Expert Risk Articles

Allianz Risk Barometer 2016 - Top risks in focus: Market developments


Digital and technological innovation is transforming industry. Flexibility, agility and rapid innovation based on new technologies and methods will be key to the success of manufacturing companies in future. Photo: Shutterstock.

More than a third of responses (34%) cited market developments as one of the three most important risks facing companies in 2016, ensuring it ranked as the second top peril in the Risk Barometer overall.

Businesses are increasingly concerned about the impact of volatility, intensified competition and market stagnation. It is the first time market developments ranks as one of the top three global perils in the Risk Barometer, although this rise can be partly explained by the fact it is also the first year these risks have been included as one collective peril. In the 2015 Risk Barometer both market stagnation (15%) and intensified competition (13%) featured in the top 10 global risks, ranking seventh and eighth respectively.

Nevertheless, the responses reveal that many industrial businesses are facing a growing number of wide-ranging challenges. Long-term strategic issues include successfully adapting to, and managing, challenges to business models posed by increasing automation, digitalization and interconnectivity of industry. Then, there is the threat posed by the continuing emergence of potentially more agile start-ups and the ongoing development of “disruptive technologies”, so-called because such innovations help to create a new market and value network, eventually “disrupting” the old one (see here). Finally, there is the need to be more innovative themselves in order to more effectively serve the next generation of customers.

At the same time, many businesses are already having to manage a long list of issues, such as having to comply with changing legislative environments, import and export restrictions, more stringent safety requirements and work rules, increasing government involvement and approvals, and environmental restrictions – such as the growing trend to move investment assets away from fossil fuel companies, for example – which are already impacting business models.

Therefore, it is not surprising that market developments is ranked as a top three business risk for 2016 in the engineering, financial services, manufacturing, marine and shipping, pharmaceutical (see Risk Barometer Appendix) and transportation sectors, and is the top risk in the engineering, financial services and marine and shipping industries. In addition, it ranks as a top two concern across all industries questioned in the Africa & Middle East, Asia Pacific and Europe regions (see here) and fourth in the Americas.

IN FOCUS: Manufacturing (incl. automotive)

“The global nature of many companies has resulted in them optimizing their value chains through setting up manufacturing locations and focusing their supply chains in the emerging economies, resulting in greater cost efficiencies and proximity
to growth markets,” comments Michele Williams, Global Practice Group Leader, Heavy Industries & Manufacturing, AGCS. “This has inadvertently resulted in a greater exposure to natural disasters and increasing uncertainty around areas such as demand, volatility and supply chain disruptions.”

Regional production standards and legislative requirements can vary considerably, and in some regions there is also a requirement for compulsory joint venture businesses. There are advantages to this but also the potential to limit the influence of the parent company and lose some of the technological lead competencies. “This means that there is a need to reassess the balance between the efficiency gains and locality to growth markets which comes from these globally optimized value chains, and the control and resilience of less fragmented and dispersed operations,” says Williams.

Automotive developments
There are a number of major trends in the automotiveindustry which are representative of the complex trends in the manufacturing industry as a whole, including:

Government influence in manufacturing policy. Many governments in key markets are legislating for safer, cleaner transportation. Their incentives and penalties are forcing a change in consumer demand which requires manufacturers to invest in new materials, technologies and production techniques to meet these demands.

Changing global mobility needs. Increasing disposable income and the need for personalized transport in some parts of the world is fueling the growth of individual car ownership, and the demand for smaller cheaper models. Whereas continuing urbanization in other societies is leading to the demand for alternative options to individual car ownership. The resulting need is for companies to focus and invest in more diversified portfolios and partnerships which could include services like car sharing.

Digital is changing demand and purchasing patterns. Society’s need to be connected to electronic devices and social media does not stop in a car and the driving experience must reflect this need. In addition, uncensored feedback online
is directly impacting the way people research and purchase vehicles, and changing their expectations.

Future competition. This will come from areas not traditionally seen as competition in this industry. Technological developments, for example electric driving and driverless vehicles have resulted in new entrants to the market like Tesla Inc, Google Inc and Uber Technologies Inc. The newer technologies may also reduce the level of competencies required for new producers, allowing for faster development and shorter time to market.

IN FOCUS: Marine & Shipping

The Baltic Dry Index – the global freight rate index for dry bulk shipping – recently plummeted to its all-time low, meaning freight and charter rates for dry bulk vessels are as low as ever, “ says Sven Gerhard, Global Product Leader Hull & Marine Liabilities, AGCS.

“Often the charter income is below the vessels’ operational expenses. Lower commodity demand in China but also overcapacities in the worldwide fleet are contributing to this. Many container liner operators announced losses for Q3 2015 and the situation with crude tankers is similar.

“The low oil price results in fewer offshore exploration activities and lower demand for offshore supply vessels. Based on the overall still weak outlook of the industry, both banks, as well as financial investors, take a restrictive approach on ship financing, limiting the access of ship owners to new funds. The overall weak
outlook is likely to continue in 2016.”