Emerging Risks

Geopolitics

Frquent Earthquakes

Adopting Generative AI

Risk Description

In recent years, the escalation of the US-China trade and technology conflict has posed long-term structural challenges to Taiwan's export-oriented chemical industry. Risks include expanded export controls, increased supply chain relocation pressures, and dependencies on key technologies and raw materials from specific countries, creating significant uncertainties for strategic planning and operational execution.

Nan Pao's main production sites are located in southwestern Taiwan, a region with frequent seismic activity. Major earthquake events could not only cause structural damage to facilities and casualties but also lead to large-scale equipment failures, power and water outages, and raw material supply disruptions. Insufficient preventive and response measures would severely challenge operational continuity and corporate resilience.

• Generative AI, a technology capable of generating human-like text, images, and other media, has gained traction in recent years. While it offers potential benefits in terms of efficiency, it also poses several risks:
• Inaccurate Output: Generative AI models trained on biased or inaccurate data can produce misleading or harmful content, leading to incorrect business decisions and reputational damage.
• Data Security and Privacy: The development and deployment of generative AI models require large amounts of data. Without robust data security measures, there is a risk of data breaches and model exploitation.

Potential Business Impact

Some of Nan Pao's products (e.g., electronic chemicals and high-performance adhesives) rely on exports to the US and Chinese markets, as well as raw material supplies from China. If the US further expands export restrictions or China restricts imports, it could lead to reduced orders and higher costs. Additionally, international brand customers shifting to Southeast Asian procurement could create order diversion pressures, affecting existing production line utilization and regional layout benefits. Technology licensing and upgrade plans may also be affected by trade policy dynamics.

A major earthquake could halt operations at key factories, including water, power, and natural gas supply interruptions, and damage to production equipment. Raw material supply and logistics could also be disrupted due to infrastructure damage, preventing on-time delivery and impacting customer satisfaction and brand reputation. In the long term, the absence of diversified production planning could result in customer attrition and significant

revenue fluctuations.

• Misinformation: Employees who rely on generative AI for information may be misled by inaccurate or false outputs, leading to operational errors.
• Unauthorized Use: Unauthorized use of generative AI tools by employees can expose the company to legal and reputational risks, such as the creation of copyrighted content without proper licensing.

Mitigation Strategies

To address these risks, Nan Pao continues to diversify its markets and supply chains, strengthening sales and production sites in Southeast Asia, India, and the Middle East. The company is also establishing a compliance system for US export regulations to mitigate potential legal and financial risks. Medium- to long-term strategies include introducing digital supply chain risk prediction tools, enhancing in-house R&D capabilities, developing high-value- added green products, and leveraging international strategic alliances to overcome licensing barriers, thereby improving overall risk resilience and global competitiveness.

Nan Pao has conducted earthquake scenario simulations and established various prevention and response measures, including high-capacity water storage systems and emergency power generation equipment, dual-fuel (natural gas and diesel) boilers, and strengthened safety stocks of raw materials and finished products. Additionally, the company is implementing overseas subsidiary production lines and co-production plans to diversify operational risks. An emergency response center has been established, with cross-departmental drills to ensure rapid response to sudden disasters.

• Cybersecurity: Strengthen cybersecurity measures, including data protection and privacy controls. Conduct regular social engineering and data breach response drills.
• Generative AI Governance: Establish guidelines for the use of generative AI, including data quality checks and risk assessments for specific applications.