Week 1 September 2024
Geopolitical Risks: Chip-making equipment squabble
The Dutch government announced broader restrictions on exports of semiconductor-making machines produced by ASML. The Netherlands is set to match U.S. export restrictions to China. ASML said the updated license requirement will apply to its TWINSCAN NXT:1970i and 1980i DUV (deep ultraviolet) immersion lithography systems, which print the tiny elements of a microchip. Dutch export licenses already existed for other types of DUV systems as well as its extreme ultraviolet (EUV) lithography machines, which are used to make more advanced semiconductors.
In the meantime, China has threatened to Cut Off ASML in response to new U.S. export restrictions. ASML CEO Christophe Fouquet, believes Washington’s push to stop the company from selling top chip making equipment to China has become more “economically motivated” over time.
China also warned Japan of retaliation over potential new chip curbs that could impact Chinese tech companies. The warning comes as Japan considers tightening exp
ort controls on semiconductor technology.
Vertaeon View:
There are impacts to both China & ASML: On one hand, China’s advances in chips will possibly be restricted with these export controls. On the other hand, it can create a major revenue impact for ASML and other equipment makers considering China’s $7 billion worth of equipment purchases in 2023. Reportedly, China accounted for 49% of ASML’s net system sales in Q2 of 2024.
Macroeconomic Risks: Contraction bells for Manufacturing
Germany’s leading trade group has issued a warning about the country’s export sector, citing concerns about a looming recession. The group highlighted declining demand for German goods in key international markets. A prolonged economic downturn could have severe consequences for Germany’s export driven economy.
U.S. manufacturing activity has contracted for the fifth straight month, according to a new report from Institute for Supply Management (ISM). The decline is attributed to weakening demand and ongoing supply chain issues. Economists are concerned that the prolonged slump could lead to job losses in the sector. The manufacturing gauge edged up 0.4 point to 47.2, data out Tuesday showed. A reading below 50 indicates contraction.
Vertaeon View: Impact on manufacturing sectors in the US and Europe; stress on small/medium suppliers and customers; potential interest rate cuts
Climate Risks: Typhoon and extreme heat in Asia
Super Typhoon Yagi made landfall in China’s Hainan province, bringing torrential rain and strong winds. The typhoon caused widespread damage, including flooding and power outages, as authorities worked to evacuate residents. China’s weather bureau issued warnings for continued heavy rainfall in affected areas.
Japan Swelters Through Hottest Summer While Parts of China Log Warmest August on Record – Japan has recorded its hottest summer on record after a sweltering three months marked by thousands of instances of “extreme heat,” with meteorologists warning that unseasonably high temperatures will continue through the autumn.
Vertaeon View: It is rare to make landfall in Hainan and first since 2014. Impacted not only people, but closed bridges and key financial centers such as HongKong. Are companies prepared for more infrequent events? How about the local offices/sites/supply chains? Here at Vertaeon, we are tracking historic data as well as changes in recent years for several climate and disaster risks.
What were the supply chain impacts? The shipment delays were estimated to be 6-30 days with anticipated decrease in port calls such as Hainan Island – 52.5%, Macau – 49%, Hong Kong – 47%, Guangxi – 42.5% and Guangdong – 34%. Guangxi and Guangdong are important for the automobile industry and electric appliances manufacturing. Over three million vehicle units are made every year by local and international manufacturers such as Volkswagen, Nissan, Toyota, and Audi.
Learning curve: Japan’s 2011 tsunami developed a long-term impact for the regional and global automotive value chain. This also prompted a series of reliance actions. There is potential for benchmarking for other events in Japan (drought as an example) and other regions (for typhoons).
Week 2 September 2024
Climate Risks:
Two earthquakes hit Southern California and Baja California on Friday, 6th of September. The United States Geological Survey (USGS) reports a 3.1 magnitude earthquake struck near Ensenada, Baja California, Mexico, Friday afternoon, while a 2.4 magnitude earthquake struck just off the coast of Del Mar, California, Friday morning. Since the start of 2024, the region has recorded 13 sequences, with quakes of magnitude 4.0 and above, departing from the last two decades of relatively quiet periods.
Vertaeon View: Even without significant damage, earthquake prone areas like Southern California have a real and lasting impact for people and industries alike by fear of the “big one” inevitably coming. This can directly translate into higher cost to hire new employees, costly delivery delays and higher cost to insure buildings for instance. It is vital for companies to have business continuity plans in place and to (i) review contracts for ‘force majeure’ provisions, (ii) anticipate and include potential delivery delays in contracts, (iii) plan for additional inventory locations, (iv) ensure adequate insurance coverage and (v) monitor at the sub-tier supply chain level for critical sourcing and
Geopolitical Risks: Tariffs locked in
The US locked in tariff hikes on Chinese imports to boost protections for strategic industrie. The U.S. Trade Representative’s(USTR) office said that many of the tariffs, including a 100% duty on Chinese EVs, 50% on solar cells and 25% on steel, aluminum, EV batteries and key minerals, would take effect on Sept. 27. The 50% duty on Chinese semiconductors, now including two new categories – silicon wafers and polysilicon used in solar panels – is due to start in 2025.
Vertaeon View: These measures on specific products can preserve domestic competitiveness in selected strategic economic sectors. However, broad tariff hikes can lead to some geopolitical consequences. This has the potential to weaken the US-China interdependence and strengthen Chinese trade relations with other countries such as Brazil, Russia, Australia and South Africa just to name a few. A second major short-term impact could be for American businesses and consumers – so far $221 billion, according toInformation Technology Industries Council.
Macroeconomic Risks: Inflation and Trade Decline in Major Economies
German inflation has fallen to its lowest level in more than three years, providing some relief to consumers. This decline is largely driven by lower energy prices and weakened consumer demand. Economists are cautiously optimistic that this trend could persist in the coming months. Core inflation, which excludes volatile food and energy prices, slowed slightly to 2.8% in August from 2.9% the previous month. In August, energy prices in Germany fell by 5.1% compared to the same month last year.
China’s trade data for August showed a sharp decline in both exports and imports, signaling continued weakness in the country’s economy. Exports fell by 8.8% while imports dropped by 7.3%, reflecting slowing global demand and domestic challenges. The trade slump is raising concerns about China’s economic outlook. Exports grew by 8.7% in U.S. dollar terms in August from a year ago, while imports rose by just 0.5%. The volume of China’s rare earths exports fell by 1% in August from a year ago, while imports declined by 12%.
Vertaeon View: Lower inflation merely indicates a slowdown in the rate of price increases, not a reduction in prices, and is not necessarily positive news. This trend, following the post-COVID inflation surge, signals an economic slowdown, declining demand, and may be a precursor to an upcoming recession. As a result, forecasts and projections will need to be revised for 2025, with regional variations. Vertaeon’s risk tools can provide the insights needed to navigate these uncertain times.
Technological Risk: China advances in semiconductor equipment research
A newly revealed patent from Chinese lithography systems maker Shanghai Micro 
Electronics Equipment (SMEE) shows how domestic firms could progress in the local advanced lithography tools market despite US sanctions. The patent shows how SMEE is progressing in EUV lithography. Despite years of efforts, SMEE remains behind ASML in reliably mass producing lithography gear that can be used for processes at the 28-nanometer level and below. (In May, without the assistance for extreme ultraviolet (EUV) lithography machines manufactured by ASML, China’s largest foundry, SMIC, is rumored to produce 5 nm chips for Huawei this year. However, ASML’s CEO has denied the possibility that China would be able to replicate EUV technology.)
Vertaeon View: China’s progress with SMEE’s EUV patent marks a key step in reducing reliance on foreign chip-making tech despite U.S. sanctions. This advancement could disrupt global semiconductor supply chains, creating both risks and opportunities. Vertaeon’s risk tools can help businesses assess the potential impact on their supply chains and market strategies amid these shifting dynamics.
Vertaeon’s risk platforms have been tracking multiple disasters and other risks mentioned above for the last three years. Contact Us for more detailed analysis.
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