connections and about 180,000 with Tier 3. 

Russia’s suspension of natural gas to Bulgaria and Poland has instigated uncertainty within the environmental, social, and governance (ESG) investment market. The U.S. commitment to increase LNG supplies to Europe may come with externalities, including investing in the LNG import and export terminal infrastructure required to export LNG at scale. These LNG investments require capital, which ESG investor groups often deny in favor of clean energy investments. Those priorities may shift to meet this commitment so as to reduce Europe dependence on Russian gas. That said, as part of its decoupling from Russian energy sources, the E.U. could more quickly expand investments in renewable energy to meet its net-zero commitments. 

Finally, suppose the “unfriendly countries” continue to deepen their resolve in support of Ukraine. In that case, Russia not only may extend the natural gas suspensions as part of the ongoing tit-for-tat economic warfare, but the Putin regime may accelerate and expand its hybrid warfare, resulting in the need for improved cyber supply chain risk management. Microsoft’s recent report highlights the malicious cyber activity of six state-linked actors and 237 operations against Ukraine. As NotPetya illustrated, Russia’s targeted activity has a history of spreading into the wild. There also are growing concerns about military expansion beyond Ukraine. Explosions in the Transnistria region heighten fears about violence spilling over into neighboring countries. The instability could also extend to North Africa and the Middle East due to grain shortages – especially wheat – and those regions’ dependence on Ukraine and Russia. They together supply more than a quarter of the world’s wheat.

The suspension of natural gas to Poland and Bulgaria, coupled with the ongoing invasion and other humanitarian crises, are prompting more swift diplomatic action and movement toward energy diversification than has occurred in previous decades. As International Energy Agency Executive Director Fatih Birol explained, “Nobody is under any illusions anymore. Russia’s use of its natural gas resources as an economic and political weapon shows Europe needs to act quickly to be ready to face considerable uncertainty over Russian gas supplies next winter.” 

Click here to download a new Interos white paper that further explores Europe’s dependence on Russian natural gas: Report: Analysis of Russian Natural Gas in Europe – Interos.  Then, to learn more about how the Interos platform can help you stay aware of risks, visit interos.ai

 

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
success.

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.

We also encourage you to watch Obi-Wan Kenobi, the new Star Wars show that premieres on
Disney+ on May 27. May the force be with you.