Asia Pacific (APAC) contributed more risk to the global economy through its supply chain than ever before in the first quarter of 2016, according to the latest CIPS Risk Index, powered by Dun & Bradstreet.
Global supply chain risk crept higher for the second consecutive quarter from 79.3 in Q4 2015 to 79.8 in Q1 2016, with Asia Pacific providing the largest risk contribution of any region. The importance of major exporters in Japan, China and Australia to global trade, make international supply chains particularly sensitive to any instability in the region. This quarter, APAC contributed more than a third of global supply chain risk, with Western Europe contributing 30%, and the Middle East and North Africa, providing just 9%.
This increase in supply chain risk this quarter comes from man-made causes as suppliers in New Zealand and Australia continue to struggle with persistently low commodity prices and the economic slowdown in China. The latter is causing acute ethical concerns for Australian and New Zealand businesses working with Chinese exporters. Chinese manufacturing and construction firms struggling for cash flow, are opting to withhold pay to their employees, resulting in an increasing number of labour disputes. With new evidence this quarter that the majority of supply chain managers lack the skills to detect the mistreatment of workers in their supply chain, it remains difficult to assess the scale of the problem.*
While man-made risks to supply chains have grown, natural disruptions have failed to have a major impact. Although milk and agricultural production have been hit as a result of the phenomenon, it appears to have reached its peak, with Australian producers expected to recover.
Furthermore, neither the 6.4-magnitude earthquake in Taiwan nor a 5.8 magnitude quake in Japan (the latter falling just outside the quarter’s end) have had a major impact on global supply chains. Building regulations designed to prevent widespread infrastructure damage after the catastrophic 1999 quake appear to have made supply chains in Taiwan far more resilient, although the collapse of the residential Weiguan Golden Dragon complex is a reminder that these regulations are not consistently observed. Taiwan’s electronics manufacturers have been able to swiftly resume production, using stock reserves to plug any gaps. TSMC, a major supplier for Apple’s iPhone, reported that only one percent of shipments would be affected by damage to its facilities, while other manufacturers including LCD panel producers and chipmakers have reported that their plants were able to shut down and restart without taking damage. In Japan, meanwhile, manufacturers were well prepared, having expanded their inventories and adopted multiple sourcing, to prevent a repeat of the widespread disruption experienced following the 2011 earthquake.