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BW Businessworld

Green Costs Go Global

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As a succession of crises break out on three continents, extreme weather events have added a new challenge to the world economy. By disrupting the tightly woven supply chain that is the backbone of world commerce — witness the flooded manufacturing plants in Thailand choking off supply of hard disks to the world — natural disasters have caused heavy losses to global corporations. Over the medium term, austerity measures and painful reforms could help economic recovery, but extreme weather conditions seem destined to become the new normal.

Evidence is mounting that increasingly frequent, though wholly unpredictable, typhoons, floods and hurricanes have disrupted industrial production in far-flung locations, with significant downstream consequences for the world's largest companies.  So far, this has been par for the course and risk managers have been able to adapt by pricing in such costs and short-term replacement arrangements. But the disruption to the global supply chain caused by last month's Biblical floods in Thailand have once again brought this issue to the fore.

From the supply of hard disks for computers to automobile parts and electronic assembly, Thailand has quietly emerged as a key player in the production and distribution of automobile and consumer electronics of global brands. Suffering sizable losses — some companies had to employ scuba divers to retrieve production moulds and machineries from under meters of muddy water — managers have been criticised for not calculating the risk of flooding  in the industrial zones set up by the government.  Hindsight is of course 20-20 but once the immediate crisis is over, lessons learnt are quickly forgotten. As things get back on track, the relatively high costs of alternatives often dissuade managers from making fundamental changes. But the situation this time around require a serious re-think about long-distance supply chains.

A leaked early draft of a UN report states what many climate scientists have been warning for some time: the extreme weather events that have been occurring in recent years are part of a long-term trend resulting from man-made climate change. The report predicts increased frequency or intensity of all manner of catastrophes, including heat waves, wildfires, floods and cyclones. Climate scientists have noted that the global surface temperature has increased by 0.76 degrees Celsius since fossil fuel-run industrial revolution started producing greenhouse gases. Warming trends have caused massive flooding all over the world. Tropics with naturally warmer weather face particular risks: the warmer the air, the greater its ability to retain moisture and produce heavy rainfall, as the recent examples in the Indian subcontinent, Thailand and the Philippines have shown.

The misfortunes that have befallen labour-intensive manufacturers in parts of, for example, Southeast Asia, might strengthen calls to reduce the length of the supply chain and consolidate production and assembly closer to their main markets.  Rising wages in China and growing fuel costs have already led some US companies shift production from China to Mexico and South America, and German and French firms have moved production to Eastern Europe.

If nothing else, the UN report seems to make clear that the consequences of man-made climate changes on business are no longer a theoretical matter. Indeed, the Corporate Leaders Network for Climate Action, created by several hundred top corporations in 2010 has called on the United Nations Framework Convention on Climate Change meeting in Durban to impose a carbon tax and curbs on green house gas emissions to keep global warming under the limit of 2 degree Celsius.

This call for action by corporate titans is an ironic reversal. Some 20 per cent of GHG emissions are caused by the 2,500 largest global corporations, with far more coming from their tens of thousands of suppliers worldwide. The relative contribution of the global supply chain towards climate change is difficult to ascertain, but massive increase in transportation would surely have played a significant role. In 2005 exports from China, the supply chain capital of the world, was calculated to account for a third of China's GHG emission. The call of companies to adopt green policy is certainly a belated attempt to reverse the warming trend threatening global prosperity.

The author is director of publications at the Yale Center for the Study of Globalisation, and Editor of YaleGlobal Online


(This story was published in Businessworld Issue Dated 28-11-2011)