Will Extreme Weather Break Asia’s Supply Chains?

As of this month, heat is back at extreme levels across the globe. And if last year is anything to go by, that heat promises to bring with it wildly unpredictable weather, ranging from extreme storms and hurricanes to floods and droughts. With all this uncertainty looming, it is worth asking: Are companies prepared for the changing climate to disrupt their supply chains?

The short answer is: No.

In fact, there is growing concern that most global firms are actually underestimating the risks that extreme weather events pose to their supply chains. For instance, a recent research report by S&P global finds that most global firms overlook climate risks hidden in their supply chains. “A lot of research on physical climate risks focuses on direct risks to business operations from hurricanes, droughts, floods and wildfires,” Paul Munday, Director of Global Climate Adaptation and Resilience at S&P, told Reuters.

But considering most industries are dependent on a range of suppliers, often spread across the globe, that approach is just not enough. “What happens to an auto company when its parts supplier is hit by a hurricane?” Munday asks.

It’s a question worth pondering on when the absence of just one component or raw material can be enough to halt production. That’s a problem hurting the auto industry right now due to China’s rare earth blockade. A nearly 2000 kilogram car requires just half-a-kg of rare earths, and yet, the absence of those minerals has caused production delays, and even temporary shutdowns.

In comparison, the extent of damage that a flood or hurricane could cause can be far more phenomenal, threatening auto suppliers’ infrastructure, access to raw materials and availability of labour. And that threat becomes even bigger for companies with supply chains in Asia, which faces a disproportionate threat of climate change.

The region has warmed faster than the global average and is expected to see more than a two degree Celsius increase in average temperature by 2050. McKinsey warns that by 2040, some parts of Asia, including coastal areas of China, South Korea and Japan, could see three times more typhoons and as much as four times more flooding than today. At the same time, countries such as India and Bangladesh are at risk of lethal heatwaves “that exceed the survivability threshold for a human being.”

It is worth noting that all of those countries are major manufacturing hubs of the world. And while it might seem that 2040 and 2050 are still a few decades away, climate tragedies in these countries have already begun to affect supply chains. Take for example, floods last year in South Korea, which currently produces about 60% of the world’s memory chips. They drowned major production facilities and damaged logistics networks, slowing down memory chip production for weeks. Similarly, a typhoon in Vietnam and Thailand led to delays in shipments of electronics and components to Europe and North America as it damaged production facilities and brought ports to a halt. Unprecedented floods in China, India and Bangladesh, meanwhile, caused billions of dollars worth of economic damage.

These are only a handful of examples — and from just last year. If the occurrence of extreme weather events worsens — as predicted — it would impact every single industry in the world, making the inflation rates of today seem like small numbers compared to what might lie ahead.

Becoming climate resilient

While climate change is inevitable, navigating its impact doesn’t have to be as daunting in the coming years.

The primary task ahead for global businesses is to carry out extensive risk assessment and improve their supply chain resilience, insurers and supply chain experts say. This would include everything from mapping out supply chains and the risks they face to identifying how suppliers can make their infrastructure and logistics climate resilient. Using key advanced technologies, such as AI, can particularly help companies identify vulnerabilities in their supply chains.

Diversifying operations will also be key, particularly for critical industries, such as the semiconductor sector which is currently concentrated in East Asia, particularly Taiwan and South Korea.

Companies will also need to focus on making their workforces climate resilient. They can do so by helping employees gain climate and sustainability skills, while also committing to support employees hit by climate-related disasters.

And it will also become increasingly important for industries to become pro-climate in their operations, such as by investing in renewable energy or by investing in industries to counter their emissions. A key area could be the carbon removals industry, which while being crucial to removing carbon dioxide from the environment, currently faces a huge gap in investment.

Taking these steps and becoming climate resilient will be particularly important as investors are becoming increasingly concerned about the long-term health of the companies they invest in.

Most importantly, though, it would help companies ward off significant costs for themselves. HSBC estimates that climate-related risks in supply chains could cost as much as $162 billion. But mitigating those would need only $56 billion worth of investments.

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