Peak Water: Risks embedded in Japanese supply chains
03 March 2012
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Cross-border production and trade by Japanese companies could increase vulnerability to water risk across Asia.
Supply chains are responsible for three-quarters of the water used by all 225 companies.
Water intensity varies among Food & Beverage, Personal & Household Goods and Automobiles & Parts companies.
If suppliers to Personal & Household Goods companies were to pay water prices that reflect water scarcity in Asia, water costs passed through the supply chain could equate to 84% of earnings on average.
Data on purchasing patterns can reveal which industries contribute most to water use in supply chains. For audio and video equipment manufacturers, water hot spots include suppliers of electronic components and packaging.
Water scarcity costs could equate to at least 10% of earnings for 32 out of 56 Asian companies analysed.
Supply chain water risk assessments can be used to secure supplies and stabilise input costs.
Water scarcity and flooding can play havoc with global supply chains. The financial risks were brought home to more than 400 large manufacturers in 2011, when the worst floods in Thailand in almost 70 years disrupted supplies. Thailand is one of the world’s largest producers of automobile and computer components, and shortages of key parts cut production at several Japanese vehicle manufacturers and electronics firms.Japanese companies were among multinationals hit hardest,reflecting a shift in their manufacturing to suppliers and subsidiaries in Thailand.
Last year’s Great East Japan Earthquake has accelerated the trend of many Japanese companies relocating production to other Asian countries in order to cut costs and benefit from high-growth markets.More than half of affiliates controlled by Japanese companies are located in Asia,and rising imports now outweigh exports in Japan.
Why did KPMG and Trucost carry out the research?
Many companies in the Nikkei 225 are likely to be exposed to water-related financial risk through their supply chains. Understanding which suppliers are most exposed to water shortages and floods is important in order to secure supplies and stabilise input costs. Infrastructure and contracts that lock in high levels of water use in areas of water stress could face higher-than-forecast costs, lowering future cash flows and earnings.
Japan’s environmental reporting guidelines for businessand initiatives such as the CEO Water Mandate,CERES Aqua Gaugeand the World Business Council for Sustainable Development Global Water Tool 2011all encourage companies to collect and monitor data on water use and discharge. Companies need to understand risks to water resources that their businesses depend on. Although the timing and exact location of water risks can be uncertain, an understanding of the likelihood of water scarcity and flooding can be used to make operations and supply chains more resilient.
KPMG and Trucost are working in partnership to provide companies with the data and intelligence to make business sense of environmental risks and opportunities.