2023 RISK REPORT | 00 everstream.ai The year’s biggest disruptions are coming, here’s how to dodge them 2023 Risk Report 2023 RISK REPORT | 02 everstream.ai For want of a nail, a shoe was lost. For want of a shoe, the horse was lost. The sidelined horse caused a lost battle, war, and kingdom, all for want of a half-penny nail. You probably know the old proverb, and this year it increasingly applies to your supply network. Seemingly obscure events like a small business bankruptcy in another country can bullwhip through your supply chain, decimating your careful planning and tight budgets. Oh, that nail! If only you’d noticed earlier that it was missing! It would have been so quick and inexpensive to replace, and the kingdom would still be yours. Here are the five “nails” of 2023. Miss these critical risks, and you’ll burn through more resources and play catch-up throughout the coming year. Instead, save time and money by identifying early how each of these could disrupt your operation, and plan accordingly. JANUARY 2023 Contents JANUARY 2023 2023 RISK REPORT | 00 everstream.ai JANUARY 2023 2023 RISK REPORT | 04 everstream.ai A small business bankruptcy will halt production at one of your suppliers Insolvencies worldwide will rise in 2023 due to worsening economic conditions. Larger companies often have stronger buffers helping them survive the financial challenges that can shut down small and midsize operations. Those small-business closures don’t often get much attention, but they will catch many companies by surprise this year, creating a bullwhip effect that could halt production. Everstream risk score 60 % JANUARY 2023 2023 RISK REPORT | 06 everstream.ai Here’s why: By the time the average operation learns that they can’t get a component because their supplier’s supplier went out of business, it’s too late to seamlessly shift to an alternate plan. At best, they will spend time and money researching and onboarding a new supplier, with additional costs for expediting materials or missing delivery deadlines. At worst, production stops because competitors scooped up the alternate sources. Everstream Analytics tracked more than 1,400 insolvencies across China, Germany, and the United States affecting our clients in 2022. Overall, manufacturing and electronics companies are suffering the most, compounded by slowing consumer spending and worsening economic conditions. With widespread energy shortages, small- and medium-sized manufacturers in Germany are surviving on government subsidies, production cuts, and energy rationing. Smaller businesses in China are struggling more than larger ones to weather ongoing COVID lockdowns. Insolvencies in Germany, the U.S., and China, 2022 Manufacturing Aerospace & Defence Food & Beverage Pharmaceuticals Agriculture Chemicals Consumer Goods Automotive Logistics Medical Devices Oil & Gas Electronics Mining 10.14% 3.24% 38.25% 14.02% 11.43% 6.4% 4.46% 3.67% 2.3% 2.01% 1.44% *Percentages for mining and agriculture not shown in chart JANUARY 2023 2023 RISK REPORT | 08 everstream.ai China accounted for a higher percentage of insolvencies in electronics, automotive, and chemicals than the U.S. and Germany combined. The percentage of logistics- related insolvencies in the U.S. and Germany was much higher than in China. This risk permeates your sub-tier supply network, so make sure you can see it coming. Identify single-source bottlenecks in Tier 2, Tier 3 and beyond to add options before you need them. Insolvencies by Country, 2022 0% 100% 80% 60% 40% 20% Percentage of Total Incidents Manufacturing Electronics Logistics Automotive Chemicals China Germany United States Global Financial Incidents in the Automotive Industry 2019 115 115 70 34 92 99 121 110 110 90 56 76 135 101 78 30 150 120 90 60 2020 2021 2022 0 Q1 Q2 Q3 Q4 JANUARY 2023 2023 RISK REPORT | 00 everstream.ai JANUARY 2023 2023 RISK REPORT | 10 everstream.ai Cybercriminals will hit one of your suppliers with a ransomware attack Cyberattacks will continue to be a major supply chain risk heading into 2023, with increasing geopolitical tensions and new ransomware tactics driving much of the action. As companies shift more processes into the digital realm, connecting internal and external teams via software, it becomes easier for hackers to get in and disable entire operations. Everstream risk score 70 % JANUARY 2023 2023 RISK REPORT | 12 everstream.ai Hackers have targeted the same major industries over the past few years: Electronics, manufacturing, and logistics companies. However, the number of cyberattacks on global infrastructure doubled between 2021 to 2022 likely due to Russian cyber warfare against Ukraine and western countries that imposed sanctions. Attacks on oil, gas, and chemicals industries rose year-over-year due to their critical involvement in all manufacturing operations. The war in Ukraine marked the end of any possible law enforcement cooperation from Russia, opening the door to increased levels of cybercrime activity. Economic downturns correlate to increased crime in general, including cybercrimes—especially lucrative ones such as ransomware attacks targeting high-value organizations and critical infrastructure operators. Ransomware attacks remain more common than data breaches, although, presumably, if a hacker can lock you out of your data, they can steal it too. Cyberattacks by Type, 2022 14 March 0% 100% 80% 60% 40% 20% 41.94% 81.03% 18.97% 58.18% 41.82% 63.64% 61.29% 46.67% 81.48% 53.33% 68.18% 18.52% 31.82% 65.00% 35.00% 84.67% 15.38% 53.85% 71.43% 28.57% 50.00% 50.00% Food and Beverage Aeroplane and Defence Electronics Manufacturing Logistics Automotive Oil, Gas, Chemicals Consumer Goods Infrastructure Medical Devices Agriculture Mining Pharmaceuticals 58.06% Percentage of Companies 46.15% 36.36% 38.71% Data Breach Ransomware Cyberattacks by Industry 2022 Year Aerospace Agriculture Automotive Consumer Goods Electronics Food and Beverage Infrastructure Logistics Manufacturing Medical Devices Oil, Gas, Chemicals Pharmaceticals 2021 4.19% 7.91% 9.37% 21.40% 7.44% 5.58% 12.56% 14.88% 2.33% 8.37% 4.19& 5.26% 7.89% 5.26% 22.81% 5.70% 2.19% 14.47% 16.23% 5.70% 5.70% 6.14% 1.4% 2.19% 0% 100% 20% 40% 80% 60% JANUARY 2023 2023 RISK REPORT | 14 everstream.ai Although cyberattacks often target IT systems, websites, and communications, 20%—30% of all companies that experience cyberattacks report subsequent production downtime. Work stoppages are often due to companies refusing to pay ransomware demands, then having to rebuild data from recent backups. Not only do attacks at sub-tier suppliers provide an access window to your network, but they can ship you infected components or ones with easily hacked software code. Now is the time to build closer integration with contractors and suppliers to protect your network’s safety and integrity. Cyberattacks Impacting Manufacturing Operations, 2022 0% 100% 80% 60% 40% 20% 36.23% 20.00% 80.00% 29.03% 70.97% 27.59% 72.41% 68.18% 73.91% Food and Beverage Electronics Manufacturing Logistics Automotive Oil, Gas, Chemicals Consumer Goods Pharmaceuticals 13.27% Percentage of Total Incidents 34.29% 28.13% 71.88% No Disruption Disruption 86.73% 63.77% 65.71% Investigators will find ESG violations in your sub-tiers Media investigators, NGOs, and other research teams investigating forced labor violations spurred the passage of the Uyghur Forced Labor Protection Act (UFLPA). Investigators have uncovered links between several high-profile brand names and their sub-tier suppliers that utilized forced labor in Xinjiang, China. Your company could be in the next headlines, especially if it’s in the electronics or retail industry. JANUARY 2023 2023 RISK REPORT | 16 everstream.ai Everstream risk score 75 % 5.71% 6.86% 14.86% 17.71% 17.71% JANUARY 2023 2023 RISK REPORT | 18 everstream.ai More than half of all companies publicly linked to forced labor in Xinjiang have been tied to the metals, electronics, and retail industries. Any company sourcing electronic components is exposed to ESG violations as some of China’s largest copper, nickel, and lithium producers have been accused of utilizing forced labor in Xinjiang. Industrial electronics and solar energy companies also have dependencies in Xinjiang. Cotton and silica-based products are the top exports from Xinjiang banned under the UFLPA. Number of Companies with Forced Labor Links to Xinjiang Industries Linked to Forced Labor in Xinjiang 0 140 120 100 80 60 40 20 200 180 160 Companies identified by Everstream 177 BIS Export Ban List 50 CBP Import Ban List 12 UFLPA Entity List 31 Industrial Metals Other Medical Devices General Metals Automotive Components Consumer Electronics Polysilicon Industrial Electronics Construction & Building Materials Electronic Components Clothing and Apparel 18.86% 4.57% 4.57% 2.29% 1.71% There are only 31 companies on the UFLPA banned list, but Everstream’s researchers have identified at least 177 total sub-tier suppliers linked to forced labor in Xinjiang. Expect those to surface in media coverage in the coming year. 5.13% JANUARY 2023 2023 RISK REPORT | 20 READ ALL ABOUT IT World supply chain laws, here today and coming tomorrow everstream.ai Forced labor isn’t the only issue. Watchdog groups investigate supply chain environmental, social, and governance (ESG) violations, including air and water pollution, heavy energy use, waste dumping, and labor conditions. The risk of exposure will increase because more countries are adopting supply chain due diligence laws. Germany’s Supply Chain Due Diligence Act comes into force in January 2023, and Japan is the first major Asian nation to formally introduce guidelines on responsible supply chains. ESG compliance on issues from forced labor to energy use can no longer be fulfilled by comparing a list of your known suppliers to a government entity list, or even by surveying your suppliers directly about ESG issues—they likely don’t have enough visibility to know the answers. But the public doesn’t accept ignorance as an excuse, so dig in now to proactively uncover problematic relationships. JANUARY 2023 2023 RISK REPORT | 00 everstream.ai JANUARY 2023 2023 RISK REPORT | 22 everstream.ai You will pay more for metals, fertilizer, and glass from Europe Europe is scrambling to build the infrastructure required to wean itself off decades of cheap Russian natural gas, and it will take months, if not years, for energy-intensive manufacturing to return to pre-war levels. Manufacturing bottlenecks there will create more worldwide competition for these in-demand materials, driving up prices and driving down availability. Everstream risk score 80 % JANUARY 2023 2023 RISK REPORT | 24 everstream.ai European manufacturers spent much of 2022 reeling from high gas and energy prices after the outbreak of the Russia-Ukraine war. Over the summer, gas prices reached all-time highs, and companies in energy-intensive sectors experienced operational disruptions due to increased production costs and government calls to reduce energy expenditure. Chemicals and metals industries suffered most, with additional disruptions to textiles, food and beverage, glass, and paper. Some of the continent’s biggest steel, aluminum and chemicals producers had to curtail manufacturing, causing ripple-effect damage throughout food, beverage, and automotive industry sub-tiers. Fertilizer manufacturers account for more than half of all chemical sector disruptions. Food and beverage companies faced additional problems due to falling CO 2 supplies and rising commodity prices. Production Disruptions in Largest EU Economies, 2022 Germany 37 Spain 23 Italy 18 7 Netherlands 10 France Number of Disruptions European Energy-Related Production Disruptions by Industry, 2022 Chemicals Automotive Electronics Food and Beverage Manufacturing Oil and Gas 69.48% 19.48% 7.79% 1.95% 0.97% 8.41% 16.67% 56.67% JANUARY 2023 2023 RISK REPORT | 26 everstream.ai Given the multiple ongoing factors, energy-intensive manufacturers across the continent are unlikely to return to full production anytime soon. As a result, big packaging groups are importing paper from the U.S., and some chemical players have announced wanting to downsize operations in Europe permanently. One German chemicals company decided to freeze current production investments and move to China instead, deciding that volatile China is more stable than the EU. And with recent incentives for renewable energy manufacturing, the U.S. is a tempting alternative for that industry. This is a long-term disruption, not a quick blip. Make sure that your sub-tier supply of raw materials is diversified among multiple sources. European Energy-Related Production Disruptions by Industry, 2022 Steel Renewables Textiles Packaging Glass Rubber Paper Aluminium Other materials Ceramic Other Metals Chemicals Breakdown 40% 14.29% 11.43% 8.57% 6.67% 6.67% 3.81% 2.86% 2.86% Agrochemicals Pigments Industrial Chemicals Plastics 3.33% Manufacturing Breakdown 1.9% 0.95% JANUARY 2023 2023 RISK REPORT | 00 everstream.ai JANUARY 2023 2023 RISK REPORT | 28 everstream.ai Chinese manufacturers will leave you hanging, repeatedly Expect myriad delays and order cancellations this year if your suppliers have suppliers in China. Assurances from your Tier 1 suppliers that they don’t do business with China isn’t sufficient protection because those suppliers probably don’t have visibility through their entire supply network. But they will feel the impact at some point in 2023. Everstream risk score 90 % JANUARY 2023 Ongoing disruptions will upset Chinese manufacturing until authorities can provide a clear roadmap for exiting the pandemic. Currently, China’s rapidly changing COVID-19 policies create ongoing headaches for manufacturers as companies and workers struggle to adapt to shifting local policies. Everstream tracked more than 85 lockdowns in 2022 across China’s largest industrial cities, with 18 in November alone. Chinese manufacturing saw a corresponding rise in production disruption for every month except September. Although China’s lockdown measures are loosening in major cities, rollbacks are far from uniform. Authorities aren’t saying how long the new measures will last and whether they will revert to strict lockdowns after the inevitable rise in infections. 2023 RISK REPORT | 30 Lockdowns in Major Chinese Cities, 2022 March April May June July Aug. Sep. Oct. Nov. 0 14 12 10 8 6 4 2 Number of Cities Month Production Stoppages Across China Jan March April May June July Sep. Oct. Nov. 0 250 200 100 50 Feb. Aug. 150 Number of Stoppages Month 2021 2022 everstream.ai JANUARY 2023 2023 RISK REPORT | 32 everstream.ai Many chip-making companies decided to move out of China during the height of the COVID-19 pandemic and the chip shortages of 2020–2021. Because it takes about three years to build up a semiconductor chip plant, diversifying away from China will become evident in 2024 as those new plants come online. If you don’t have a China diversification strategy, build it into your 2023 plan. If you already have one, expedite it. New Semiconductor Plan Investments 10,000 20,000 30,000 40,000 50,000 60,000 70,000 USD in Millions 80,000 90,000 2024 0 2023 2022 2021 China Taiwan Rest of the World READ ALL ABOUT IT Apple supplier Foxconn’s multiple problems in 2022 JANUARY 2023 2023 RISK REPORT | 34 Methodology Everstream’s proprietary risk scoring model incorporates historic, present, and future risk across more than 30 major categories. Using human and artificial intelligence, we predict overall risk exposure, probability, severity, and relevance for our individual clients and end users. Every day Everstream identifies relevant events that help our clients avoid disruption, including these from 2022. Industrial fires at our clients’ suppliers and their suppliers Production stoppages in our clients’ sub-tier network Factory strikes at our clients’ manufacturing and automotive suppliers and their suppliers Insolvencies in our clients’ sub-tier network Port-related incidents at the top 25 container ports Airport-related incidents at the top 25 airports for cargo shipments Storm, flood, and wildfire incidents affecting client locations or shipments Force majeures at petrochemical suppliers in our clients’ sub-tier network 7,750 3,950 2,450 3,000 960 300 1500 200 everstream.ai 2023 RISK REPORT | 36 JANUARY 2023 everstream.ai Learn more at everstream.ai About Everstream Analytics Everstream Analytics’ risk scores and predictive insights set the world’s supply chain standard, helping global companies turn supply chains into business-changing assets. Removing the traditional blinders of one-dimensional data, we offer more complete information, sharper analysis, and accurate predictions to help companies get in front of what’s ahead. If you’re serious about building a better supply chain, Everstream will show you how to get there. JANUARY 2023 2023 RISK REPORT | 00 Setting the world’s supply chain standard Get in touch: ©2023 Everstream Analytics. Website: everstream.ai | Phone: +1 (800) 261 7947 | Email: info@everstream.ai