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Month: August 2023

How a Coup in Central Africa Could Threaten America’s Defense Supply Chains

Posted on by Interos
By Joshua Clarke and Trevor Howe, Senior Operational Resilience Consultants

Multiple supply chain risks converged this week, with Hurricane Idalia spreading chaos in the Southeastern U.S. and a coup – over 6000 miles across the Atlantic – in Gabon threatening further disruption – particularly for the aerospace & defense sector.

Gabon’s military seized power yesterday following a controversial presidential election. Supply chain leaders are tracking the fallout as the country is the world’s second-largest producer of an essential material, manganese ore. The coup heralds both an uncertain time for industrial and commercial activity in the country and potential disruptions to global supply chains.

The Criticality of Manganese

Manganese is crucial for several industries including aerospace and defense, energy production and storage, and automotive – among others – because of its use as an alloying agent, metal coating additive, and as a cheaper, more ethically sourced alternative to cobalt. The shutoff of Manganese imports could impact everything from batteries to guns to automotive transmissions. Interos’ analysis identified over 155,000 US companies likely to be impacted.

According to the U.S. Geological Survey (USGS): “Because manganese is essential and irreplaceable in steelmaking and its global mining industry is dominated by just a few nations, it is considered one of the most critical mineral commodities for the United States.”

Between 2018 and 2021, 67% of manganese ore imported to the U.S. was from Gabon, compared with 19% from South Africa and 12% from Mexico. The U.S. is 100% reliant upon imports of manganese ore for apparent consumption.

Second African Coup in a Month Threatens Regional Stability and Vital Exports

This past Wednesday, Gabonese soldiers announced on national television they seized power in the African nation of Gabon and arrested recently re-elected President Ali Bongo, whose family has held power in Gabon since 1967. The soldiers behind the coup announced that they have canceled the recently certified election results.

The military announced that the country’s borders would be temporarily closed. This resulted in the anchoring of 30 commercial vessels off the coast of Gabon while they awaited the resumption of activity at the Port of Libreville.

Gabon’s top export is crude petroleum, accounting for 60.7% of its exports at approximately 200,000 barrels per day, making it Africa’s seventh largest oil producer. But there is more concern around manganese ore, which is Gabon’s other primary export.

The ore accounts for almost 23% of the country’s export activity, valued at $1.34 billion annually. The French mining firm Eramet, reportedly the top producer of manganese worldwide (having produced 7.5 mega tonnes of ore in 2022), announced shortly after the coup that it would temporarily halt all operations in the country, including the transportation of already-extracted ore.

A Flexible Transition Metal

Manganese ore is a key component in steel and alloy production because of its structure as a transition metal, which allows it to improve the strength, workability and wear resistance of partner metals. Manganese consumption in the U.S. is overwhelmingly focused on the production of iron and steel products, with 90% of manganese ore directed to this use. Beyond these applications, manganese is utilized for:

  • Aluminum alloys – Manganese, alloyed with copper, silicon, tin, nickel and zinc, is used to create high-strength and lightweight structures in aerospace and defense applications.
  • Stainless steel – Manganese, alloyed with silicon and nitrogen, is used to create oxidization-resistant steel.
  • Batteries – Manganese oxide, usually a processed version of manganese, is utilized in dry-cell and alkaline batteries to prevent the formation of hydrogen in a battery, preventing possible combustion or explosion.
  • Copper alloy – Manganin, an alloy of copper, manganese, and nickel, is utilized to create shunt resistors, with a low-temperature coefficient and resistance to sulfur, these resistors are useful for creating large currents.
  • Potassium permanganate – Manganese is essential to the production of potassium permanganate, which is widely used in drinking water and wastewater treatment.
  • Manganese phosphate – This type of metal finishing is mostly used within engines, transmission systems and gears to provide smoother overall operation while increasing the service life of treated components.

While the U.S. does maintain a domestic stockpile, disruption to manganese ore exports from Gabon could pose a material risk to American manganese refineries and manufacturers dependent on raw and refined manganese products. Manganese supply disruptions would most affect the following industries:

According to the USGS, manganese ore is consumed mainly by five companies at six U.S. facilities with plants principally in the Eastern and Midwestern States. Analysis by Interos suggests that these firms directly supply more than 200 U.S.-based customers and indirectly almost 155,000 as tier-2 suppliers.

Action That Affected Companies Need to Take

Since the coup, many countries in the international community have called for a return to Gabon’s elected government and to stability. Russia and China called for a peaceful resolution to the conflict, while France condemned the coup and called for a “commitment to free and transparent elections”.

Regardless of the coup’s ultimate outcome, the situation in Gabon – and the impact uncovered by Interos, is a stark reminder of how geopolitical turmoil (and a high degree of reliance on single/highly concentrated sources) can intersect with natural disruptions, like Hurricane Idalia, to threaten supply chains a world away.

At this time of uncertainty, companies can ill afford to sit idly by. Those that are dependent on manganese ore, particularly aerospace & defense organizations, need to identify where it is sourced within their extended ecosystem and understand their level of dependence on Gabon and suppliers operating in the country.

With its artificial intelligence-based software, Interos is well positioned to support supply chain risk management programs for companies around the world trying to address this issue. Interos provides continuous monitoring of suppliers with timely alerts so that companies can both get ahead of potential supply chain disturbances and be among the first to react to them.

Navigating MOVEit: Six Lessons in Resilience for the Next Mass Supply Chain Attack  

Posted on by Interos

The MOVEit computer virus recently surged back into the headlines with IBM and the Colorado Department of Health Care Policy & Financing confirming cyber-attacks that exposed the private health care data of millions of customers. The ensuing supply chain attacks have caused chaos for a growing number of victims spanning banks, hotels, energy giants and others. It’s no coincidence the events also saw the filing of five separate class-action lawsuits against Progress Software, the publisher behind the MOVEit file transfer application.

The breach, and the widening scope of damage, highlights the hidden risks posed by digital concentration risk – defined as high levels of dependence on massive, globally interconnected systems. In highly concentrated systems, a single vulnerability has the capacity to affect millions of entities. Various reports show at least 620 businesses and more than 40 million individuals have been impacted – over one-third via third party connections.

The incident underscores the constant battle to protect data and highlights the urgent need for a proactive approach to supply chain cybersecurity.

A Closer Look at the Attacks

Originating at IBM, the MOVEit attacks have affected hundreds of organizations, including the BBC, British Airways, Johns Hopkin’s University, multiple U.S.-based financial services firms, and even U.S. government agencies.

The breaches were carried out by exploiting SQL injection vulnerabilities, enabling hackers to access the server database. The CL0P ransomware gang was credited with the attack and has gone on a ransomware spree, contacting dozens of companies and demanding payments to prevent stolen information from being published online.

Six Steps to Respond Proactively

Though the situation is still unfolding, six key lessons have already emerged:

  1. Collaborate with Cybersecurity Teams & Identify Affected Third Parties: Engage procurement and cybersecurity teams to collaborate on guidance and developing vendor communications to determine which vendors use MOVEit. Unlike calls or surveys, automated platforms could identify likely affected vendors immediately and across sub-tier/extended supplier networks. Contact these critical vendors immediately and agree on mitigation strategies. If the enterprise maintains a legacy or manual systems, the only option may be issuing a manual questionnaire to vendors – which may take weeks to gather and analyze for vulnerability mitigation. If customer data has been exposed, take steps to notify them and review your vendor contracts for data breach notification requirements.
  2. Segment Critical Third Parties: Identify and group third parties and supply chain partners based on their criticality to continued operations – and their level of instability.
  3. Drill Deeper: Once critical third parties & supply chain partners have been identified, organizations need to drill deeper into risk sub-factors to understand their true vulnerability posture. When assessing vendors, it’s essential to consider everything from liquidity to cybersecurity breach history. Undertake exercises like threat modelling to further understand which vulnerabilities may pose the most risk to operations.
  4. Take Action: Develop an action plan to address findings. Long-term and short-term risks may require different remediation measures, such as focusing InfoSec teams on addressing specific CVEs.
  5. Perform Cybersecurity Due Diligence/Continuous Monitoring: In addition to immediate triage, it’s important to assess suppliers who furnish similar software to evaluate their cybersecurity practices as copy-cat attacks are a strong possibility. Again, automated risk assessment/monitoring applications will help here – provided they have insight across your supply chain.
  6. Stay Updated with Official Information: Monitor official information from Progress Software and other sources for updates.

Emphasizing Resilience by DesignTM

In a world of escalating supply chain cyber-attacks, the MOVEit breaches have highlighted the dangers of digital concentration risk and the need for robust third-party risk management practices. This incident is only the latest to emphasize the importance of proactively and continuously assessing enterprise supply chain cybersecurity backed by a robust incident response plan.

More broadly, the attacks stress the need for organizations to take control of risk for competitive advantage by ensuring resilient design in supply chain cybersecurity strategies. Per Interos’ latest annual survey of procurement leaders, cyber-attacks were the second-greatest concern for supply chain leaders, after supply shortages – costing large companies $43M a year, on average. Additional survey risk insights can be downloaded here.

By embracing Resilience by DesignTM, organizations can overcome risks, simplify their business, and deliver results. It’s not about avoiding the inevitable but about planning and reducing the impact and the time and resources required to restore normal operational performance.

Cyber-attacks and ransomware are inevitable – every organization will be impacted by one at some point – but with continuous multi-tier monitoring, and comprehensive recovery planning, we can minimize the damage and maximize profitability.

 

Latest Salvo in the Chip Wars: Chinese Export Controls on Gallium and Germanium May Undermine Western Industries

Posted on by Interos

By Trevor Howe, Senior Operational Resilience Consultant

 

China’s imposition of export controls earlier this month on two strategic raw materials could have significant implications for Western manufacturers of electric cars, smartphones and a host of other advanced technology products.

 

The restrictions require Chinese firms to attain special permits from the government to ship gallium  and germanium out of the country. Gallium compounds are commonly used in the manufacture of semiconductors, defense systems, medical devices and solar cells, while germanium is most often used in fiber optics.

 

Both the United States and the European Union (E.U.) are heavily reliant upon China as a source of these two critical commodities (see table below). So the Chinese government’s move could undermine global supply chains and increase the potential for disruption.

 

In the short term, these new export controls may add upward pressure to commodity prices in anticipation of constricted supplies to global markets. In the medium to long term, they could further accelerate moves in multiple countries to diversify the raw material supply chain away from China.

 

U.S. and E.U. Dependence on China for Gallium (Ga) and Germanium (Ge)

 

Net Reliance on Imports for Ga Import Reliance on China for Ga Net Reliance on Imports for Ge Import Reliance on China for Ge
U.S. 100% 53% >50% 54%
E.U. 98% 71% 42% 45%

 

Sources: The United States Geological Survey Mineral Commodities Survey (2023); The European Commission Study on the critical raw materials for the EU (2023)

 

An Escalating Technology Trade War

 

China’s action comes as it has been openly sparring with the U.S. in an escalating technology trade war. The export controls on gallium and germanium are widely seen as retaliation for the U.S. government’s restrictions on sales of advanced semiconductors and chip-making equipment to Chinese companies.

 

As well as its own export controls, the U.S. has been putting pressure on partners such as Japan, South Korea and the Netherlands to limit their sales. The Netherlands, for example, recently implemented controls on the export of advanced semiconductor manufacturing equipment to China from ASML. ASML is currently the only company in the world to produce extreme ultraviolet lithography machines used to produce leading-edge chips.

 

Given the reliance of American and European firms on Chinese supplies of gallium and germanium, experts are worried about the effect China’ new controls could have on aerospace & defense, energy, telecommunications and other industries affected. Moreover, there is the potential future threat to rare earth elements (REEs), the supply of which China also dominates. REEs are crucial for clean energy technologies, electric vehicles, consumer electronics, and national defense.

 

Gallium-Related Products Facing Export Controls

 

Gallium occurs in very small concentrations in ores of other metals. Most gallium is produced as a byproduct of processing bauxite, and the remainder is produced from zinc-processing residues. The metal is not currently recyclable and there is no substitute for its use in some products where increased semiconductor performance and efficiency are required.

 

Aside from gallium metal itself, China’s new controls will apply to several gallium-related products:

 

Material Usage Examples

 
Gallium arsenide (GaAs) Uses include as a doping material to manufacture compound semiconductor wafers used in integrated circuits (ICs) and optoelectronic devices, which include laser diodes, light-emitting diodes (LEDs), photodetectors, solar cells, and solid-state devices such as transistors. While several substitutes for GaAs do exist, no effective substitutes exist for GaAs in many defense-related applications where GaAs-based chips are used because of their unique properties.

 
Gallium nitride

(GaN)

 Uses have been growing in importance because of its ability to offer significantly improved performance across a wide range of applications while reducing the energy and the physical space needed to deliver that performance when compared with conventional silicon technologies. For example, GaN is used in advanced radars such as the AN/TPQ-53 which has been provided to the US military.

 
Gallium phosphide (GaP) Uses include as a semiconductor and optical material for the manufacture of low and standard brightness red, orange, and green light-emitting diodes.

 
Gallium antimonide

(GaSb)

 Uses include as a compound semiconductor for infra-red (IR) photodetectors used in sensing and imaging applications. The application of GaSb detectors is extensive, encompassing military, industrial, medical, and environmental uses.

 
Gallium oxide

(Ga2O3)

 Uses take advantage of conduction and luminescence properties; this includes in semiconductors, gas sensing, catalysis, and nanostructures as blue and UV light emitters. Ga2O3 is also ued in spectroscopic analysis.

 
Gallium selenide

(GaSe)

 Uses include as a nonlinear optical material for frequency conversion of laser light and as a photoconductor.

 
Indium gallium arsenide (InGaAs) Uses include within photodetectors and short-wave infrared imaging (SWIR) devices, solar cells, high-speed electronics, and medical imaging.

 

____________________________________________________________________________________________________

Germanium-Related Products Facing Export Controls

 

The major use of germanium worldwide is for fiber-optic systems, whereby germanium is added to the pure silica glass core of fiber-optic cables to increase their refractive index, minimizing signal loss over long distances.

 

The available resources of germanium are associated with certain zinc and lead-zinc-copper sulfide ores. On a global scale, as little as 3% of the germanium contained in zinc concentrates is recovered. Significant amounts of germanium are contained in ash and flue dust generated in the combustion of certain coals for power generation.

 

Germanium is more available than gallium, with around 30% of global supply produced from recycled materials. However, there is a notable lack of information surrounding the mineral. According to the 2023 Mineral Commodity Summaries published by the U.S. Geological Survey, no data was available pertaining to world refinery production and reserves of germanium.

 

In addition to germanium metal, ingots, and substrates, China’s new controls will also apply to several germanium products:

 

Material Usage Examples

 
Germanium dioxide (GeO2) Uses include in phosphors, transistors, diodes, infrared-transmitting glass, and electroplating.

 
Germanium tetrachloride (GeCl4) A colorless liquid, its uses include as an intermediate in the production of purified germanium dioxide and germanium metal. GeCl4 is transparent to infrared light and therefore useful in optical materials. It is also widely used as a semiconductor and as an alloying agent.

 
Zinc germanium phosphide (ZnGeP2) Uses include in high power, high frequency applications and in laser diodes, especially as a component for the laser source of infrared countermeasure systems in military aircraft which protect aircraft from heat-seeking missiles.

 

 

 

Substitutes for germanium do exist (e.g., silicon in certain electronic applications and antimony/titanium are substitutes for use as polymerization catalysts), providing a degree of resilience to undercut supplies to global markets.

 

Government and Company Actions to Manage Strategic Risks

 

Given the geopolitical context for China’s controls on gallium and germanium exports, and the concentration of global supply, there will inevitably have to be problem solving at the government level to address any shortages. Countries can bolster their resilience by maintaining strategic stockpiles, identifying alternate suppliers, investing in domestic extraction or production, or promoting the expansion of the industry via incentives for the private sector.

 

South Korea serves as a prime example; officials there reported that the short-term effects on operations in their country would be limited due in part to stockpiling and alternative supplies. The Korea Mine Rehabilitation and Mineral Resources Corporation has approximately 40 days’ stockpile of gallium that domestic manufacturers could use.

 

Meanwhile, the E.U. is engaging with countries in South America to secure further access the region’s abundant raw materials. If the E.U. can successfully expand its partnership with the Southern Common market (MERCOSUR), it would help achieve its strategic goal of securing a diversified, affordable, and sustainable supply of critical raw materials.

 

At the same time, the E.U. intends to bolster domestic production through recently proposed legislation such as the Critical Raw Materials Act.

 

While governments must step in to secure their countries’ respective supply chains, companies can ill afford to sit idly by and not take proactive steps to secure their direct supply chain. Although relatively few companies would be in a position to invest in REE or critical commodity extraction or production, they can still benefit from identifying where these materials are sourced from within their ecosystem.

This type of visibility deep into the supply chain can help uncover concentrated reliance on a supplier or region, and the information leveraged to pursue de-risking methods such as supply base diversification to bolster resilience against certain risks.

 

With its artificial intelligence-based software, Interos is well positioned to support supply chain risk management programs for companies around the world trying to address this issue, as well as future disruptions that may arise.

Forced Labor Regulations Materially Impact U.S. and European Supply Chains

Posted on by Geraint John

By Geraint John

Forced labor is becoming an ever more impactful source of supply chain risk as new regulations on both sides of the Atlantic begin to bite.

In the United States, the Uyghur Forced Labor Prevention Act (UFLPA) has seen more than 4,600 imported shipments worth over $1.6 billion intercepted by U.S. customs officials in its first full year of operation. This week, U.S. customs added new Chinese companies to the list of those restricted from selling their products in America.

The law seeks to stop products associated with forced labor in China’s Xinjiang region from entering the U.S. Recently, a growing list of companies have been accused of flouting the legislation. They include the parent company of printer manufacturer Lexmark International, power tool maker Milwaukee Tool and Nike Canada.

In Europe, automotive firms BMW, Volkswagen and Mercedes-Benz have also been accused of using forced labor in their Chinese supply chains. If true, they would be in contravention of Germany’s new Supply Chain Due Diligence Act (SCDDA). The SCDDA came into force in January.

This specific complaint, brought by a Berlin-based non-profit, has yet to be proven. However, it is a stark warning to larger companies that they need to up their game when it comes to managing forced labor risk in their extended supply chains.

Regulations Address a Growing Global Problem

Forced labor is defined by the International Labour Organization (ILO) as “all work or service which is exacted from any person under the menace of any penalty and for which the said person has not offered himself voluntarily.”

According to a recent report, as many as 50 million workers worldwide may be enduring forced labor or “modern slavery” conditions. The report estimates this number has grown by 25% over the past five years. The report argues that this increase is due to global trade conducted by G20 developed nations.

A new Interos survey of 750 procurement leaders in North America and Europe underlines the significance of new supply chain regulations that seek to tackle this issue. It found that:

  • 80% of those in the U.S. and 71% in Canada see the UFLPA as having a significant or moderate impact on their organizations. Energy and A&D sectors were the most affected.
  • 61% overall think the SCDDA will have a significant or moderate impact. This rises to 77% in the energy and financial services sectors.

The UFLPA has a direct operational impact. Violations lead to the physical detention of shipments at entry ports, as well as cost and reputational implications. The SCDDA, meanwhile, gives the German government powers to levy fines of up to 2% of a company’s annual turnover. They may also be banned from competing for public contracts for up to three years.

Revealed: The Highest Risk UFLPA Goods

Of the 4,651 shipments detained by U.S. Customs and Border Protection (CBP) under the UFLPA to the end of June, 872 (19%) were denied entry, 1,849 (40%) were released and almost 2,000 were awaiting a decision.

But Interos’ analysis of CBP’s data reveals that shipments of specific products from certain countries are much more likely to be rejected than others. In particular:

  • Almost half (46%) of all shipments detained (worth $1.37 billion – 84% of the total value) were electronic products. However, just 3% of CBP decisions resulted in these being refused entry. The vast majority are shipped from Malaysia.
  • In contrast, customs rejected almost two-thirds of industrial raw materials and more than 62% of pharmaceutical and chemical products. Well over half of apparel, footwear and textiles met the same fate (see chart).
  • Vietnam has the highest proportion of shipments denied entry (49%), with 89% of raw materials and 69% of apparel, footwear and textiles rejected. This demonstrates that attempts to skirt the UFLPA by shipping from outside China don’t always work.
  • China itself is the second riskiest originating country for U.S. imports, with 40% of CBP decisions denying its shipments entry. Compare to an 11% rejection rate for Thailand and just 2% for Malaysia.
  • China’s highest risk category is apparel, footwear and textiles (64% rejected). This was followed by pharmaceutical and chemical products (62%) and raw materials (44%). At the other end of the scale, just 14% of agricultural products and 8% of consumer products were denied entry by CBP officers.

Products at Greatest Risk From UFLPA

Percentage of CBP decisions where shipments are denied entry, June 2022 – June 2023

Source: U.S. Customs and Border Protection

Polysilicon – a key raw material in the production of solar panels – is one high-risk product targeted by the UFLPA. More than 40% of the world’s supply of polysilicon comes from Xinjiang. Following previous action against Chinese imports, Vietnam is now the biggest exporter of solar panels to the U.S. Vietnam accounts for one-third of solar panel shipments in 2021.

Actions That Companies Need to Take

Companies can take similar actions to manage forced labor risk and comply with both the UFLPA and SCDDA. At a foundational level, they include establishing a robust risk management and due diligence system capable of identifying and remediating illegal practices.

Interos’ recent survey found that nearly two-thirds of procurement leaders believe they have made significant or moderate progress on forced labor with their suppliers over the past three years (see chart).

Forcing the Issue on Forced Labor

Progress made with suppliers in the past three years

n=750 procurement leaders

Source: Interos Resilience Survey 2023

However, as with other ESG issues, one of the main challenges around forced labor is a lack of sub-tier supply chain visibility. This ranked as executives’ joint top barrier to progress alongside a lack of reliable data for setting and tracking goals.

To support their regulatory compliance efforts on forced labor, procurement leaders need to:

  • Use supply chain mapping and risk-scoring tools to pinpoint high-risk relationships with both direct and indirect suppliers in geographies prone to forced labor.
  • Ensure that existing direct and sub-tier suppliers are not on, or being added to, any restrictions lists, including those specific to the UFLPA.
  • Harness detailed risk intelligence to help identify and mitigate forced labor risks before selecting or onboarding new suppliers in China or other at-risk countries.
  • Keep a close eye on high-risk raw materials and products shipped by Chinese or other firms based in Vietnam, Malaysia, Thailand, Mexico and other countries on the U.S. CBP watchlist.

Supply chain regulations impose a heavy burden on companies. They require time, money and resources to ensure compliance. 79% of CPOs we surveyed agree with that view.

But the same proportion also believes that regulation forces their organizations to do a better job of managing supply chain risk. 70% say it even enhances their competitive advantage in the market.

So the message on forced labor, as with other types of supply chain risk, is that it pays to invest. Organizations can derive value from both complying with emerging regulations, but also proactively developing greater operational resilience.