Environmental Disasters Cause Economic Disasters

The November 5th catastrophic failure of a dam in Brazil has caused probably billions of Brazilian Reais (AU $1.94 B) in damages; ruined hundreds, if not thousands of lives, and may drag business partners of the dam’s managing company into litigation courts. The owner of the dam, Samarco Mineracao, may or may not be able to pay the costs associated with the disaster (in June 2015, it reported assets of AU $964 M and debt of AU $6.75 B). If it can’t, Brazil’s leading legal minds are indicating that the company’s corporate parents – Brazil-based Vale SA and Australia’s BHP Billiton – may be tapped to make up the difference, at a considerable cost to their shareholders.

Samarco is a limited liability, joint venture corporation shared between the two international conglomerates. So far, both parents are contending that Samarco is legally independent and therefore solely responsible for the disaster and its cleanup. The challenge is that the dam collapse is now considered one of Brazil’s worst environmental disasters ever, and the costs of cleaning it up are, as yet, undetermined.

Environmental Disasters Cause Untold Damage:

The environmental toll of the dam failure is horrific: millions of tons of contaminated water surged down the riverway, flooding farms, killing livestock and leaving a lethal slew of toxic sludge in its aftermath. It took more than three weeks before officials released test results that showed the high levels of toxins that had been discovered along the waterway.

The long-term impact of exposure to the chemical mix may have a life-long impact on local residents, and cause the costs of repairing the damage to rise even higher. And the legal responsibility of the failure remains a mystery, which is deepened by the fact that (according to Samarco) all of its environmental licenses were “absolutely up-to-date” when the structure came down, and its contingency plan (for a potential failure) was fully executed.

Dam Failure Offers A Head’s Up:

The disaster should be a flag to every international corporation that does business with foreign corporations and in foreign countries. Every supply chain has within it inherent risks of damage, loss, and disruption. Corporations that routinely seek out, identify and plan to mitigate the risks within their supply chains can prevent serious losses not if, but when disaster happens.

Because internationally-sited supply chain modules are exposed to a broad variety of disparate regulations and standards, and are dependent on their local communities for compliance and enforcement, intentional and strategic management of the high risks of supply chain disruption is even more critical. Unfortunately, many off-shore manufacturers fail to address the potential risks of supply chain disruptions caused by environmental and other disasters, let alone put in place operations to mitigate damages when those occur.

China’s Environmental Protection History Raises Concerns;

China, of course, presents a perplexing situation for every international business person engaging in commerce within its borders. Relatively low labor costs and an already established manufacturing chain of factories entice global producers to save money while not cutting product quality.

However, the sheer size of China’s manufacturing sector and its thousands of materials and supplies sources makes it virtually impossible for off-shore management to fully comprehend the scope of the true circumstances that exist within any one factory or manufacturing plant. Ferreting out potential risks of environmental catastrophes is especially critical in today’s ultra-competitive commercial world, where competitors exist around the globe and margins are razor thin at the best of times.

Despite the prevalence of risk, however, a 2014 study revealed that, of the 150 international executives surveyed:

* None used outside expertise in assessing international supply chain risks;

* 90% of them did not quantify risk when outsourcing supply chain production channels; and,

* 100% acknowledged that insurance was a good mitigation tool but did not have it on their priority list nor was it an aspect of their job description.

In my next post, I’ll flag a Chinese situation that should raise environmental disaster concerns, and offer some “best practices” as suggested by my years of experience and some recent studies. And, of course, I’m always willing to chat about all aspects of your supply chains, especially those that exist in South East Asia and China.

Links:

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[1] http://www.wsj.com/articles/vale-says-company-it-jointly-owns-is-legally-responsible-for-dam-breach-1447245510%20%20
[2] http://www.wsj.com/articles/brazil-to-file-5-3-bln-suit-against-samarco-owners-in-dam-collapse-1448656655%20
[3] http://globalsupplychaininstitute.utk.edu/publications/documents/Risk.pdf%20%20
[4] http://globalsupplychaininstitute.utk.edu/publications/documents/Risk.pdf%20
[5] https://vantagecompliance.com/
[6] https://vantagecompliance.com/contact/

You may also like to read some of my other blogs. They can be found here:

IMF ELEVATES CHINESE YUAN

Regional Variations Will Impact Rollout of China’s Two-Child Rule – Part 2

Two-Child Policy May Open New Economic Doors in China – Part 1

“Red Flag”: Reducing Risks in your China Supply Chain

Flexiblity of Chinese Import Suppliers Will Weather Changes in Global Manufacturing Sector

Communication and Relationships Smooth the Process of Importing From China

Protect Your Manufacturing Outcomes By Avoiding Product Delays and Failures

Reputable Chinese Suppliers Maintain China’s Industrial Reputation

China’s Economic Overhaul Will Improve Global Supply Chains