4 risk considerations in your supply chain diversification journey: Physical damage, business interruption, third-party liability, people

As Asia’s automotive companies diversify their supply chains, 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 expansion 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 an automotive business that choose to diversify its supply chain 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): These are the parties 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, and engineering consultants.
Operators (O): This includes the managers and project owners who oversee the day-to-day operations of the manufacturing facilities and manage the supply chain.
Financiers (F): These are the entities providing financial backing for the projects, often through joint ventures or other financing arrangements.

Mitigating risks in the construction phase

Automotive businesses face four key risks in the construction phase of new facilities: physical risks (e.g. fire, flood, heat), business interruption, third party liability, and workforce and talent risks.

With Asia being the most disaster-hit region in the world in 2023³, extreme weather events can cause considerable damage to automotive supply chains. In 2020, 20 car plants in Thailand⁴, which make up about 10 percent of total automobile parts production for Thailand, 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 ensure the facility’s design complies with local regulations.

Additionally, they must accurately quantify risks to ensure sufficient coverage by leveraging the physical risk modelling capabilities of a trusted risk advisor, and subsequently obtaining right-sized Construction All Risks insurance coverage along with transferring environmental risks via Contractor’s Pollution Liability and Directors and Officers (D&O) insurance.

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

Third-party liability issues may arise during the construction phase. Contractors and operators need adequate third-party liability insurance coverage to ensure they are indemnified against any external claims of loss or damage.

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. 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.

Beyond the basics, 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.

Strengthening operational resilience

In the operational phase of a facility, automotive businesses face three key risks: business interruption, third party liability, and people risks. For instance, if a facility relies on shared utilities (e.g. national power grid, transportation route), operators must have backup measures in place.

The latest Property Damage and Business Interruption (PDBI) claims data from Marsh Asia justifies the need to obtain adequate protection against business interruption: 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 — that can put it at risk of property damage and business interruption losses.

The red sea crisis has had an immediate impact on the automotive industry. In 2024, Tesla and Volvo Car⁵ have paused production due to a shortage of components. To mitigate against business interruption, 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.

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 and Claim Services team helps businesses conduct Business Interruption Review to accurately quantify losses to insurers to optimise claims outcomes.

Third-party liability issues may arise during the operational phase. Contractors and operators need adequate insurance coverage in the form of general liability insurance, Errors and Omissions (E&O) insurance, and product and recall liability insurance to ensure they are indemnified against financial loss or damage.

A trusted risk advisor and insurance broker can help identify critical coverage gaps and implement an integrated approach to mitigating third-party liability risk through robust business continuity management and crisis management.

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 can 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 supply chain diversification: Checklist to consider

Navigating risks when diversifying your supply chain can be a complex. The checklist below provides a concise overview of key considerations that automotive businesses in Asia must address when they diversify and expand abroad:

Marsh Asia: Enabling the success of supply chain diversification for Asia’s automotive businesses

Marsh’s data-driven approach to automotive supply chain risks management combines deep industry expertise and global reach to formulate your supply chain diversification strategy. At the same time, we work with insurers to expand insurance capacity worldwide, enhance transparency, and create innovative solutions for automotive businesses.

A Japanese automotive battery manufacturer needed 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 obtained project financing within the given timeframe while ensuring cost-effective and sufficient insurance coverage.

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/

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4 risk considerations in your supply chain diversification journey: Physical damage, business interruption, third-party liability, people

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

Mitigating risks in the construction phase

Physical risks

Business interruption

Third-party liability

People risks