The Year Ahead: Key Themes for 2023

Macro Trends

China Covid Outbreak

The potential consequences of China's COVID-19 response could have far-reaching effects on global stability in the coming year. As millions of workers return to rural areas that are ill-prepared to handle outbreaks, we have already seen significant disruptions to various industries, including manufacturing, warehousing, and transportation. These disruptions have prompted companies such as Foxconn, Pegatron, Volvo, and Mercedes to sever ties with China and shift their operations to India with more to come.

• Covid outbreak throws Chinese factories and supply chains into chaos
• Tesla extends Shanghai plant shutdown amid COVID-19 surge
• Foxconn invests $500M in India business as Apple reconsiders China production

Auquan has been tracking this theme since March 2020, with 280+ unique developments collected in a single view for easy reference.

‌US-China Tensions

Tensions between US and China have risen over the past few years, with Taiwan being a flashpoint in their relationship. In October last year, the US imposed several export controls against Chinese-owned factories. In December, the US Commerce Department added 22 Chinese companies to a trade blacklist, including manufacturing & chip firms. China, on the other hand, has criticised the US sanctions and travel restrictions, with warnings of retaliation which could prevail this year.

• China threatens to tighten borders in retaliation to global Covid travel bans
• With US-China tensions rising over Taiwan, the global economy must brace for geopolitics trumping economics
• China blasts back at Biden’s vow to defend Taiwan from invasion

South Korea Truckers Strike

In May last year, Auquan caught on early to the first truckers strike in South Korea from a local Korean source, demanding freight rate hikes and other safety measures. South Korea's factory activity shrank for a sixth consecutive month in December. South Korean manufacturers were heavily affected, with five Korean steelmakers, including POSCO and Hyundai Steel failing to ship 721,000 tonnes of products due to the June strike, leading to an output loss of 1.15 trillion won. The sluggish industrial activity caused by the worker's national strikes is likely to extend SK's export drop into this year with significant disruptions to the auto and steel sector.  

• Cargo truckers to go on general strike next month to demand freight rate hikes (early local news source)
• South Korea December factory activity weakens on demand slump, trucker strike
• South Korean production and shipping disrupted as truckers strike for third day

Sector

Big Alcohol Social & Climate Risks

There is building scrutiny over excess water usage for many breweries, including Heineken, Constellation Brands and AB InBev, as they were recently exposed to excess water use in beer production in Northern Mexico, leaving a serious climate crisis due to the poor sanitation and threat to livelihoods. Brewers in Mexico have water rights which can last decades, allowing beer companies to keep draining water to make beer. In retaliation, the Mexican president has called for a halt in beer production following intensifying droughts, which could hamper operating margins due to relocation costs and proximity to the US-Mexico border for distribution.

• Big Alcohol's Water Footprint in Mexico: Beer Production Fuels Water, Climate Crisis
• Mexico’s president proposes ban on beer brewing as drought intensifies

‌Forced Labour in Retail

As cost inflation rises into 2023, retailers face conflicting positions between cheaper produce to alleviate squeezed margins and the ethical backlash for which a growing number of consumers are unwilling to compromise - meaning these social risks could start becoming more and more financially material. Just last week, U.S. lawmakers barred imports from three Western apparel suppliers companies likely tied to forced labour in South Korea. Among many other retailers, Auquan have exposed across supply chains:

• Adidas' poor labour conditions in Myanmar and Xinjiang factory (local source)
• Hellofresh employee abuse in Bjuv facility in Sweden
• Tesco labour abuse in Thailand
• Sacked Myanmar Workers Appeal to Adidas after Junta Breaks Factory Strike
• Further research supporting the effect of inflation in 2023
• U.S. Bars Imports From Three Companies, Citing Possible Use of Forced Labor

Auquan has been tracking this theme since May 2021, with 75+ unique developments collected in a single view for easy reference.

Single Stock

Hair Straightening Products Cancer Risk

A growing number of lawsuits for L'Oreal and Dabur surrounding cancer risk exposure from hair straightening products have followed a research study surfaced by Auquan in October. Last month, another lawsuit was filed against L'Oreal for their Dark and Lovely Product linked to Endometrial Cancer. Other major retailers, such as Unilever and Procter & Gamble, are exposed via their hair products to these evolving hair-relaxing cancer litigations, with potentially significant compensation payouts from these deep-pocket defendants and growing reputational strain in 2023.

• Dark & Lovely Hair Relaxer Caused Endometrial Cancer Diagnosis, Lawsuit Alleges
• Doctors and endometrial cancer researchers want more data on hair chemical
• Hair Relaxer Cancer Lawsuit
• Research Study: Use of Straighteners and Other Hair Products and Incident Uterine Cancer‌

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