South African automotive and other manufacturers may have to halt production if Japanese factories and ports in tsunami affected areas are not reopened soon.
The recent earthquake in Japan and subsequent electricity supply shortages forced the country to shut down industrial production, close ports and divert energy to civilian use.
Since much of South Africa’s growing automotive industry relies on components produced exclusively in Japan, this could have serious implications for local motor vehicle production.
“In times like these, being able to claim a portion of your losses under a full supply chain cover might make the difference between surviving a disruption to your supply chain or having to shut shop entirely” says Tracy de Kock, Manager, Credit and Political Risks Unit, Alexander Forbes Risk Services.
Certainly, since the level of self insurance is high in Japan and much local Japanese insurance is reinsured internationally, claims may take a while to settle, and even longer to pay out. Since the Japanese economy, the third largest on the planet, is almost entirely export dependent, the production delays occasioned by this claims process are, in addition to the earthquake damage, likely to have global repercussions.
Furthermore, in addition to damage caused locally by the earthquake, global supply chains have also been disrupted by the closure of Japanese ports as well as by the number of vessels destroyed during the tsunami.
“While it is yet to be established how many ships were destroyed, what is certain is that many ships, and the cargoes that were booked on them, have been taken out of the Asian shipping service” says de Kock.
So, even if your factory in South Africa does not rely on Japanese imports, the number of ships destroyed in the tsunami means there is a good chance of you not being able to receive goods or send your products to, say, Korea, India or the Middle East - until additional shipping has been found and booked.
And when Japanese ports do open again, “cargoes booked at low rates over the last few months of shipping surplus in a global recession will be much more costly to re-book in a recovering economy suffering a substantial loss of ships in the Asian market” warns de Kock.
The result will be delays, backlogs and increased costs all round for months to come, with just some of the associated losses being covered by marine insurance or standard business interruption cover.
“Certainly the best marine insurance in the world or the best business interruption cover will not fully reimburse your business in South Africa for a disaster that happened to a supplier in Japan, or for the loss of ships that you had booked future cargoes on” explains de Kock.
Only full supply chain cover can help businesses meet the many losses caused by a disaster elsewhere that disrupts the supply of critical inputs to a business in South Africa.
Also, only full supply chain cover was able to assist exporters of perishable food stuffs recover from the temporary loss of markets caused by recent popular uprisings in Egypt, North Africa, the Gulf and the Middle East.
Similarly, South African food producers relying heavily on cocoa experienced supply chain disruption following the disputed election in Cote d'Ivoire, forcing them to source more expensive cocoa from South America with much longer delivery times.
In short, full supply chain cover protects a businesses’ supply against political risks as well as natural disasters.
Either way, following the recent disaster in Japan, some policy wordings and exclusions may be re-written. Certainly, “whether destruction was caused by the tsunami which followed the initial earthquake, or damage caused by radiation from affected nuclear plants count as part of the original event – or count as separate events for insurance purposes will set some interesting precedents” says de Kock.
In the meantime, however, what is certain is that between Japan and the disputed elections in Cote d’Ivoire, South African businesses have recently become a lot more aware of the need for full supply chain interruption cover.
“Increasingly, and correctly, this is seen as a necessity for any business relying on imports from abroad” concludes de Kock.
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