Category Archives: Business Interruption

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Japan Earthquake Causes Parts Shortage, Closing 4 GM Plants

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The earthquake in Japan earlier this month has impacted the supply chain of General Motors, causing four plants in North America to close temporarily because of a shortage of parts from Japan, the company reported.

GM said in a statement that its manufacturing operations are expected to be down for two weeks beginning April 25 in Spring Hill, Tennessee; Lordstown, Ohio; Fairfax, Kansas andGM logo the Oshawa Flex Assembly in Canada.

The temporary adjustment is not expected to have “any material impact on GM’s full-year production plans in North America,” GM said. In addition, the company “does not expect a material impact to its second quarter or full-year financial results for GM North America.”

Japan’s Kyushu Island was rocked by a 7.0 temblor on April 16, killing 58 people and injuring about 900, according to AIR Worldwide. The quake was the strongest to strike Japan since 2011, when a massive 9.0-magnitude offshore earthquake unleashed a tsunami that killed 18,000 people in the country’s northeast and triggered meltdowns at a nuclear power plant in Fukushima, the New York Times reported.

AIR said the earthquake is expected to result in insured losses between $1.7 billion and $2.9 billion. Those losses only reflect insured physical damage to onshore property (residential, commercial/industrial, mutual), both structures and their contents, from ground shaking, fire-following and liquefaction, AIR said.

The Japan Fire and Disaster Management Agency (FDMA) estimates that more than 3,900 residences and 120 non-residential buildings were damaged or destroyed, a number of mudslides resulted, and 14 fires were attributed to the temblors.

On the same day, April 16, a 7.

8 earthquake struck the central coast of Ecuador, killing 570 people and injuring more than 4,700. AIR estimates losses from that quake between $325 million and $850 million. More than 1,100 buildings are reported to have been destroyed and more than 800 damaged.

Even though they happened just hours apart, the two quakes are not related. The Times reported:

Are the two somehow related?

No. The two quakes occurred about 9,000 miles apart. That’s far too distant for there to be any connection between them.

Large earthquakes can, and usually do, lead to more quakes — but only in the same region, along or near the same fault. These are called aftershocks. Sometimes a large quake can be linked to a smaller quake that occurred earlier, called a foreshock. In the case of the Japanese quake, seismologists believe that several magnitude-6 quakes in the same region on the previous day were foreshocks to the Saturday event.

Mexico’s Pemex Illustrates Trade Credit Risks in Latin America

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With all the focus on the Middle East and Europe, it is easy to lose track of Latin America as a region with major risk issues. Companies investing and selling to Latin America have become accustomed to viewing its largest economies—Mexico and Brazil—as relatively low-risk countries with promising growth prospects. That perception has recently changed, however, largely because of a common ingredient: large state-owned oil companies on which the government depends.

With a $1.26 trillion economy and population of 122 million, Mexico is a key market for the United States and Canada, particularly since the advent of the North American Free Trade Agreement. Some $535 billion in trade occurred between the U.S. and Mexico in 2014. From 2000 through 2012, U.S. foreign direct investment into Mexico totaled $291.7 billion.

With a monopoly (until recently) on oil production and fuel distribution, Petróleos Mexicanos (Pemex) is a colossus—the largest company in the country, representing about one-third of all government tax revenues and approximately 5% of Mexican exports. From its origin in 1938, Pemex has also been a political entity, as it was nationalized at a time when foreign companies dominated the oil sector. Since then, it has become enmeshed in Mexican politics and patronage, suffering from frequent allegations of corruption.

However, in the early 2000s, Mexico’s political leadership recognized a problem: oil production was falling and Pemex lacked the resources to invest in new fields to reverse the trend. Clearly, foreign investment was going to be needed to keep Mexico competitive in world oil markets. So, in August 2014, Mexico passed the laws necessary to open up the oil, gas, and power sectors to private companies, including foreign ones.

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Unfortunately, with oil prices taking a serious downturn, the timing of the opening was awful. Pemex was losing its monopoly at the same time its revenue was dropping and home currency was depreciating against the U.

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S. dollar, after it had accumulated enormous foreign currency debt.

Not surprisingly, in November 2015, Moody’s downgraded Pemex’s credit rating from A3 to Baa1, with a negative outlook. Without the sovereign support, the rating was put at a lowly Ba3. And Pemex’s problems have directly drained the central government: this month, the Mexican government announced over $4 billion in aid for the company.

Pemex has serious cash-flow problems and is not able to pay its suppliers on time. In late 2015, citing low oil prices, it announced that it would unilaterally extend payment terms on all contracts to 180 days from the previous 60-90. For suppliers dependent on short payment terms who were already under cash-flow stress from general industry conditions, these payment delays could cause serious financial problems, including bankruptcies. Accordingly, the trade credit insurance industry—which covers buyers’ failure to pay contractual trade obligations on the due date—is already seeing claims related to Pemex and its suppliers.

Except for people who remember the early 1980s, when Mexico defaulted following the high oil prices and debt run-up of the 1970s, Pemex’s problems were unthinkable just a few years ago. This is an example of the difficulty of predicting how commodity markets, politics and financial management can mix for any given country. However, while Pemex’s problems are serious for its suppliers and represent a drag on the economy, Mexico is still forecasted to grow 2.

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6% in 2016 and no wide political crisis is currently underway. Many other countries dependent on oil are not so lucky. Next month we will look at one with much more serious problems and risks to investors and suppliers: Brazil.

Brussels Bombings Highlight New Risk Realities

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Belgium map
The deadly terrorist bombings in Brussels this week have elicited an outpouring of support for the victims and for Belgium, along with renewed rage and consternation regarding ISIS. These are predictable reactions.

What these acts also elicited, I’ve noticed, are numerous comments from many outlets that the attacks were not surprising.

The BBC, in fact, said the bombings were “not a surprise” and security experts chimed in with similar assessments. Even Belgians themselves admit that the attack wasn’t shocking—Prime Minister, Charles Michel, lamented that “what we feared, has happened.” Think about how much has changed in less than a generation. Now, when the capital of the EU and NATO becomes a war zone, many react as though this is business as usual.

When it comes to political violence and warfare, we (or at least Western Europe) are living in a brave new world.

In fact, research I’ve conducted in recent weeks for a RIMS Executive Report on political risk confirms how much the paradigm has changed. Political risk experts I interviewed have been emphasizing this point. “I think it is truly a distinctive point in world affairs,” said one. Another confessed, “I’ve been doing this for nearly 20 years, and this is by far the most unstable, tenuous, deteriorating…risk environment I’ve ever seen.”

These sentiments are based on more than ISIS. Recent developments include the Ukraine civil war, the migrant crisis, deterioration of large swaths of the Middle East, tensions in the South China Sea, a weakening Chinese economy and Brazil’s political crisis. All contribute to a consensus that things are changing.

For the risk community, a big change is formerly reliable standards of which parts of the world are stable and which are unstable, such as developed economies versus developing and first-world versus second- and third-world. Now more than ever, risk managers considering the security of global operations need to examine a country’s vital signs rather than rely on conventional wisdom about stability. And if mass-casualty terror attacks are the new normal for Western Europe, a number of risk professionals will need to become better acquainted with the realities of political violence.

To end on a positive note, however, we do not have to believe the sky is falling. While terrorist attacks are brutal and unfortunate, it is consoling to think about the odds of being a victim. As data nerds are happy to point out, a person is much more likely to meet his or her demise from bathtubs, dogs and food poisoning. The Post has reported that you are more likely to be crushed by furniture than snuffed out by ISIS.

Top Obama Administration Officials, Law Enforcement Reach Out at RSA Conference

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loretta lynch at RSA

Attorney General Loretta Lynch addresses RSA Conference 2016

SAN FRANCISCO—Many of the Obama administration’s top brass are here in force, addressing some 40,000 practitioners from every part of the technology and information security industry at the annual RSA Conference. Set against the backdrop of the ongoing fight over between Apple and the FBI encryption and backdoors, the tension ebbed and flowed during sessions with Attorney General Loretta Lynch, Secretary of Defense Ashton Carter, and Admiral Mike Rogers, U.S. Navy Commander, U.S. Cyber Command, and director of the NSA. While many speakers will not address the issue directly, the subtext is clear throughout the show, particularly as the public battle brings considerable interest to the privacy and security issues the RSA has centered on for 25 years.

Indeed, in his keynote address, RSA President Amit Yoran called law enforcement’s current stance on encryption “so misguided as to boggle the mind.” Brad Smith, president and chief legal officer of Microsoft, chimed in as well, asserting that we cannot keep people safe in the real world unless we can keep them safe in the virtual world. He lauded Apple and pledged that the tech giant would stand with Apple in its resistance.

Ash Carter at RSA

Secretary of Defense Ashton Carter in Conversation with Ted Schlein of Kleiner Perkins at RSA

While the gravity of the issue and the massive potential impact for many in the sector are boggling many minds here, the administration officials’ sessions also offered more broadly positive comments for businesses outside the tech sector. The conciliatory tone Lynch and Carter often struck centered on the critical need for partnerships between technology and government. They tried to emphasize the ways the administration is reaching out to private entities, both within Silicon Valley and across corporate America at large.

According to Sec. Carter, for example, the United States Cyber Command has three core missions: defending the Department of Defense’s network; helping American companies, the economy and critical infrastructure; and engaging in offensive cyber missions. The second is a key pillar, he said, as the DoD must keep in perspective that the strength of American entities is the strength of the nation. From threat intelligence to the Defense Innovation Unit Experimental he announced yesterday, to be helmed by Google’s Eric Schmidt, Carter believes there is considerable need for industry to engage with government on cyberrisk, and both parties have valuable assets to contribute. “Data security is a necessity, and we must help our companies harden themselves,” Carter said. Indeed, he wants both help for and from the industry. In closing, he said, “We are you. You pay us. We represent you and our job is to protect you, and we’d love to have your help.”

He also noted that the DoD is trying to learn a bit about managing its cyberrisk from the commercial sector’s best practices. “We do grade ourselves and we’re not getting good grades across the enterprise,” Carter told reporters Wednesday, according to Defense News. “I have these meetings where I call everyone in and we have these metrics which tell us how we’re doing [and] if you don’t score well, that is evident to the Secretary of Defense at those meetings.

“We don’t assume for a minute that we’re doing a perfect job at this,” he added. “That’s the whole reason for me to be here and the whole reason for me to be engaging with this community here at this conference.”

Carter also announced that the Department of Defense will be hosting “Hack the Pentagon,” a bug bounty program offering white hat hackers cash for finding and reporting vulnerabilities in the Pentagon’s websites. Many companies have been offering these programs to try to discover their exposure in a controlled setting, without the risk of reputation damage, personal information exposure and business interruption that accompany an unknown hacker finding them instead. Carter called these a “business best practice” to gauge preparedness.

Federal law enforcement also has a notable presence at RSA and is making a pronounced effort to reach out to businesses regarding cyberrisk, threat intelligence, and managing a cyberattack. Indeed, in one session Tuesday, panelists from the Department of Homeland Security, FBI and the White House urged a call to action for businesses to get serious about proactively building bridges with law enforcement and to make use of the many resources the administration is trying to activate to help private industry fortify against cyber threats. The government is working to make it easier for companies to turn to it for help, they said, and attitudes are shifting to more consistently recognize and respect victimized businesses and minimize business interruption.

Some in the audience expressed skepticism, such as one man who seized upon the Q&A portion of a session on government departments’ specific roles in fighting cyber criminals. He asked how the government can be trusted to help industry when it cannot protect itself. But corporate entities should be taking note, particularly of the services available. While many hesitate to share threat intelligence or even successful attacks, Eric Sporre, deputy assistant director of the FBI’s cyber division, stressed that FBI Director James Comey has made it a directive for FBI field offices to develop relationships with local businesses and to treat businesses as crime victims, not perpetrators. In responding to attacks, he noted, the Bureau sometimes even brings in victim services to holistically approach aiding in the investigation and recovery process.

Andy Ozment, assistant secretary for cybersecurity and communications at the Department of Homeland Security, also highlighted the preventative measures his department offers companies, including personal risk assessment services. In some cases, chief information security officers and other executives engaged in cyberrisk management functions have been getting DHS assessments, using them as a tool to drive investment or otherwise sell cyber upwards with the board or C-suite of their organizations.