Over the last three decades, U.S. companies have increasingly sought overseas locations for production facilities, one of the chief drivers being the lower labor costs in many countries outside of the U.S.
But as those companies reached, many of them are finding that they reached too far. With global reach comes global risk. Supply chain risk increases with globalization, as we saw only too clearly within the past year with the quake in Japan and the flooding in Thailand.
Regulatory risk, political risk, terrorism risk and currency risk are just a few of the other risks that a risk manager for a company with offshore production facilities has to worry about.
As the first quarter of 2012 closes, underwriters are sitting down with their risk management partners and asking them, as they have never asked them before, to tell them what they know of their supply chains. Insurers who write contingent business interruption and other forms of coverage are no longer satisfied with a cursory knowledge of the first tier of a supply chain.
They want to know more and they expect their partners in risk management to know more. That process gets much more difficult and much more expensive the more global a company's reach is.
Companies are also finding out that gradually, as middle and upper-middle classes in countries with massive populations like China and India expand, that the delta of the wage disparities between the U.S. and those countries is decreasing.
A tipping point will eventually be reached when the ever increasing risks of having global operations will start to appear more and more onerous, balanced against the lessening benefit of lower overseas wages.
U.S.-based companies can create micro and macro economic benefits by refocusing their production plans in that space of land between the Empire State and the Golden Gate. Basing operations here creates more U.S.-based jobs, which increases the purchasing power of the world's largest economy.
Retracting from a global reach also helps companies manage risk better. Yes, hurricanes and tornadoes and earthquakes are as liable to strike this country as they are any other. But a relatively prosperous U.S. is much better equipped to respond to disaster and get businesses up and running again, than many other countries throughout the world, particularly Asia, where risk management and economic strength are not as robust.
DAN REYNOLDS is managing editor of Risk & Insurance®. He can be reached at firstname.lastname@example.org.
May 1, 2012
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