Supply chains around the world continue to be impacted by pandemic, war, geopolitics, and now inflation. What do these forces have to do with engineering? Plenty. The materials, supplies, equipment, and services that engineers depend upon are not sourced in a vacuum—they flow from around the world and are frequently subject to shifting market and regulatory forces and more.
Design News asked Matthew Bey, senior global analyst for RANE, a risk intelligence company, about the current supply chain risks that could impact engineering projects in 2023. Around this time each year, RANE shares the key global trends and constraints that could impact the year ahead.
What risks are there to engineering material supply chains around the world, and what is driving these risks? Are there any particular materials of concern that could be difficult for engineers to procure?
Bey: There are a number of risks to engineering material supply chains around the world as natural gas and oil prices remain at high levels. In Europe, the decline in competitiveness of European industry vis-a-vis Asian and North American competitors is likely going to be permanent, exposing companies that have supply chains dependent on Europe to disruption and operational changes as European firms reduce production and, in some energy-intensive industries, shut down. China’s zero COVID-19 policy will also create significant risk because protests seen in late 2022 may only be the start of more periodic protests against China’s lockdown measures even though China is relaxing aspects of its zero COVID-19 policy. The country’s relatively low vaccination rate and lack of mRNA vaccines makes it exposed to a potential rapid rise in cases in 2023 that could result in more frequent lockdowns that disrupt movement of industrial goods in and out of China. In terms of materials of concern, those that are energy- and processing-intensive (such as many metals) and use natural gas or oil as a feedstock (such as plastics) are more likely to be more prone to disruptions.
Do concerns about climate change and/or any pending regulations present any risks to the engineering and manufacturing communities?
Bey: Climate change and energy transition related policies are going to have a significant impact on the engineering and manufacturing industry as Western governments, as well as corporate shareholders, put more pressure on companies to reduce emissions. In the United States, upcoming climate disclosure requirements by the SEC will place more onus on SEC-regulated firms to be more transparent and specific about emissions reductions targets. It will also put more pressure on financial institutions in the same vein that will affect engineering and manufacturing industries’ access to finance and even private companies emissions policies to come under scrutiny as financial institutions look to reduce their carbon footprint. In the European Union, the EU’s upcoming carbon border adjustment mechanism will increase trade barriers to manufactured and industrial goods produced outside the EU in countries with limited emissions requirements and will likely eventually result in trade wars.
What threats do original equipment manufacturers face around the world?
Bey: For high-technology manufacturers, the United States’ export controls on Chinese entities and Chinese sectors are going to be a growing concern as Washington looks to restrict China’s access to high-end technology. While Washington has focused much of its attention on the semiconductor industry, other high-technology sectors (such as biotechnology, green technologies, advanced materials, etc.) could all come under scrutiny in the coming years. The global economic slowdown combined with continued high energy prices in 2023 also presents the risk of more social and political unrest that cause disruptions to supply chains, and in some extreme cases, political turnover (as seen in Pakistan and Sri Lanka in 2022). Finally, Russia’s sustained use of cyberattacks in Western Europe and the willingness by Russian state threat actors to use ransomware as a tactic may result in periodic energy disruptions or direct cyber risk for companies that are active in Europe, particularly in Eastern and Central European countries that have a more hawkish stance against Russia over the Ukraine war (such as Poland and the Baltic states).
Does the rise of Industry 4.0, automation, robotics, and artificial intelligence pose any risks to engineering and manufacturing communities?
Bey: The rise of Industry 4.0, automation, robotics, and AI poses a number of challenges for engineering and manufacturing industries. The increasing reliance on digital technologies for manufacturing further exposes companies to cyber risk by threat actors that are willing to carry out disruptive or destructive cyberattacks (i.e., Russian, Iranian, and North Korean hackers). As seen with the 2021 Colonial Pipeline hack, even attacks targeting information technology systems can have an indirect impact on operational technology systems due to OT systems often being reliant on IT systems for some processes (such as billing). Automation and Industry 4.0 also push more of the risk towards the cloud when third-party services are used, opening up third-party and software supply chain hack risks—particularly as threat actors are increasingly carrying out supply chain hacks.
Do inflation and rising interest rates pose any risks to the engineering and manufacturing communities?
Bey: High inflation and rising interest rates will continue to lead to a global economic slowdown where many engineering and manufacturing companies are facing both declines in demand but still high energy prices that affect their bottom lines. Beyond the financial risks that inflation and rising interest rates pose, the risk of social unrest and disruptions in supply chains over labor and transportation strikes will also be higher as countries' citizens deal with the economic impact of inflation on their livelihoods and workers' demand higher wage increases due to higher inflation. Companies, however, in many cases will not be in a financial position to give into those high demands, creating risks of labor disputes.
Are there any other risks impacting the engineering and manufacturing communities?
Bey: In 2023 the main risks will be economic risks (i.e., inflation, high energy prices, economic slowdown), social unrest (i.e., protests in developing and middle-income countries), geopolitical risks (i.e., U.S.-China tech restrictions, climate change/energy transition-related risks, Ukraine war, U.S.-Iran tension), and cyber risks (i.e., financially motivated hacking, nation-state threat actors).
Are there any markets that are most vulnerable to any of these risks? (Automotive, consumer electronics, medical, food/agriculture, energy, or others?)
Bey: Virtually all major industries will be affected by each of these risks in some fashion, but those that are most dependent on complex and deep cross-border supply chains (i.e., electronics, automotive, etc.) and those that are energy-intensive (i.e., metals and agricultural) are the most exposed.
How should engineers and manufacturers protect themselves against these risks in 2023?
Bey: The types of risk companies will face in 2023 will be highly varied, with different types of threats. Each of these threats requires different risk mitigation strategies and constant monitoring. Companies need to be proactive in evaluating how each of these major risks affects their specific business lines and develop mitigation strategies tailored to their specific supply chains and exposures to different geographic areas, supply chains, and energy supplies.