Category: Perspective

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.

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.

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.

By Geraint John

As the annual Earth Day takes place again on April 22nd, the world faces an all-too-familiar message: we are not doing enough to confront the impact of climate change and human-inflicted damage to our fragile environment.

Global supply chains, as the engine room of trade and economic growth, are a major source of carbon dioxide emissions, deforestation, water and natural resource wastage, and pollution  – which explains why national governments are busy introducing laws to regulate companies’ activities more tightly.

In the European Union, for instance, legislation currently in progress includes:

• A carbon border tax on greenhouse gas emissions associated with imported products to begin operating from October 2023.
• A ban on imported products linked to deforestation from 2024.
• A Corporate Sustainability Reporting Directive that will require around 50,000 companies to disclose environmental impact data and set improvement targets.

In the United States, current proposals include:

• New Securities and Exchange Commission (SEC) reporting rules. These include disclosure requirements for CO₂ emissions in listed companies’ supply chains (so-called Scope 3 emissions).
• Tough new Environmental Protection Agency (EPA) limits on tailpipe emissions from fossil-fuel-powered cars and other vehicles.

This surge in regulatory activity will, over time, certainly force many firms to improve their environmental practices. But those leading their procurement and supply chain organizations need to go beyond compliance with these laws if change is to be effective on the scale required.

Coming to Terms with the Impact of Supply Chains on the Environment Is No Small Feat

To mark Earth Day 2023, Interos conducted an analysis of its ESG risk-scoring data, ranking the best and worst countries based on their performance against a dozen environmental attributes — which will be published soon (check back here for a link).

The key finding from this analysis is that even the “best performing” countries – and the companies headquartered there – have their work cut out to meet net-zero emissions, limit temperature rises to 1.5°C, and hit other key environmental targets.

Research by the Carbon Disclosure Project (CDP) reveals that supply chains are not yet contributing at anything like the scale required to effect meaningful change. Data it collected from thousands of firms in 2022 shows that:

• Only 41% reported any Scope 3 (supply chain) emissions, compared with 72% for Scope 1 or 2 (internal operations). This is despite the fact that Scope 3 emissions are typically more than 11 times greater.
• Just 36% of reporting firms were able to calculate Scope 3 emissions for purchased goods and services.
• Relatively few companies currently provide detailed reporting on water consumption or deforestation in their own operations, let alone in their supply chains.

The CDP welcomes the regulations mentioned earlier, which will force many more companies to measure and report their broader supply chain environmental impact. But it argues that “the necessary cascade of action down the supply chain is just not happening”.

Compelling direct (tier-1) suppliers to provide data and make improvements isn’t sufficient. Active engagement, incentivization, and collaboration with a targeted group of direct and indirect (tier-2+) suppliers are necessary to drive change.

Just 39% of companies engage their suppliers on climate-related issues, says the CDP, while 23% do the same for water. The figure is higher for deforestation (69%), but this is tempered by the fact that relatively few firms disclose data on this issue.

ESG and Procurement: From Compliance to Engagement and Continuous Monitoring

A separate report on sustainable procurement by the United Nations Environment Programme also notes the growing body of legislation, but cautions buyers against a “superficial compliance oriented approach”.

It urges them to look beyond the needs analysis, supplier selection, and onboarding stages of the procurement cycle, where most activity takes place today (see chart), and put more emphasis on post-contract supplier management.

The need for continuous monitoring and intervention along the supply chain, rather than just one-time certification, is as important in environmental performance as it is for other types of supplier risk, such as labor standards and cybersecurity.

How Procurement Leaders Can Make ESG Progress

Chief procurement officers (CPOs) face plenty of complex challenges as they work to improve environmental sustainability in their organizations. Collecting relevant data and measuring results is certainly not the smallest one.

But, aside from it being “the right thing to do”, there are real business benefits to be gained. These include creating lower-risk, more resilient supply chains. Organizations will also enjoy commercial advantages over rivals in terms of innovation, customer perception, and sales. They also have greater attractiveness to stakeholders such as investors and employees.

A new study by Bain and Ecovadis also found that companies “at the forefront of sustainable procurement,” which focus on their suppliers’ environmental practices, are more profitable – by an average of three percentage points over other firms.

Practical steps CPOs can take to make progress on this journey include:

• Raising internal awareness of supply chain-based climate, water, deforestation, and other environmental issues. This includes both within their own teams and others they work with.
• Designing incentives to ensure that buyers and category managers pay sufficient attention to sustainability considerations at different stages of the procurement cycle.
• Writing climate, water, and other requirements into supplier contracts and including sustainability KPIs in scorecards and regular performance reviews.
• Harnessing technology to identify the highest-risk supply chain dependencies. Also, collecting environmental data to conduct analysis and support decisions.
• Engaging suppliers not only to disclose and share information about CO₂ emissions, water usage, and other activities, but also to encourage and incentivize them to take action to improve their environmental footprint.

Actions such as these mark a big change from the “traditional” procurement focus of lowering costs and ensuring supply. But CPOs in leading companies are increasingly staking their reputations and careers on it.

For the sake of our planet, the efforts of these leaders and others need to become a source of celebration on future Earth Days.

By Andrea Little Limbago 

Globalization is undergoing a significant transformation. Along geopolitical fault lines, global economies are decoupling, while simultaneously like-minded countries are seeking greater integration. This reglobalization of the international system is defining the new normal, introducing a range of opportunities as well as risks.  

The shockingly swift collapse of Silicon Valley Bank (SVB), China’s announcement seeking greater technological self-sufficiency, California’s record-breaking snowfall and floods, and the U.S., U.K., and Australia trilateral pact announcement, all occurring around the same time, are indicative of this new normal.  

As the International Monetary Fund’s Managing Director noted, organizations need to “think of the unthinkable” to better build toward resilience in light of disruptions. This requires a mindset shift regarding systemic risk – moving from a siloed view of “known” risks (e.g., the shutdown of a single supplier with poor credit) to a multi-faceted approach that accounts for hyper-dependencies in a world routinely shocked by unforeseen risks (e.g., the 48-hour collapse of an industry-leading and deeply connected bank). Organizations that successfully build on and expand their risk mindset to encapsulate the multitude of economic, political, climatological, and technological transformations underway will be at a competitive advantage going forward; those that fail to do so will be ill-equipped to navigate these “unthinkable” risks. 

Multi-faceted Risk and Supply Chain Catastrophe in a Reglobalized World (aka The New Normal)

Traditional risk frameworks crafted over the last few decades are inadequate to address today’s risk landscape consisting of hyperconnected digital economies and multi-layered business ecosystems. That does not mean they aren’t useful — they’re simply not flexible enough to keep pace with modern change.  

The first quarter of 2023 alone has witnessed a series of shocks that were once unthinkable. Ransomware infiltrated a major supplier in the semiconductor industry and propagated across technology and defense communities, causing a $200M hit to its revenue, as well as a $250M hit to a customer. The Middle East may be on the verge of a major transformation following an unprecedented, China-brokered deal to reestablish diplomatic relations between longtime bitter foes Saudi Arabia and Iran. The deal reflects a shift in the balance of power and China’s growing influence in the region. And now SVB – dubbed the tech industry’s banker – experienced the second largest bank failure in U.S. history, with ripple effects from China to Europe. 

 These “unthinkable” events reflect a new status-quo for all manner of risks. For cyber risk, an expanded mindset that includes, but also looks beyond, vulnerabilities is essential. Threats, regulations, and anomalous behavior must also be part of a coordinated cyber risk mindset. On the geopolitical front, organizations must account for changing fault lines which continue to foster new alliances and new divisions. And for financial risk, solvency is foundational, but as the events with SVB illustrate, continuously monitoring solvency alone is not enough. A more nuanced view of financial risk is required to achieve operational resilience against financial volatility in the new normal.  

 For example, in addition to solvency, volatility of equity returns often represent a timelier examination of the business risk of a company. Equity markets are more sensitive to new information and can react more quickly than solvency metrics based on accounting measures reflect. SVB is particularly instructive. For the five years from 2018-2022, SVB Financial’s market fluctuations largely behaved within an expected range. However, in the 47 trading days between January 3, 2023 and March 9, 2023, SVB experienced volatility outside of the expected range it exhibited the previous five years.  

By monitoring stock price volatility outside of historical expectations, organizations can gain a more complete picture of business risk. 

Risk Ecosystems in the New Normal

Despite the splintering of many historic trade ties along geopolitical fault lines, the new normal will remain defined by interdependence. The pandemic demonstrated how shocks can propagate across industries and countries, as did Russia’s invasion of Ukraine. In addition, over the last year, global democracies collaborated at unprecedented (for modern times) levels, inspiring a sanctions regime against Russia that continues to grow. Russia’s invasion also stimulated enormous shocks that rippled across interdependent supply chains, from key metals to wheat and grains to natural gas. Organizations that believed themselves immune from the ripple effects were soon exiting Russia, some of which have since seen their stock prices impacted due to direct exposure to the conflict.  

In a similar manner, the contagion impact of the SVB collapse continues to garner scrutiny. For instance, customers of HR software startup Rippling experienced payroll delays because it relied on SVB to process the transactions. Thousands of corporate payrolls have been impacted even if they weren’t direct SVB customers. In the new normal, “invisible” software supply chains like this are taking on a greater importance as an expanded view of critical business relationships comes to include everyone from buyer to supplier, investor, or borrower. 

These kinds of connections and dependencies affect every industry. Interos’ analysis revealed the top seven industries with business relationships to SVB include: software, biotechnology, healthcare equipment and supplies, communications equipment, pharmaceuticals, semiconductors and semiconductor equipment, and IT services. This diversity shows how far-reaching the effects of such a collapse may be.  

Moreover, the contagion concerns are not limited to the U.S. Many Chinese companies are scrambling in light of the collapse. Based on Interos data, roughly 11,000 companies have direct ties to Chinese companies with business relationships with SVB. European banks also experienced a decline in stock prices as contagion fears spread, with Credit Suisse shares falling to a record low on Wednesday. 

Operational Resilience in the Face of Potential Supply Chain Catastrophe

A range of forces has ushered in a once-in-a-generation global supply chain transformation –the pandemic, escalating geopolitical tensions, climate change, economic anxiety, and emerging technologies. Global trade is expected to reach a record $32 trillion, while at the same time the pace of global trade growth has slowed and allyshoring is reshaping trade patterns. During a time of heightened transformation, what was unthinkable in previous eras must be imagined — and mitigated against today and tomorrow. 

A siloed or outdated approach to risk is not enough to achieving operational resilience amid sweeping global changes, Organizations must continuously monitor a range of new and emerging risks and gain visibility across their extended supply chain. With an expanded view of risk, organizations can also proactively identify potential vulnerabilities in their supply chain and more easily conduct the due diligence required to inform key decisions – such as alternative suppliers, diversification, and reshoring strategies.  

Shifting mindsets toward the unthinkable is unfortunately a core component of operational resilience in this new normal. Working together to build collective resilience – through innovations in technology, processes, and collaboration – will be the best defense against the risks you can’t imagine today. 

Interos supports organizations seeking to minimize these risks through advanced risk intelligence, supply chain scoring, and relationship discovery technologies that automate assessment, detection, and incident response. This gives procurement and other supply chain leaders a powerful way to quickly produce a list of at-risk suppliers for due diligence and continuous monitoring. 

For more information, contact Interos Customer Success: [email protected] 

By Geraint John

Restrictions on global free trade and supply chain relationships are flying around like Chinese “spy” balloons over North America were just a few weeks ago.

Last month, China slapped sanctions on U.S. defense giants Lockheed Martin and Raytheon, ostensibly because of their arms sales to Taiwan. But the move was widely interpreted as retaliation for the U.S. government’s decision a few days earlier to blacklist six Chinese companies it accuses of being involved in China’s surveillance-balloon program.

So far this month, the American military has shot down one high-altitude Chinese balloon and three unidentified objects over U.S. and Canadian airspace. China denies U.S. government claims that the balloon was spying on sensitive installations. Their government claims it was used purely for weather monitoring.

Regardless of whose version is true, these tit-for-tit sanctions are part of an escalating technology war between the U.S. and its allies and China that threatens to blow apart the international trading system as we know it.

Global Trade Restrictions Have Increased Sharply

As with geopolitical tensions, trade restrictions on goods, services and foreign investment have increased sharply in recent years. From 2018, when the Trump administration imposed tariffs of up to 25% on many Chinese imports, to December 2022, the number of worldwide restrictions more than doubled to around 2,500, according to data from the International Monetary Fund and Global Trade Alert.

A new Interos white paper reveals that Russia displaced China as the most targeted country for restrictions last year, following its invasion of Ukraine. More than 1,100 restrictions were imposed on Russian entities in 2022 – almost six times more than China.

Russia is also well ahead of Iran and China in terms of the total number of restrictions imposed by other nations since 1981 (see chart).

On the opposite side, the U.S. dwarfs other countries in the number of restrictions it issues (around 8,000 during the past 40 years). And it has dozens of restricted entity lists across different government departments and industry sectors.

Prominent examples include:

• The Department of Commerce’s Entity List, which sets out export licensing requirements for hundreds of foreign-owned businesses.
• Sections 889 and 5949 of the National Defense Authorization Act banning the use of certain Chinese products and services for military purposes.
• The Department of Homeland Security’s UFLPA Entity List for the Uyghur Forced Labor Prevention Act, which bars imports of tainted products from the Xinjiang region of China.

Keeping up to date with the ever-expanding list of prohibited firms and ensuring your organization doesn’t fall foul of new trade rules has become a more complex task. Which is why restrictions risk is one of the six risk factors captured and updated continually in Interos’ Resilience platform.

Implications for Global Supply Chains in Light of Trade Sanctions Against China

Standing back from the detail of these multiple lists and regulations, it’s important to consider the broader implications of the spiraling number of restrictions on international supply chains.

During the past couple of years, the U.S. has implemented progressively tighter and more far-reaching rules around the sourcing of Chinese components and sales of American semiconductors and chip-making equipment to Huawei and other Chinese tech firms.

This is having a dramatic impact on the ability of these companies to scale up production and manufacture products.

Last month, China’s semiconductor industry body issued a strongly worded statement condemning action by the U.S., Japan, and the Netherlands to deny its members vital equipment.

Such measures would “destroy the global semiconductor ecosystem”, it claimed.

Trade Restrictions on China Signal Broader Supply Chain Trend

While complaining loudly and portraying itself as the defender of free trade and globalization – as it did at the World Economic Forum’s meeting of political and business leaders in Davos in January — China is also flexing its trade-restriction muscles.

It has, for example, threatened to stop the export of solar panel manufacturing equipment to the U.S. China dominates the supply chain for this crucial clean-energy technology and could — in a mirror image of its own semiconductor woes — impede American efforts to beef up its domestic solar industry.

Although trade between China and the U.S. grew strongly last year, economists and other critics argue that protectionism, “decoupling,” and politically led moves towards “friend-shoring” (or “ally-shoring”) could have negative consequences for the global economy and supply chains in the years ahead.

These include higher prices, lower efficiency, less innovation, wasted public money through ineffective subsidies and industrial policies, and diminished levels of resilience.

As FT columnist Martin Wolf cautioned in a piece on the “new interventionism” last month: “Fragmentation is very easy to start. But it will be hard to control and even harder to reverse.”

Get more information on trade restrictions, sanctions, regulatory changes and their impact on the global supply chain by reading our latest white paper – the Red Tape Revolution.