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5 risk considerations in your automotive expansion and diversification journey: Physical damage, contractual, business interruption and supply chain, third-party liability, human capital

As Asia’s automotive companies diversify their supply chains, they face complex risks that can disrupt operations. Know the right solutions and safeguard your business.

02/08/2024

As Asia’s automotive companies expand and diversify their operations, they face interconnected risks that can disrupt operations.

Recent tariffs imposed by the United States and European Union are impacting Asia’s automotive sector by limiting potential market distribution in the West.1 In addition to tariffs, stiff competition among the region’s automakers, in particular electric vehicle (EV) manufacturers, are prompting investment and diversification into alternative markets such as Southeast Asia, from new factories to strategic partnerships with countries including Thailand and Indonesia.2

Build vs. Acquire

For automotive businesses that choose to grow their manufacturing capacity via acquisitions, transactional risks are one of the risks that necessitate warranty and indemnity coverage. If it involves building a new facility, risks in both the construction and operational phases will need to be considered. Effective risk management along the entire project lifecycle also involves an understanding of the stakeholders involved, their roles, and potential implications:

  • Contractors, Engineering, and Procurement (C): Involved in the construction and setup of new manufacturing facilities. For instance, an electric carmaker building a new production facility engages construction firms, equipment suppliers, engineering and professional consultants.
  • Operators (O): Oversees and manages the day-to-day operations of the manufacturing facilities including the supply chain.
  • Financiers (F): Financial institutions, private equity, government incentives or schemes that provide financial support for the projects.

Mitigating risks in both the construction and operational phases

Automotive businesses face five key risks in the construction and operational phases of new facilities: physical risks (e.g. fire, flood, heat, earthquake), contractual risks, business interruption and supply chain risks, third party liability, and risks related to human capital.

With Asia being the most disaster-hit region in the world in 20233,  , extreme weather events can cause considerable damage to manufacturing plants. In 2020, 20 automotive manufacturing facilities in Thailand4, which make up about 10% of the country’s total automobile parts production, were disrupted by floods.

For physical risks in the construction phase, all stakeholder groups (C, O, F) need to consider the impact of natural disasters on the progress of the facility’s construction and future operational considerations. Not only do owners need to ensure the new facility design complies with the minimum local regulations, but they must also account for more stringent international standards such as NFPA and FM Global. In the case of an emerging technology, it is advisable to align design review process with risk engineering to identify hazards that the design may pose to the property, environment, workers, and public. This will help assess the potential risks and Estimated Maximum Losses (EMLs) associated with the facility design and enable owners to make informed decisions.

Additionally, they must accurately quantify risks to ensure sufficient coverage by leveraging the physical risk modelling capabilities of a risk advisor, and subsequently obtaining right-sized insurance coverage. The potential for causing pollution or damage to the environment during construction works is generally elevated compared to the everyday running of a facility. The potential for a fuel spillage or for an escape of large volumes of water is increased and therefore so is the potential for a regulator or third-party claim for damages or a requirement for clean-up. Contractors pollution liability insurance can be used to insure against the eventuality of having an environmental liability for pollution, caused by a spill or leak or through the exacerbation of an existing land contamination situation.

In the operational phase, the latest Property Damage and Business Interruption (PDBI) claims data from Marsh Asia justifies the need to obtain adequate protection against physical risks: In the span of just one year from 2022 to 2023, the number of PDBI claims in Asia has increased by 18%. Regardless of sector, each business has unique dependencies, operating models, and characteristics — such as geographical location, aging public infrastructure/utilities — that can put it at risk of property damage and business interruption losses. 

With the increasing frequency and severity of natural disasters, traditional insurance may fall short in adequately protecting organisations from natural catastrophe (Nat Cat) related losses. Parametric insurance offers a complementary solution to fill the gaps left by PDBI coverage by linking coverage directly to predefined triggers, such as wind speed or rainfall levels, ensuring certainty and efficiency of payouts when specific conditions are met.

As the automotive industry continues to experience rapid growth and technological advancements, businesses venturing into the construction of modern manufacturing plants face a variety of contractual risks. 

Each project is unique, and the chosen delivery method inherently entails a range of insurable, partially insurable, and non-insurable risks that must be carefully evaluated throughout the project lifecycle especially when risk transfer via insurance alone may not offer optimal coverage. For automotive companies, effectively navigating these contractual complexities is paramount to achieve successful and efficient project completion. Moving into the operational phase, businesses must continue to review their contracts to ensure compliance of insurance obligation, risk allocations and indemnity provisions. 

Hence, it is vital to work together with experienced and specialised risk professionals, who can tailor effective solutions to manage contractor risks throughout the project lifecycle.

Given supply chain uncertainty, all stakeholder groups (C, O, F) should ensure that a construction project is adequately covered by Delay in Start-Up (DSU) insurance.

As they progress into the operational phase, automotive businesses should create a tailored business continuity plan (BCP) as part of their operational risk management approach, and regularly exercise and review the BCP (i.e. BI review) to ensure contingency processes can be effectively operationalised when a risk event occurs and to mitigate against business and supply chain interruption. The Red Sea crisis, for example, has had an immediate impact on the automotive industry, with Tesla and Volvo Car5 having to pause production due to a shortage of components in 2024. 

To ensure efficient recovery following a business interruption event (e.g. power failure, shipping delay), automotive businesses will also need the support of an experienced claims team. Marsh’s Forensic Accounting, Delay Analysts and Claim Services team can help businesses conduct business interruption reviews to accurately quantify losses to insurers to optimise claims outcomes. 

In addition, Marsh’s ‘Sentrisk’ uses advanced technologies such as supply chain mapping AI and geospatial satellite imaging to help organisations map their supply chains much more comprehensively, enabling organisations develop risk mitigation, transfer, and management strategies that more closely align to their business needs.

Automotive manufacturers face significant third-party liability risks in both the construction and operational phases. These risks range from general third-party liability at different stages of production and end-user liability. The development of technology and evolving regulations can make it challenging for businesses to secure the appropriate insurance protection. 

Third-party liability issues often arise during the operational phase. Owners and operators need adequate insurance coverage in the form of third-party liability insurance and product and recall liability insurance to ensure they are indemnified against legal liabilities and expenses relating to product recalls. A trusted risk advisor and insurance broker can help identify critical coverage gaps and implement an integrated approach to mitigating third-party liability risk with horizon scanning, analytical quantification of crises, and product recall management.

In the Philippines, unsafe working conditions was identified as the top 10 risks in the 2024 People Risk study, illustrating the need to ‘get the basics right’ in ensuring the safety of the workforce. First and foremost, contractors and operators must procure sufficient casualty insurance, personal safety and accident insurance during the construction phase, with a coverage limit that meets safety regulations. 

Additionally, when investing in new locations, it is also vital for the automotive industry to calibrate the right talent strategy across pay equity, skills availability and talent mobility.

According to Mercer’s Global Talent Trends survey, trust among employees in Asia towards their organisations continues to erode, with a decline of almost 20% from 2022 to 2024. With three in 10 planning to quit in the next 12 months, Asia’s employers face challenges with employee retention. Automotive companies should consider key actions such as fostering upskilling and reskilling, promoting pay equity and offering comprehensive preventive health benefits to rebuild trust and improve talent retention. 

Key success factors for automotive expansion and diversification: Checklist to consider

Navigating risks for new expansions can be complicated. The checklist below provides a sample of key considerations that automotive businesses in Asia must address when they diversify and expand abroad:

Marsh Asia: Enabling the success of expansion for Asia’s automotive businesses

Marsh Asia’s data-driven approach to automotive risk management combines deep industry expertise, engineering prowess, construction specialisation, and global reach, delivering seamless solutions. At the same time, we work with insurers to expand insurance capacity worldwide, enhance transparency, and create innovative solutions for automotive businesses.

Here’s a case study to illustrate our capabilities: A Japanese automotive battery manufacturer required project financing within a tight schedule but lacked the expertise to conduct thorough due diligence and manage stakeholders across banks, legal and accounting. Marsh Asia stepped in to provide insurance due diligence, facilitate collaboration between stakeholders across different geographies (Japan, China, United States), and promptly responded to inquiries. An Erection All-Risk insurance was also secured to cover machinery and equipment for factory improvement. As a result, the manufacturer successfully achieved project bankability and obtained project financing within the given timeframe while ensuring cost-effective and sufficient insurance coverage in line with commercial realities.

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1 Channel News Asia. (2024). China EV makers to pivot to emerging markets as US, EU hike tariffs. https://www.channelnewsasia.com/east-asia/china-ev-industry-byd-nio-us-eu-tariffs-emerging-markets-4459426

2 East Asia Forum. (2024). Asia ground zero in the revolution of electric vehicle markets. https://eastasiaforum.org/2024/03/19/asia-ground-zero-in-the-revolution-of-electric-vehicle-markets/ 

3 CNBC. (2024). Asia was most impacted by extreme weather and climate in 2023, UN report shows. https://www.cnbc.com/2024/04/26/asia-most-impacted-by-extreme-weather-and-climate-in-2023-wmo.html 

4 Supple Chain Digital. (2020). Thailand flooding impacts automobile supply chain https://supplychaindigital.com/logistics/thailand-flooding-impacts-automobile-supply-chain 

5 Reuters. (2024). Tesla, Volvo Car pause output as Red Sea shipping crisis deepens. https://www.reuters.com/business/autos-transportation/tesla-berlin-suspend-most-production-two-weeks-over-red-sea-supply-gap-2024-01-11/