Global Events Archives

The Latest Supply Chain Shockwave: Labor Strikes Loom in Canada and India

Posted on August 27, 2024August 27, 2024 by Interos

Report Authors: Mackenzie Clark, Andrea Little Limbago, and Caralyn Welliver.

In 2023, labor strike activity increased 280%, with last summer referred to as the ‘Summer of Strikes’ due to the spike in labor activity. This trend seems to persist into 2024. Last Thursday, two of Canada’s major railways briefly shutdown, with a lockout that could have cost hundreds of millions of dollars. A forced arbitration has trains running again, but it is unclear how long that will last. At the same time, Indian port workers are threatening a strike starting tomorrow, August 28th, with negotiations scheduled for today.

Significant and simultaneous strikes at two of the top ten largest economies in the world would cause significant supply chain disruption at a time when they are already undergoing significant transformation. Geopolitically driven export controls are reshaping supply chains, while political instability in the Red Sea has forced new risk assessments and rerouting at the same time as the Panama Canal drought has created bottlenecks and restrictions. The addition of labor strikes in two major economies has been compared to an ‘earthquake’ disruption to the US economy. Of course, not all disruptions are created equally, and each has a unique impact on companies and the global economy. Below is a short overview of the potential impact of these labor strikes.

Canadian Rail Strikes: Potential for Significant Disruption to US Supply Chains

Prior to the binding arbitration, the short-lived rail labor strike shut down 75% of Canadian railways and had the potential to impose costs exceeding $251 million dollars per day, by one estimate. This would be a blow to Canada’s economy, but also would have global impact. Within the US-Mexico-Canada agreement area alone, these strikes threaten to upend the free trade region at a time when these countries work to reduce reliance on geopolitically risky exporters of vehicles and vehicle parts and semiconductors and electronic components.

These key industries are at risk if a strike occurs. While petroleum makes up the largest portion of Canada’s exports, companies in the United States and Mexico also import many goods from Canadian suppliers. Since 2023, Interos’ data shows that the top Canadian commodities imported by companies in the U.S. and Mexico include:

From 2023 to present, Interos‘ data shows that over 74,000 companies in the United States and Mexico have been directly supplied by a Canadian company. In the US and Mexico, customers of Canadian suppliers are concentrated in the following industries:

The industries most impacted are widespread across various diverse sectors with far-reaching potential shockwaves to the US economy.

Even without a strike, some disruptions occurred as pre-emptive stoppages were underway in preparation for the strikes. For instance, the two major rail carriers stopped shipments of hazardous materials in anticipation of the strike. In addition, with 20% of US trade first arriving in the Ports of Vancouver and Prince Rupert, a longer strike would have ripple effects across the interdependent economies. Although arbitration forced a return to work, the threat of strikes still looms.

India’s Planned Strike Looms Large Over Global Economies

India has a history of workers’ strikes and protests, with truckers striking earlier this year leading to a drop in goods such as fuel and fruit. Similarly, the farmers’ protests over new legislation had disruptive supply chain impacts. Despite this history, the risk of strikes at the major ports could lead to unprecedented disruption. Three years of labor negotiations may be coming to a halt, as twenty thousand workers at 12 major Indian ports are threatening to strike tomorrow, on August 28th.

As the fifth largest economy, and most populated country, a labor strike in India certainly would have global ramifications. Since the beginning of 2023, India has accounted for well over one hundred million individual export shipments. Based on Interos data, the United States and United Arab Emirates combine for over 30% of Indian exports, while Hong Kong, and several European countries hold other top spots.

Since 2023, Interos’ data shows that India’s top exported goods encompass a wide range of products:

The Port of Nhava Sheva and New Delhi accounted for roughly one third of India’s total number of exports since 2023, while the Ports of Chennai, Mumbai, Bangalore, and Mundra also serve as key corridors. A closure to any of these could exacerbate already strained supply chains.

Looking Ahead: Labor Strikes Positioned for Significant Disruptions to Supply Chains

India and Canada are far from alone in the risk of labor strikes. On August 25, the Fremantle Ports in Australia were expecting a second weekend of stoppages due to strikes and just today thousands of Australian construction workers protested, leading to the disruption of projects in major cities. The Fremantle Port strikes were halted on Friday when an agreement was reached. Germany and Belgium also have had recent labor strikes at their ports, and earlier this year, labor strikes also impacted German railways and airports. The number of striking workers in the US more than doubled in 2023, as labor strikes impacted ports on both the East and West Coasts of the US. China is not immune from this trend, as strikes and protests have increased in response to the economy and demanding higher wages, with 80% of the strikes within manufacturing and property.

In some cases, forwarding leaning companies who have adjusted to the new norm of supply chain disruptions may be less impacted by these labor strikes. For instance, in response to instability in the Red Sea, some companies placed their orders much earlier, potentially shifting peak shipping season to earlier in the year.

For others, reshoring and geographic diversification is a growing strategy to build more resilient supply chains. This requires a holistic view of risk as new locations may pose different, but potentially equally disruptive, challenges. For instance, many companies look to India as a viable alternative to China but must be aware of the localized benefits and risks at the subnational level.

Get Ahead of Labor Strikes with Interos

Interos’ continuous monitoring alerts quickly identify the potential impact of disruptions across their extended supply chain. This visibility empowers companies to get ahead of potential disruptions both upstream and downstream in their supply chain.

For instance, a bi-coastal strike by the International Longshoreman’s Association in October in the US looms large pending contract negotiation. Interos will be watching the ongoing risk of labor strikes in Canada, India, and the US closely, as well as the broader trend of global labor strikes.

For a more detailed analysis of the potential impact of labor strikes in Canada and India, download our report below:

IT Outage Impact Analysis – At Least 674,000 Enterprise Customers at Risk of Disruption Globally

Posted on July 19, 2024July 22, 2024 by Interos

by: Deverick Holmes, Operational Resilience Consultant, and Mackenzie Clark Senior Computational Social Scientist

This report details the global outage involving CrowdStrike, highlighting the incident’s domestic and international impact on trade and business operations. Interos has provided a detailed timeline of events and recommended steps customers should take here.

Summary

CrowdStrike was involved in a global IT outage that has highlighted the vulnerability of interconnected global supply chains. The outage impacted 674,620 direct customer relationships of CrowdStrike and Microsoft, and over 49 million indirectly, according to Interos data. While the U.S. was the most affected country, with 41% of impacted entities, the disruption was also felt at major ports and air freight hubs in Europe and Asia. Ports from New York to Los Angeles and Rotterdam reported temporary shutdowns, while air freight suffered the hardest blow, with thousands of flights grounded or delayed. The outage exacerbates existing supply chain challenges amid rising global demand and freight prices, highlighting the potential long-term implications for global trade and finance.

Another Global Trade Disruption

The interconnected nature of global supply chains means international trade will experience ripple effects due to even temporary shutdowns. This comes as freight prices skyrocket and shipping demand rise. When using Interos data to understand how expansive the trickle-down effects of the outage are, the results are striking.

Interos analyzed the extended supply chains of both CrowdStrike and Microsoft, whose Microsoft 365 systems were disrupted as part of a CrowdStrike update, leading to outages for Microsoft users across the world. When examining the direct customer relationships (Tier 1) of both Microsoft and CrowdStrike, Interos was able to identify 674,620 customer relationships. When expanding the scope of impact to include the customers of Microsoft and CrowdStrike’s customers (Tier 2), the number of customer relationships identified by Interos data grows to over 28 million, and when going one step further (Tier 3), that figure increases to over 49 million customer relationships.

The outage has had varying levels of impact across Union Pacific’s freight network while Ports from New York to Houston and Los Angeles reported temporary container terminal shutdowns overnight but were mostly operational by early morning. Rotterdam, the largest port in Europe, said some companies operating at its terminal were impacted. On average, the port at Rotterdam handles approximately 1.3 million tons of cargo daily. This includes a diverse range of goods such as containers, bulk commodities (like crude oil, coal, and iron ore), and various other cargo types. In addition, UK ports of Felixstowe and Tilbury have all been confirmed to be suffering from major IT outages while similar issues were reported at ports in Poland and Asia.

Air freight was hit the hardest, with many global airlines grounding flights and the complex air cargo system facing a recovery period that could last days or weeks. Thousands of flights were grounded or delayed at the world’s largest air freight hubs in Europe, Asia, and North America. These hubs are critical nodes in the international logistics network, handling vast quantities of cargo daily. The grounding of these flights may lead to trickle down delays in the movement of goods, impacting various industries. The semiconductor supply chain, for example, relies heavily on air freight to transport finished products from manufacturing centers in the EU and Asia to markets in the U.S., has been particularly affected. This new issue for the global supply chain comes amid a rise in global demand and prices, driven by the ongoing conflict in the Red Sea and climate change impacting trade routes, with shipments up 13% year-over-year in June, while air freight supply has only increased by 3%, already causing higher costs for shippers due to limited capacity. As it may take days or weeks for airfreight companies to fully bring their systems back on-line this will only exacerbate the ongoing supply chain hurdles facing the global market.

Interos Data Shows U.S. & European Entities Highly Impacted

According to data from Interos, the outage potentially impacted 674,476 entities globally, with 280,760, or 41%, of these being in the United States. Given that the U.S. is a major economic engine for global trade, this outage may have significant short-term implications for international commerce and finance.

Interos data would also indicate that European countries are highly exposed to this event. Within the top ten countries listed in the chart above, several are in Europe: the United Kingdom, Germany, Italy, France, Spain, The Netherlands. Combined, these countries account for 186,749 of entities, or 27.68%. While this does not account for the entire European continent, this figure underscores the global nature of this outage.

U.S. companies whose systems remain down are exposed to increased cyber risks. When systems are offline or experiencing disruptions, it becomes harder to implement standard security protocols and monitor for potential threats. This downtime can create vulnerabilities that cybercriminals may exploit, such as weakened defenses, unpatched software, and delayed security updates.

U.S. consumers have reported issues with declined credit card transactions, disrupting personal and business activities. Additionally, U.S. airlines, which play a crucial role in facilitating cross-border business, have experienced widespread cancellations and delays. This disruption in airline operations could lead to delays in business meetings, shipments, and other critical economic activities, further exacerbating the impact on global trade. With critical systems and data at risk, these companies face a heightened possibility of cyberattacks, including data breaches, ransomware attacks, and unauthorized access. Moreover, the inability to detect and respond to threats in real-time during such outages can exacerbate the potential damage, leading to significant financial losses, reputational harm, or regulatory consequences.

According to reports, CrowdStrike is utilized by 82 percent of U.S. state governments and 48 percent of the largest U.S. cities. Given its widespread adoption, a prolonged outage of CrowdStrike’s services could severely impact municipalities’ ability to maintain essential cybersecurity defenses. These state and municipal entities rely heavily on CrowdStrike Falcon’s advanced threat detection and real-time monitoring to protect sensitive data and critical infrastructure from cyber threats. Without these protections, municipalities could experience increased vulnerability to cyberattacks, such as ransomware, data breaches, and unauthorized access, potentially compromising public safety, emergency response systems, and the security of citizen information.

Furthermore, the disruption could hinder the ability of these governments to deliver public services effectively. Key functions such as water treatment facilities, public transportation systems, and healthcare services, which increasingly depend on digital infrastructure, could be at risk.

In addition to local municipalities, CrowdStrike is used by many prominent organizations across various sectors. Various U.S. government agencies, including parts of the Department of Defense and intelligence agencies, rely on CrowdStrike for its advanced threat detection. Major financial institutions across the U.S. and EU such as Goldman Sachs, Bank of America, and Santander also use CrowdStrike to protect their sensitive data, and giant retailers like Walmart and Target, as well as energy companies such as ExxonMobil and Exelon, also depend on CrowdStrike to defend against cyber threats and protect critical infrastructure. The system is particularly preferred by high-profile organizations worldwide for its ease of use and robust security features.

Outage Spans Multiple Industries

The direct effects of this outage also span a broad range of industries. While impacts to airlines and banks have been the most widely reported on, Interos data shows that companies in the professional services, wholesale, and various manufacturing industries make up the bulk of companies that are potentially experiencing disruptions.

Of those directly supplied by Microsoft or CrowdStrike, companies in the Professional, Scientific, and Technical Services industry make up almost 7% of customers, followed closely by companies in the Merchant Wholesalers industry, at almost 5% of customers, and the Administrative and Support Services industry, at over 3% of customers.

In total, Interos identified companies spanning almost 1,200 unique industries that are directly supplied by Microsoft or CrowdStrike. From the telecommunications industry, to hospitals, utilities providers, and even postal services, virtually no industry was left unaffected by this outage. These types of disruptions cause delays in critical infrastructure and the delivery of products services, leaving businesses and consumers across the world without access to key services or goods.

Interos’ data shows ongoing supply chain disruptions cost enterprises $100 million in annual losses on average. The company’s critical risk intelligence platform helps companies mitigate the financial impacts of multi-tier risks by continuously mapping and monitoring extended supply chains at speed and scale.

Learn how you can manage risk by exception, at scale. Speak to an expert today.

Posted on June 11, 2024 by Interos

by Julia Hazel and Dianna ONeill

While the dire outlook for the 2024 Atlantic hurricane season has raised alarms across the U.S., supply chain risk leaders focusing solely on this region are dealing with incomplete information.

Unlike 2023, the Pacific is expected to experience a relative reprieve from tropical cyclones this season. The complex climate dynamics impacting typhoons and hurricanes across the two oceans underscores the need for a global, seasonally-dependent assessment of catastrophic risks to supply chains.

The Looming Threat in the Atlantic

The National Hurricane Center’s unprecedented forecast is fueled by climatic conditions creating a perfect storm for intense hurricane development. However, an exclusive focus on this region alone risks overlooking critical threats to global supply chains posed by tropical cyclone activity elsewhere.

According to data from the World Bank, natural disasters in the East Asia and Pacific region caused over $60 billion in economic damages in 2021 alone, with a significant portion attributed to tropical cyclones disrupting supply chains.

Pacific Cyclones: An Underestimated Peril

In 2023, while the Atlantic saw 20 named storms, the remaining 58 tropical cyclones wreaked havoc across the Pacific and Indian Oceans, inflicting damage from China to Australia and Africa. The impacts of a single, powerful storm system can be immense:

Typhoon Doksuri, which ravaged Beijing and coastal China in July 2023, closed major ports and destroyed critical infrastructure, triggering $25 billion in U.S. economic losses according to Munich Re.
The technology sector has been heavily impacted by Pacific storms, with companies like Apple, Samsung, and Intel facing disruptions to their supply chains in recent years. In 2022, Super Typhoon Noru forced several semiconductor factories in Taiwan to temporarily halt operations, exacerbating the global chip shortage.
The automotive industry has also been battered by Pacific cyclones. In 2021, Typhoon Chanthu caused production stoppages at Toyota’s plants in Thailand, resulting in estimated losses of $98 million.

Regionally Tailored Forecasts

Interestingly, while the Atlantic is bracing for a historically active hurricane season, the forecasts for other regions paint a different picture. The outlooks for the Central and Eastern Pacific call for below-normal tropical cyclone activity, with NOAA anticipating a 50% chance of below-normal activity in the Central Pacific and 60% in the Eastern.

This divergence can be attributed to the effects of La Nina, which augments hurricane development in the Atlantic but has the opposing effect in the Pacific by increasing both vertical wind shear and atmospheric stability – conditions that suppress cyclone formation and intensification.

Comprehensive Catastrophic Risk Assessment

The stark disparity in this year’s forecasts across different regions of the world underscores the importance of businesses adopting a truly global, seasonally-dependent assessment of catastrophic risks to their supply chains. The threats posed by tropical cyclones are dynamic, shifting in both space and time depending on the season, the inherent risk profile of a given location, and continuously evolving climatic patterns.

To protect against these dynamic threats, organizations must gain greater visibility into their extended supply networks, identifying key suppliers situated in areas historically prone to natural hazards like hurricanes and tropical cyclones.

Moreover, they must continuously monitor how risk patterns shift across seasons and regions in real-time, using comprehensive supply chain lifecycle risk intelligence to proactively adjust mitigation strategies:

Interos’ catastrophic risk model provides a powerful solution to this complex challenge, offering a high geospatial resolution. This delivers more precise in-country and in-state risk indicators for faster and more focused hazard mitigation.
The technology enables businesses to proactively assess which suppliers are in areas susceptible to different natural hazards, as well as which specific hazard risks are likely to emerge during particular seasons.
The model’s continuous monitoring enables real-time tracking of supply chain impacts from unfolding natural events, empowering organizations to respond swiftly.

Consider the example of Cooper University Health Care. It used catastrophic risk intelligence from Interos to identify suppliers located in the path of Hurricane Idalia in 2023. By leveraging real-time catastrophic intelligence, managers were able to pre-position critical materials to ensure uninterrupted patient care.

As climate volatility and extreme weather become increasingly commonplace, embracing global, real-time hazard monitoring solutions like Interos’ catastrophic risk technology are crucial for proactively deterring and mitigating supply chain disruptions.

Click here to learn how Interos can secure your supply chain against extreme weather and other risks.

Bracing for the Worst Hurricane Season on Record: NOAA’s Dire 2024 Forecast and How to Secure Your Supply Chain

Posted on May 24, 2024May 30, 2024 by Dianna ONeill

The National Oceanic and Atmospheric Administration (NOAA) has issued an unprecedented warning for the 2024 Atlantic hurricane season, predicting it to potentially be the most active and destructive on record. A combination of exceptionally warm ocean temperatures and favorable atmospheric conditions could spawn up to 25 named storms, compared to an average of 14, including four to seven major hurricanes, compared to an average of three. The Atlantic hurricane season runs from June 1 to November 30.

NOAA’s Alarming Forecast

NOAA’s 2024 guidance is based on several factors:

Near-record sea surface temperatures: The Atlantic Ocean is experiencing among its warmest temperatures ever recorded, providing an ideal breeding ground for intense storm formation.
A rapid transition from El Nino to La Nina Conditions: La Nina conditions are typically associated with above normal hurricane seasons in the tropical Atlantic
Low wind shear: Forecasters anticipate lower-than-average vertical wind shear due to a transition from El Nino to La Nina conditions, which can disrupt the intensification and tracks of hurricanes, leading to more robust storm systems that can strike the coast.

With these conditions in play, NOAA warns that 2024 could surpass the record-breaking 2005 season, which saw 28 named storms, including the devastating Hurricane Katrina.

The Escalating Toll of Climate Disasters on Supply Chains

The potential impact of an unprecedented hurricane activity is part of a broader trend of escalating extreme weather worldwide, with serious implications for global supply chains and business continuity.

Last year alone, the United States experienced 28 separate weather disasters that accrued more than a billion dollars in damages for each incident, resulting in a staggering $93 billion in according to NOAA.
Worldwide, the figure is even higher, with 2023 exceeding $313 billion in economic losses due to extreme weather, according to global insurer Aon. Flooding, severe heat, drought, and wildfires have disrupted global supply chains across various industries, from automotive to food production.
At a company level, Interos data shows these and other climate-related supply chain disruptions cost organizations $44M annually in lost revenue.

These continued climate shocks have exposed the vulnerabilities of complex and interconnected global supply chains, underscoring the urgency of comprehensive lifecycle risk management to mitigate threats.

Organizations that lack the ability to gauge supplier exposure to hurricanes and other disasters risk paralyzing disruptions that damage brand, reputation, and profitability.

Leveraging Catastrophic Risk Technology

Interos’ groundbreaking Catastrophic Risk technology is an advanced solution to help businesses navigate extreme weather. This AI-powered innovation provides organizations with a comprehensive and continuous view of their extended supply chain, enabling procurement and risk leaders to proactively identify and mitigate risks from hurricanes, wildfires, floods, and other catastrophes.

As an example, New Jersey-based Cooper University Health Care leveraged Interos’ Catastrophic risk intelligence to get ahead of Hurricane Idalia in 2023 as it barreled toward an area in Florida where several of the company’s suppliers are based.

“Interos gave us the ability to track potential impacts before the storm hit,” says Thomas Runkle, VP, Supply Chain. “We identified three suppliers in the path, two of which provide products to our system. We discovered one placed a cutoff on orders with no notice. Having acted on the new risk map data, we reached out in time to get several days of orders placed before they were stopped due to the hurricane.”

By leveraging advanced supply chain risk intelligence and machine learning, Interos’ technology can visualize sub-tier suppliers impacted by a range of hazards, including weather patterns, climate, communication, infrastructure, and healthcare capacity.

This proactive approach empowers businesses to pre-plan months in advance and take necessary steps to minimize disruptions.

Interos’ Catastrophic Risk intelligence provides foundational risk intelligence to fuel key strategies for achieving climate-resilient supply chains, including:

Mapping to Diversify the Supplier Base: Explore alternative suppliers in different geographic regions to reduce reliance on a single location or region prone to climate disasters.
Real-time Risk Identification to Support Business Continuity Plans: Develop and regularly update comprehensive business continuity plans that outline strategies for maintaining operations during and after hurricanes, floods, wildfires, or other natural disasters.
The World’s Largest Knowledge Graph to Enhance Inventory Management: Understand your extended supply chain to support maintaining strategic inventory levels of critical components and materials to mitigate the impact of supply chain disruptions.

As the 2024 hurricane season approaches and the threat of climate disasters escalates, it is crucial for businesses to prioritize supply chain resilience and embrace AI-risk capability like Interos’ Catastrophic Risk Visibility technology.

By taking proactive measures and leveraging advanced lifecycle risk intelligence, organizations can better navigate the challenges posed by extreme weather events and ensure the continuity of their operations, while mitigating the staggering economic toll of supply chain disruptions.

New Graphite Export Controls Jeopardize A&D, Electric Vehicle Supply Chains

Posted on January 17, 2024January 18, 2024 by Interos

By Michael Eddi & Harris Allgeier

Global supply chains continue to feel the string of an escalating trade war as China implements a new range of export restrictions targeting yet another important raw material: Graphite. The latest in a series of export controls levied by China, in a tit-for-tat battle of trade restrictions with the US, these new controls have significant ramifications for a swathe of industries including Aerospace & Defense, electric vehicles, and manufacturing.

In 2021, China produced 79.1 percent of the world’s natural graphite, despite only having 22 percent of global reserves. The new laws require export permits for two types of graphite, including high-purity, high-hardness synthetic graphite, and natural flake graphite and its products. These controls took effect December 1, 2023. (Click here to read a full translation of the new regulations)

The move comes on the heels of similar Gallium and Germanium export controls, levied by China in 2023. China’s Ministry of Commerce (MOC) has classified all these materials as dual-use items under export control. “Dual use” in this context means materials that have potential military and civilian applications.

Interos analysts looked at the possible impacts these new regulations could have for the electric vehicle and A&D sectors. We then created guidance for what supply chain leaders can do in response.

1. Graphite Restrictions’ Impact on Electric Vehicle Affordability

China produces nearly 100 percent of the processed graphite used to create battery anodes used in electric vehicles. The US is taking initial steps to help diversify graphite production. However the US currently has no domestic production of natural graphite and no domestic processing of graphite into anode materials for EV batteries. A potential graphite scarcity will reverberate through the entire production process, leading to higher overall production costs for EV manufacturers. This could impact the affordability of electric vehicles, reducing the adoption of clean energy transportation globally at a time when demand has already leveled off.

Furthermore, export controls on graphite from China could instigate a broader reassessment of supply chain strategies within the EV industry. EV firms might be compelled to diversify supply sources for critical materials, including graphite, to mitigate risks associated with sole-source dependency.

This strategic shift could involve exploring alternative global suppliers or fostering the development of domestic sources, to create a more resilient and distributed supply chain.

In South Korea, EV and battery manufacturers have been focusing on silicon anode materials as a key strategy to reduce dependence on Chinese graphite. This next-generation material is estimated to have “[…] an energy density about 10 times higher than the graphite-based anode materials currently used in most electric vehicle batteries But it will be years before these materials can meaningfully replace Chinese graphite on a global scale.

The US is also investing in alternate graphite sources, with the Department of Defense awarding a $37.5 million contract to Canadian company Graphite One.

2. Graphite Restrictions’ Impact on Aerospace & Defense Operational Readiness

Graphite is used in a wide variety of various military applications in the A&D sector, including missile systems, jet components, body armor, and electronic components. Export controls on graphite could impact the operational readiness and capabilities of multiple defense systems. The strategic repercussions of this are even more severe during these times of heightened international tension, which inherently call for increased preparedness for conflict.

Domestically, the United States has looked to shore up its graphite extraction, refinement, and production capabilities via private entities. However these are a long way away from matching the levels currently imported from China.

3. An Increasingly Restricted Supply Chain

China’s new regulations will ensure a stable supply of graphite for its growing domestic industries. They will also offer the country greater economic control over other nations dependent on Chinese graphite. However, the decision to restrict graphite exports is considered by many as a retaliatory move, influenced by the US’s recent restrictions on exporting high-tech AI chips to China. The restrictions also come on the heels of several recent efforts by the Chinese government to limit access to critical raw materials used in semiconductors and advanced technologies.

China isn’t the only country to take a more protectionist stance on natural resources. Resource nationalization is sweeping across the Asia-Pacific region. In recent years Malaysia, Indonesia, Mongolia, India, and other countries have all implemented (or announced the intent to implement) legislation to secure critical raw materials (usually rare earth elements) for domestic industries and reduce dependency on external suppliers.

China’s restrictions are likely driven by multiple factors. These include a growing domestic need for the material, the regional/global push towards nationalization, and the US’ recent restrictions targeting China.

The restrictions are a perfect example of a growing nationalization movement, where nations increasingly view control over critical resources as essential for maintaining economic resilience and national security. Overall, these trends underscore the complex interplay between economic interests, geopolitical strategies, and the evolving dynamics of global trade. All of these play a crucial role when considering how to build a resilient supply chain.

4. What can supply chain leaders do?

Supply chain managers in aerospace & defense, the electric vehicle sector, and other industries impacted by the new graphite export controls, or other recent trade restrictions, have several strategies available to them.

Advanced Intelligence and Continuous Monitoring: Utilize leading vs lagging risk indicators to continuously monitor potentially impacted suppliers and identify any vulnerable portions of your supply chain. The Interos platform tracks 400M+ entities in real-time to pre-empt sub-tier risk for aerospace and defense, technology, and other sectors.
Diversify Sourcing: Screen for alternative sourcing options for graphite from countries or regions not subject to import controls. Diversifying suppliers can help reduce the reliance on a single source and minimize the disruptions caused by import controls. This is also known as the process of identifying potential alternative suppliers that may exist within your industry’s periphery.
Optimize Your Supply Chain: Review and optimize your supply chain to identify potential bottlenecks and vulnerabilities caused by export controls. Streamlining processes, improving logistics, and establishing backup plans can help ensure a smoother flow of materials despite regulatory constraints.
Maintain Regulatory Compliance: Stay updated on fast-moving export regulations and ensure full compliance with the requirements. Engage in advocacy efforts and lobbying activities to influence policymakers and advocate for more favorable import control policies that align with the interests of your supply chain.
Identify New Strategic Partnerships: Forge strategic partnerships with suppliers, distributors, and industry associations to collectively address challenges posed by import controls. Collaborative efforts can help leverage collective bargaining power and facilitate the sharing of resources and expertise.

To learn more about how Interos can help you manage regulatory compliance and identify latent geopolitical risk within your supply chain, click here.

The High Cost of Natural Disasters and How to Get Ahead of Them

Posted on September 19, 2023January 18, 2024 by Geraint John

By Geraint John

Wildfires, earthquakes, hurricanes, floods… just some of the catastrophic natural disasters that have devastated Libya and many other countries in recent weeks. The floods in Libya alone have killed over 11,000 people – with that number expected to rise. In addition to the tragic loss of life and destruction of people’s homes, these events also cost companies billions of dollars and can severely disrupt their supply chains.

Earlier this month, for example, Volkswagen was forced to suspend production at its Portuguese operations until November after a small sub-tier Slovenian supplier of engine parts had its sole valley-based factory wiped out by flooding. The shutdown is likely to cost VW tens of millions of euros in lost productivity.

The financial impact of natural disasters is rising almost as quickly as sea levels and global temperatures. Insurer Munich Re calculates that total economic losses have exceeded $200 billion worldwide in each of the past seven years (see chart below). Less than half of these losses were insured.

Figures for 2023 are on a pace to continue this upward trend, with damage estimated at $110 billion in the first half of the year – 12% higher than the average for the previous decade.

Global Losses From Natural Disasters

US$ billions, inflation adjusted

Supply chains bear much of this cost burden. Interos’ recent survey of 750 chief procurement officers (CPOs) found that the cost of extreme weather and natural catastrophes in their supply chains in 2022 was, on average, $45 million per organization.

Although supply shortages and commodity inflation led their list of risk concerns for the next 12 months, more than one-quarter ranked natural disasters in their top five. And just over one-fifth picked extreme weather/climate change.

While it is extremely difficult to predict, let alone prevent, catastrophic supply chain disruptions, CPOs and their teams need to be keenly aware of suppliers in potential disaster zones and closely monitor regional events as they unfold.

2023: A Catalogue of Devastation

Climate change is fueling more extreme weather patterns and more intense natural disasters, as global air, sea and land temperatures increase. A new Interos whitepaper on catastrophic risk notes that July 2023 was the hottest month on record, according to the World Meteorological Organization.

While the massive earthquake in Turkey and Syria in February, which claimed more than 50,000 lives, has been the most destructive and costly disaster in 2023 so far, there have also been many damaging climate-related events. They include:

The largest ever wildfires recorded in the European Union, in Greece in August, along with major fires last month in Canada and Maui, Hawaii.
Tropical storm Hillary in Southern California, also in August – the first time the U.S. National Hurricane Center has ever issued a tropical storm warning for the state.
Severe thunderstorms, tornadoes and hailstorms in the U.S., the most serious of which struck Texas in June, plus Hurricane Idalia in Florida on 30 August.
Unprecedented flooding in Hong Kong, due to record rainfall in September, and in New Zealand in late January and February, due in part to Cyclone Gabrielle – described as the worst storm to hit the country this century.

Key Supply Chain Hubs Susceptible to Natural Hazards

The supply chain impact of such events will, of course, vary depending on the physical presence of both upstream suppliers and downstream partners such as logistics providers. Interos’ whitepaper highlights the natural hazard risks associated with 10 major global supply chain hubs. These include earthquakes in Indonesia, Taiwan and the key U.S. port city of Los Angeles; drought and rising sea levels around the Panama Canal; and coastal flooding risks in Shanghai and at Europe’s largest port, Rotterdam.

Today, many organizations have limited visibility of how such events might impact their supply chains, and a lack of timely information about disruptions affecting critical suppliers. In Interos’ recent survey, just 4% of procurement leaders believed they would be aware of a supplier disrupted by extreme weather or a natural catastrophe at all tiers of their supply chains within a 48-hour period (see chart).

Almost half (44%) acknowledged that they needed to make “significant” or “major” improvements to their monitoring capabilities, since they would have either zero visibility during this time window or only be aware of events affecting their direct (tier-1) suppliers.

This is a serious constraint, since the research also found that disruptions in 2022 more commonly originated at indirect suppliers (those at tiers 2 and 3).

Visibility of Extreme Weather Events and Natural Catastrophes

Awareness of a supplier disruption within 48 hours of occurrence

Adapting Supply Chain Strategies to the ‘New Normal’

Overcoming these constraints means designing proactive assessments and continuous monitoring into supply chain and third-party risk management processes. Such measures include:

identifying which existing suppliers might be in areas more prone to natural hazards, and making adjustments to enable alternate locations and sources;
reviewing the geographic diversification of a supply chain to identify potential geographic concentration risks in disaster-prone areas;
integrating natural hazard risk as part of the evaluation process for new suppliers;
continuously monitoring natural hazard events to spot threats to operational business continuity faster and enable emergency response plans to be activated more rapidly.

To help organizations improve their visibility and awareness of natural disasters and weather-related events, Interos this month launched a new catastrophic risk model within its Resilience platform. Features of the new model include:

Comprehensive and timely hazard data: the most reliable meteorological real-time sources of information on hurricanes, earthquakes, floods, wildfires and other events.
Visualization of event impact zone: an intuitive world map that charts the path of tropical cyclones, impacted area of earthquakes and other natural hazard events as they relate to an organization’s global supply chain footprint.
Real-time catastrophic risk alerts: timely notifications of natural hazard events happening around the globe that could potentially impact suppliers at tiers 1, 2 and 3.
Dynamic supplier risk scores: historical location-based risk ratings for specific entities, plus a time-limited impact score that quantifies and applies a severity of risk only during a natural hazard’s duration and its aftermath.

With the upward trend in catastrophic events fast becoming the “new normal”, organizations need to adapt their supply chain strategies to take account of climate change impact.

Those that embrace this reality and deploy new digital capabilities to help them will be more resilient in the face of whatever Mother Nature decides to throw at them in the future.

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

Posted on August 31, 2023January 18, 2024 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:

Aerospace & defense – Safes, gun barrels and military helmets use steels with very high levels of manganese (up to 15%).
Automotive manufacturing – Manganese is utilized as a safer, cheaper, and more ethical alternative to cobalt for use in electric vehicles.
Manufacturing – In addition to iron and steel, manganese is used also as an alloy with metals such as aluminum and copper.
Energy production and utilities – Manganese is widely regarded as one of the critical minerals for green transition technologies in the energy sector. It is essential for zinc-ion batteries, hydrogen fuel cells, and increased solar panel efficiency.

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.

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

Posted on August 14, 2023January 18, 2024 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. Ga₂O₃is 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.

Russian Mutiny Highlights Risks Firms Face in Global Mineral Supply Chains

Posted on July 19, 2023January 18, 2024 by Interos

By Klaudia Kokoszka & Mackenzie Clark

Coverage of the Wagner Group’s recent attempted mutiny in Russia naturally focused on the threat it posed to President Vladimir Putin’s power. Less well known is the role played by Yevgeny Prigozhin’s mercenary organization in the global supply chain for gold.

Wagner has long been suspected of operating in parts of Sub-Saharan Africa. In that region, they have exploited vulnerabilities in the gold supply chain to enrich themselves and fund their operations. Recent attention on the group has spurred a U.S. Africa Gold Advisory targeting a major source of their funding.

Using the Interos platform we identified over 600,000 companies that rely on conflict minerals. This broad exposure highlights the degree to which the global economy depends on a raw materials trade that directly benefits paramilitary and terrorist groups. These associations also pose significant regulatory and reputational concerns for companies that rely on these supply chains.

A History of Exploitation

On June 27, the U.S. Departments of State, the Treasury, Commerce, Homeland Security, Labor, and the United States Agency for International Development (USAID) warned firms to be on high alert to potential exposure to illicit gold within their supply chains.

This advisory followed a U.S. Treasury Office of Foreign Assets Control (OFAC) decision earlier in the year to sanction companies engaging with the Wagner Group in the illicit gold trade. The group uses this trade to fund its expansion. The proceeds also, like the Russian government, pay for Wagner’s military activities in Ukraine.

Wagner has also been connected to numerous human rights violations in the plunder of natural resources from conflict-affected nations. The group has long been known to have a presence across Sub-Saharan Africa. They are often found in the Central African Republic (CAR). The CAR is designated as a “country of concern” under the conflict minerals provision (Section 1502) of the Dodd Frank Act.

Since 2010, the Act has established an SEC (Securities and Exchange Commission) disclosure requirement for companies that manufacture products using so-called “conflict minerals”. The conflict minerals list consists of tin, tungsten, tantalum, and gold, and often referred to as “3TG”. These minerals originate from the Democratic Republic of the Congo and surrounding countries. These include Angola, Burundi, the CAR, Republic of the Congo, Rwanda, South Sudan, Tanzania, Uganda and Zambia.

These countries are at higher risk of exploitation by armed groups such as Wagner and Islamic State. These illicit entities finance their activities by taking advantage of vulnerabilities in the mining, processing, and distribution of conflict minerals. In the process, they are able to significantly enrich themselves.

Interos Supply Chain Data Analysis

We took a look at Interos’ global relationship platform data in conjunction with the National Resource Governance Institute’s Resource Contracts database. With this data, we mapped the extended supply chains of companies that hold 3TG mining contracts with countries of concern in Sub-Saharan Africa.

We identified over 600,000 companies that rely on conflict minerals either directly or indirectly, in the extended supply chain of the firms that hold these contracts. This includes 56 direct relationships to mining companies. It also includes 25,000 indirect buyer-supplier relationships in the second tier, and over five million relationships in the third tier.

These relationship networks quickly expand as you move away from the source of these minerals, which are generally several tiers deep within global supply chains.

Who Uses Conflict Minerals?

While the mining and processing of 3TG is based largely in the global south, the consumption of value-added goods containing these minerals, such as semiconductors, chips, wires, and batteries, is highly concentrated among Western Economies.

Of those firms that have direct relationships with the mining companies, more than three quarters are located in developing and growing economies. Over half are based in India.

Downstream consumers of conflict minerals are defined as those likely purchasing a post-processed and value-added product. More than three quarters of these are based in North America and Europe.

The United States is the single largest 3TG purchaser, representing nearly 45% of all downstream consumers. The second largest is the United Kingdom, representing over 9% of downstream consumers.

Based on these findings, the United States holds an extremely sensitive position in the supply chains of 3TG, and disruptions to and regulatory risks associated with these commodities will strongly impact U.S. firms.

A broad range of industries rely on conflict minerals, either directly or indirectly. Some of the most exposed industries, based on prevalence among downstream consumers, include software and communications (8%), construction (4%), vehicle manufacturing (3%), information services (3%), medical products (3%), household electronics (3%) and aerospace engineering (1%).

These industries alone make up over 40% of the companies vulnerable to a disruption in the conflict mineral supply chain. They include some of the largest global producers of technology, software, transportation, and heavy machinery. The adverse impact to these types of companies derives from their reliance on raw minerals in the parts and components of the finished goods they purchase and produce.

Though many of these firms are not directly purchasing from the companies responsible for mining conflict minerals, illicit behavior in their extended supply chain could still adversely impact their reputation, regulatory compliance, and ultimately their ability to predictably produce the finished goods they sell.

How Can Organizations Get Proactive About Conflict Minerals?

Recent events have highlighted the importance of increased due diligence for firms that rely on gold and other raw minerals sourced from conflict-affected regions. Companies looking to safeguard their extended supply chains should consider integrating the following recommendations into their procurement processes:

Increase and improve supply chain due diligence efforts related to the mining of conflict minerals, especially related to upstream business relationships and raw mineral suppliers.
Understand potential reputational risks to your firm associated with purchasing 3TG products from conflict-affected countries. This includes human rights violations, forced labor and environmental degradation among other concerns.
Understand potential compliance risks associated with purchasing 3TG products from conflict-affected countries. Pay attention to sanctions violations, money laundering and smuggling, among other concerns.

Regulation and Supply Chain Furor Over Minerals to Increase

Last month’s attempted mutiny highlighted the tangled interdependencies of geopolitics, raw materials, and supply chains. The U.S. Africa Gold Advisory is the latest policy action in a growing tide of regulations and concerns over conflict minerals. This swell of regulatory activity is likely to continue, and a similar increase is expected regarding critical minerals (which include aluminum, lithium, and nickel). These concerns have been compounded by recent actions by China in restricting the exports of metals critical to semiconductor production.

G7 Confronts China’s Designs on Semiconductor Supply Chain

Posted on May 23, 2023January 18, 2024 by Geraint John

G7 leaders meeting in Hiroshima, Japan this past weekend were hardly short of major global issues to discuss. From Russia’s unprovoked war in Ukraine and the proliferation of nuclear weapons to the steady march of climate change — the potential scope of the agenda was vast. So it was significant that the leaders devoted part of the summit’s agenda and communiqué to the risks facing critical supply chains and the need for greater resilience.

Nowhere is this more concerning for the world economy than in the case of Taiwan. We are at a time of heightened tensions between the United States and China. An all-powerful President Xi Jinping is intent on reuniting the two rival Chinese republics. Consequently, the concentration of semiconductor manufacturing in Taiwan is the biggest geopolitical risk facing supply chains today.

Taiwan-based companies control more than 90% of the world’s production of advanced microchips. These chips are used in everything from high-end smartphones to cutting-edge military hardware. One company, Taiwan Semiconductor Manufacturing Co. (TSMC), dominates this niche and owns more than half of global chip-making market share.

A Chinese invasion or blockade of its neighbor across the Taiwan Strait would have a devastating impact on the global economy — one far greater in scale and longevity than the havoc wrought on food and energy supplies by Vladimir Putin’s aggression last year. So it is right that G7 leaders focused on the issue.

Taiwan’s Supply Chain: Powered by Semiconductor Exports

Taiwan exported $479.4 billion of products in 2022. The U.S. was the second biggest importer after China, with 15.7% ($74.9 billion) of the total. Japan was fourth with 7% behind Hong Kong, while the other five G7 countries — Canada, Germany, France, Italy and the U.K. — made up a combined 4.3% ($20.9 billion).

Many different products are shipped to these and other nations in Asia-Pacific and beyond (see chart). But it is electronic components, and especially “integrated circuits/microassemblies” — in other words, semiconductors — that dominate the list. The latter accounted for $183.5 billion, or 38% of Taiwan’s total exports by value last year. Despite a falloff in demand for chips in recent months, this figure was up 17.7% on 2021, which in turn was up 22.4% on 2020.

Dependence on Taiwanese supply chains among G7 countries is, as you might expect, extensive. An analysis of Interos’ global database of business relationships shows that:

U.S. companies have almost 70,000 direct (tier-1) relationships with Taiwanese suppliers. Companies in other G7 member countries have almost 10,000 between them.
When indirect multi-tier relationships are included, G7 member companies have more than 315,000 tier-2 and 750,000 tier-3 connections to Taiwanese firms.
Although tier-1 relationships with the two major Taiwanese semiconductor manufacturers, TSMC and United Microelectronics Corp. (UMC), are relatively small in number (led by the U.S. with around 220), as tier-2 and tier-3 suppliers these two companies are present in hundreds of thousands of supply chains in G7 countries.

The Likelihood and Impact of China Invading Taiwan

Two key questions that arise from discussions around the China-Taiwan situation are:

How likely is it that China will seek to take Taiwan by force, and when might this happen?
What impact would Chinese action against Taiwan have on the global economy and supply chains?

Opinions among commentators and analysts on the first question vary widely. Some see an invasion occurring as soon as later in 2023, to sometime in the 2030s, to never. China’s official policy is one of peaceful reunification. However, U.S. intelligence reports suggest that President Xi has ordered the People’s Liberation Army to develop capabilities to seize the island by military force by 2027.

A geopolitical risk assessment of conflict between China and Taiwan by Interos concluded that the likelihood of an invasion in the next 2-5 years was “roughly even odds (45-55%).” The assessment also noted that “the majority consensus [among government policy makers and think-tank experts] appears to be that there will be an armed conflict over the island.”

On the second question, Interos’ analysis identified that a partial blockade or full invasion could disrupt ocean and air cargo shipments from Taiwan. Our analysis also raised the possibility that Taiwan could be completely cut off from international trade.

Potential Supply Chain Scenarios for Semiconductor Disruption

A tabletop exercise conducted last year among U.S. government and business leaders by the RAND Corporation centered specifically on the likely impact to advanced semiconductor supply chains. Participants were asked to consider two potential scenarios in which China imposed a “coercive quarantine on Taiwan”:

Uncontested, China acquires a significant portion of global semiconductor capacity. This leaves the U.S. and other countries with a choice of continuing to buy from Taiwanese suppliers or imposing sanctions on China.
China faces resistance in its attempts to take control of Taiwan’s fabs. This leads to a rapid loss of access to the country’s semiconductors, and triggers U.S. and other government action to ration limited supplies.

Unpalatable outcomes from these two scenarios included a fundamental change in the balance of global power in China’s favor, and an extended economic depression for most of the world. Unsurprisingly, given the impact on multiple industries (see graphic), business participants were keen on ensuring continuity of supply even if this meant relying on semiconductor firms such as TSMC under Chinese control.

Military action against China, whether by Taiwan or the U.S. and its allies, was not considered in this simulation. But a recent assessment by The Economist laid bare the imbalance in military capabilities between China and Taiwan. The analysis also articulated the dire consequences of military conflict over the island state. This included “incalculable damage to the world economy” as a result of disruption to semiconductor supply chains.

The threat of war looms large over the Indo-Pacific region. Hence efforts in recent weeks by Japan and other G7 countries, including the U.S., to take some of the heat out of relations with China. In their communiqué, the G7 leaders emphasized that actions designed to boost economic and supply chain resilience were about “de-risking, not de-coupling” from China.

Some Major Players Begin Diversifying Chip Capacity Away From Taiwan

In practice, de-risking means diversification. Since their 2022 meeting in Germany, the response of G7 countries to semiconductor concentration risk has been to tempt advanced chip-making capacity away from Taiwan through vast public subsidies. The U.S. has led the way with its CHIPS and Science Act, but Japan, the European Union, and the U.K. have all followed suit, albeit with fewer billions of dollars to throw at the problem.

Over the next five years these industrial policies should result in new fabs, supply chains, and skilled workforces being developed in multiple geographies. However, Taiwan is set on keeping much of its domestic semiconductor “shield” intact, both in terms of manufacturing and R&D. Aside from contributing 15% of Taiwan’s GDP, the industry serves as vital leverage for Taiwan in its efforts to maintain independence from China.

Confidence in this strategy in waning in some quarters. \Warren Buffett’s Berkshire Hathaway recently announced that it had sold the remainder of its $4.1 billion stake in TSMC. This is in spite of the fact that the shares were purchased as recently as November last year — and that TSMC is regarded as one of the world’s best-managed companies.

“I don’t like its location,” Buffett told analysts. “I feel better about the capital that we’ve got deployed in Japan than in Taiwan.”

Action CPOs Should Take to Prepare for Potential Disruption

To reduce the exposure of their organizations to semiconductor concentration risk, chief procurement officers should do the following:

Assess your dependence on Taiwan by understanding the relationships you have with Taiwanese suppliers. Include both the direct, tier-1 relationships and those at tiers 2, 3 and beyond. Chip makers such as TSMC and UMC are often present at this sub-tier level.
Evaluate the extent to which key semiconductors, electronic components, and other items you depend on from Taiwan-linked supply chains are single- or sole-sourced. Identify where you have viable alternative options already in place.
Develop a strategy aimed at diversifying your supply base to other geographies. Consider sourcing from new suppliers and/or by working with existing partners to utilize alternate and emerging capacity.
Conduct scenario plans and risk simulations – like the one run by British telecommunications group BT last year. These can gauge the impact that disruption to Taiwanese semiconductor supply chains might have on your business.
Continuously monitor your Taiwan-dependent supply chains for geopolitical, operational, financial, and cyber risk events.

Until new semiconductor capacity comes online in the U.S., Japan, Germany, South Korea, and elsewhere, companies will continue to over-rely on Taiwan-based suppliers. However, it is important to be prepared for, and to support the creation of, a more diversified global supply chain for microchips – as it is with other critical products and raw materials that are heavily concentrated in particular geographic locations.