China Manufacturing Tops 2023 Supply Chain Risk Factors

Date: Friday, April 7, 2023
Source: Sourcing Journal

If you’re currently importing goods from China, or are importing apparel stitched from materials made in the country, expect a few bumps in the road this year.

In the year after the supply chain was snarled by everything from fluctuating demand and container prices to factory closures and clogged ports—all stemming from the fallout from the Covid-19 pandemic—a report from Everstream Analytics named Chinese manufacturing as the biggest potential disruptor to the current supply chain.

The global supply chain insights and risk analytics company said in its annual Risk Report that companies should expect myriad delays and order cancellations in 2023 if their suppliers have vendors in China. Everstream gave China manufacturing a 90 percent “risk score,” the highest number given across the five major risks outlined.

Major areas of concern also include manufacturing bottlenecks in Europe, potential ESG violations by suppliers, heightened risks of cyberattacks on suppliers and halted production as a result of a supplier going bankrupt.

“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,” the Everstream report said.

Everstream tracked more than 85 lockdowns in 2022 across China’s largest industrial cities, with 18 in November alone. In kind, Chinese manufacturing saw a corresponding rise in production disruption for every month except September.

In the report, the risk analytics firm cited that the Chinese authorities still haven’t provided a clear roadmap for exiting the pandemic, noting that “China’s rapidly changing Covid-19 policies create ongoing headaches for manufacturers as companies and workers struggle to adapt to shifting local policies.”

Everstream’s proprietary risk scoring model incorporates historic, present and future risk across more than 30 major categories. Using human and artificial intelligence, the company predicts overall risk exposure, probability, severity and relevance for clients and end users to help them avoid disruption.

For example, Everstream’s data has identified 960 port-related incidents at the top 25 container ports, 300 airport-related incidents at the top 25 airports for cargo shipments and 2,450 industrial fires at its clients’ suppliers (and their suppliers).

Europe’s manufacturing snags, sub-tier ESG violations persist

The second risk outlined in Everstream’s Risk Report relates to energy manufacturing bottlenecks in Europe, which has been heavily impacted by the Russia-Ukraine war due to lower material availability and higher costs.

Chemicals and metals industries have suffered the most disruptions, the report said, with additional disruptions to textiles, food and beverage, glass, and paper. Of the manufacturers negatively impacted in 2022, 14.3 percent were textiles companies, the second-most behind steel manufacturers who had 40 percent of the disruptions.

While ESG is becoming a larger cornerstone among public and private businesses alike, they will also likely be prone to more slipups that potentially violate forced labor legislation such as the U.S.’s Uyghur Forced Labor Protection Act (UFLPA) and Germany’s impending Supply Chain Due Diligence Act.

Brands will to have to do plenty of their own research, even outside the government’s purview, to ensure their suppliers stay ahead of these problems. 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 the Xinjiang province.

Clothing and apparel has the second-largest link to Xinjiang-made materials across industries at 17.7 percent of total supplier ties to the region. The sector is a hair short of the leader—industrial electronics—which has 18.9 percent of supplier linkage to forced labor.

“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 surveyed your suppliers directly about ESG issues—they likely don’t have enough visibility to know the answers,” the report said. “But the public doesn’t accept ignorance as an excuse, so dig in now to proactively uncover problematic relationships.”

Russia-Ukraine war magnifies cybersecurity risks

Although supply chains have largely focused on many of the recurring problem areas related to labor, freight, delivery times and material availability, one risk often goes under the radar—cybersecurity.

The risks compound as more businesses aim to digitize their supply chain and shift more of their processes onto third-party cloud software systems. Additionally, the war in Ukraine also puts companies more at risk to cybercrimes as Russia’s law enforcement is unlikely to cooperate with an investigation, the report noted.

While electronics was the sector most-often hit by cyberattacks in 2022, representing 21.4 percent of hacker targets, manufacturing came in second at 14.9 percent, according to Everstream. Logistics had the third-largest percentage of attacks at 12.6 percent.

Unfortunately for manufacturers, they deal with the most disruptions of any sector when they experience a cyberattack. More than 36 percent of cyberattacks that impact manufacturers cause some type of disruption, surpassing the 34 percent of hacks interrupting automotive companies.

One such incident last February cost global logistics firm Expeditors International approximately $60 million as it raced to recover from a cyberattack that slowed its ability to move shipments from ports and provide additional services to customers.

Hanesbrands fell victim to a cyberattack of its own in 2022, with the company saying the event temporarily affected its global supply chain network and limited its ability to fulfill customer orders for approximately three weeks.

Bankruptcies could halt supplier production

The Risk Report identified one final risk in 2023, pointing out that insolvencies are likely to rise in 2023 amid macroeconomic pressures—which could throw a major wrench into production levels. While major retail bankruptcies are always getting the attention in the headlines, Everstream pointed out that smaller businesses, particularly in areas like manufacturing, electronics and logistics, hold the highest risk.

Across 1,400 insolvencies that Everstream tracked across the U.S., China and Germany, 38.3 percent of these bankruptcies occur in the manufacturing space.

“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,” the report said. “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.”

Nearly 50 percent of the total manufacturing insolvencies take place in China, Everstream said, while almost 40 percent occur in Germany. Of the three countries analyzed, fewer than 10 percent transpire in the U.S.

Everstream reels in $50 million in funding

On Tuesday, the predictive analytics company unveiled that it has secured a $50 million Series B funding round co-led by Morgan Stanley Investment Management as part of its 1GT private equity platform and StepStone Group, with participation from existing investor Columbia Capital.

The new capital will be allocated to product development, hiring and customer service initiatives, and aims to help the company innovate in both operational risk and ESG performance to further enhance supply chain sustainability for its global brand clients.

“2023 has already been momentous for Everstream, and we’re not even through the first half. This funding comes when we are doubling down on our product innovation and executing rapidly and decisively to advance supply chain sustainability, which is more critical now than ever,” said Julie Gerdeman, CEO of Everstream Analytics, in a statement. “I’m grateful to our customers, investors, partners and team for their trust and collaboration as we champion this modern-day supply chain revolution.”

Everstream’s funding round comes nearly a year after the supply chain technology raised $24 million in a Series A raise. To date, the company has raised $74 million.


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