Trucost News / 03 Apr 2012

Companies exposed to water risk through supply chains in Asia

KPMG and Trucost join forces to launch a special report on water risk exposure among Nikkei 225 Index companies.

KPMG and Trucost research finds that the growing dependence of Japanese companies on manufacturing in parts of Asia is increasing their exposure to water shortages. Findings that outsourcing to water-stressed countries can increase business risks from water scarcity have implications for companies globally.

Key findings:

  • Cross-border production and trade increases vulnerability to growing water risks across Asia that can limit production, disrupt supply chains, increase commodity price volatility, drive up manufacturing costs and lower future cash flows.
  • Suppliers are responsible for the majority of water use by companies in the Nikkei 225 Index. Many of these suppliers are likely to be based in parts of Asia that are exposed to growing water shortages.
  • Companies with suppliers in the region need to understand and address risks from supply chain exposure to water stress to secure supplies and stabilise input costs.

Water came to the fore of supply chain risk management for companies in industries such as Consumer Electronics and Automobiles & Parts after floods in Thailand disrupted supplies in 2011. Businesses also face growing financial risks from water stress, as changes in rainfall patterns, more frequent and severe droughts and growing competition for resources threaten to disrupt supply chains and increase manufacturing costs.

Trucost’s analysis of companies in the Nikkei 225 Index found that supply chains account for more than three-quarters of a total of 79 billion cubic metres (m3) of water used in manufacturing processes. This is more than the total amount of water used by industry and agriculture in Japan, because most of the water is consumed during the production of goods imported from other countries in Asia Pacific.

For two-thirds of companies in the Index, more water is used in supply chains than in operations. Suppliers in the first tier of their supply chains, as well as those further upstream, are responsible for 60 billion m3 of water use. Much of this water is sourced from locations such as China and Singapore, which face growing demand for declining water resources.

Of the sectors with the highest levels of water use, the share consumed by suppliers is greatest for Food & Beverage, Personal & Household Goods and Automobiles & Parts companies. They could be affected by pressure on water resources through water pricing or scarcity driving up commodities costs.

Water intensity varies among Food & Beverage, Personal & Household Goods and Automobiles & Parts companies, indicating varied levels of exposure to water risk. Water use relative to revenue generated varies by as much as 18 times among Food Producers. The water intensity of Personal Goods companies ranges from 76 to 1,206 m3 per ¥ mn in revenue (7,461-119,077 m3/US$ mn).

Trucost has calculated regional water values, taking account of local levels of water scarcity, to identify exposure to water risk across companies and supply chains. If 19 Personal & Household Goods companies in the Nikkei 225 Index were to pay the average water scarcity costs** in 16 Asian countries for each cubic metre of water used in supply chains, input costs could rise by ¥882 bn (US$9.5 billion). This equates to 84% of their earnings, on average.

Companies can start to address these risks by mapping water-intensive parts of their supply chains. Trucost data show that by engaging with first-tier suppliers, Personal & Household Goods companies could measure and reduce risks from more than half (55%) of their total water use. Personal Goods companies are particularly exposed to water risks through greater volatility in prices for commodities such as cotton, sourced from countries including China.

Data on purchasing patterns can reveal which industries contribute most to water use in supply chains. Water “hot spots” in the Personal & Household Goods sector include the Farming & Fishing, Specialty Chemicals and Steel sectors. Trucost analysed exposure to water risk among 56 Asian companies in these sectors. If they were to pay tariffs that reflect water scarcity in the countries in which they’re listed, costs for water used in operations could amount to ¥512 billion (US$6.3 billion). Water scarcity costs could equate to more than 10% of earnings for 29 Specialty Chemicals and Steel companies. Most are based in the Republic of Korea or Taiwan, which are exposed to water stress.

Understanding which suppliers use the most water in areas of water scarcity is crucial to managing supply chain water risk and protecting water sources. Water stress could be most material to companies that have water-intensive suppliers which operate in areas with growing competition for resources.

Companies are at the starting blocks of understanding financial risks and opportunities from water-related challenges in operations and supply chains. Companies that assess water risks will be well placed to strengthen water management strategies, secure supplies and stabilise input costs.

KPMG Director Kazuhiko Saito, co-author of the study, said: “Companies headquartered in countries where water is relatively plentiful, including Japan, have tended not to pay much attention to the impact of water scarcity on business operations. An increase in the rate of relocation and outsourcing of production abroad, particularly into water-stressed regions, however, could put companies in water-intensive sectors at greater risk. Companies are increasingly required to identify and respond to material water risks in supply chains.”

Trucost Research Editor Liesel van Ast, co-author of the study, said: “Companies will increasingly need to monitor data on the water dependence of their suppliers in order to understand risks to water resources that their operations and supply chains depend on. By understanding which suppliers are most exposed to water scarcity, companies can act to protect vulnerable water sources and reduce exposure to business disruption, operating restrictions and higher water tariffs. Companies can identify water hot spots and benchmark suppliers on water risk to prioritise areas for supply chain water management.”

Contact

sarah.wainwright@trucost.com

+44 (0)20 7160 9800

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