Managing risks in the midst of a trade war

Managing risks in the midst of a trade war | Insurance Business

Managing risks in the midst of a trade war

As the economic conflict between the United States and China goes on, businesses have to plan around the tariffs and other trade barriers being erected by the rival countries. Risk managers are vital in this aspect, helping the company navigate the various economic risks that emerge.

According to Michael Jahn-Kozma (pictured), corporate risk manager at German automation and robotics firm KUKA, the risk of economic conflicts at the scale of the current US-China trade war used to be of a very low probability, and risk managers didn’t really consider it on their list of operative risks. Issues such as macro-economic tendencies, including the market environment and its market compliance issues, took more precedence.

“In case of the USA vs China trade war, we struggle to undertake effective risk mitigations since we are present in both markets with production and sales,” Jahn-Kozma told Corporate Risk and Insurance. “Production supply chains are linked with Europe, USA, and China and have inherent dependencies, which can only be changed in the long term, if at all. Hence, it is very complex to predict more or less exactly what happens and how the risk has to be assessed. Furthermore, if tariffs on products or components change with huge factors like 50% or more, then you can hardly consider it in the forecast, because pricing with extreme risk factors will not be absorbed in the market. It’s the opposite with decreasing orders due to a weaker world economy – competition gets harder and margins shrink so recommended risk buffers cannot be realized.”

He believes that if countries do not adhere to international trade rules, the effects on businesses can be very difficult to assess.

“Normally, we can mitigate currency changes with hedging instruments, insure credit risks of single projects, and react in strategical terms, but insurance can provide only very limited value.”

Jahn-Kozma, who is also a board member of Germany’s Risk Management Association e. V., advised risk managers to (1) look at the strategic environment, (2) keep networked communication with supply chain managers, legal, and export controllers, (3) watch the backlog and sales outlook in the respective markets, and then (4) try to align robust and credible scenarios to recommend the right risk strategy.

Having mentioned that KUKA’s main shareholder is Chinese, while its main market is the US, Jahn-Kozma stressed that, despite this, there is no conflict of interest in the company’s operations.

“We are still a German firm, but we are happy with our major shareholder building trust in our operation and opening new opportunities in the Chinese market,” he said. “Practically (and legally), the shareholder takes no operative influence, so there is no conflict of interest or problem with our US customers. We still keep a major part of our know-how and supply chain in the US and we are happy with our partners there.”

“Internally, we take a lot of prudence in managing information security risks and comply with all certifications and standards our customers expect from us,” he added.

Aside from economic risks brought about by the trade war, another rapidly developing risk for companies today is cyber. According to Jahn-Kozma, there are two areas dealing with cyber in KUKA’s business.

“We have to distinguish between cyber risk affecting us or our operation and production, and the effects on the functionality of our products with our customer,” he said. “With respect to our operation, we do not feel more vulnerable than other similar industries. We regularly assess our exposure and try to improve our security management. As a risk manager, cyber is an ongoing risk we have to look at in a structured recurring way.”

On the customer’s side, that’s where things get more complicated.

“The cyber exposure of our product itself depends very much on the integration in the environment of our customer. A robot with its steering software is generally no more vulnerable than any other technical device,” he explained.

“When we talk with our customers about networked production solutions, we have to consider the interfaces. This is a case-by-case analysis and depends also on the request by the customer – whether they want to solve the topic on their own or find with us a common solution on how to increase the resilience of the system or facility.”