The business world is vastly different from what it was just a few months ago. Asia was the first region to confront COVID-19 and its businesses the first to confront unparalleled stress on property assets, supply chains, technology infrastructure and people. FM Global’s Mr Nantha Marimuthu and Ms Yong Seek Ying take a look at the changing face of real estate risk.
While it is hard to anticipate the months ahead, Asia’s interconnected economies will be first to shape their recovery and address the compounding impact of shutdowns across the region on trade and capital. In doing so, they will need to recalculate risk profiles, which have changed due to the impact of the pandemic.
Two distinct situations are facing businesses across Asia. Thousands of facilities across the region have been idle in adherence to government regulations, sometimes shutdown overnight and with little preparation. Starting up again will pose a series of unfamiliar risks. Elsewhere, and in contrast, businesses are repurposing facilities or ramping up production to meet new market demands posed by the pandemic, creating new stress points.
In these situations, the risk manager’s role is nuanced. While business recovery is the ambition, it can sometimes create dangerous blind spots. As businesses consider how to manage and restart idle assets or repurpose and reclaim or gain new market share, it is essential that they understand and react to any new risks they have created as a consequence. Ensuring greater business resilience now means a stronger and uninterrupted recovery over the longer term.
Idle facilities cause worrisome risks
Companies across almost all industries have had to pause operations, leaving their facilities idle and subject to new risks. It has been described as the biggest factory shutdown since World War II, starting with China, South Korea and Japan earlier in the year and moving through to South Asia in the past months. These shutdowns often occurred with little time to evaluate and execute their business continuity plans, check safety measures and plan maintenance.
Worrisome risks have emerged. Fire remains a major challenge to idle facilities, as rushed shutdowns and low maintenance activity increase the risk of fire. Maintenance and fire protection services are often contracted out to external providers and in many countries across the region these activities are not seen as essential services.
Asia is home to many multi-tenanted facilities, creating unique challenges as some tenants temporarily shut down operations, while others within the same facility might be categorised essential and able to continue operations. Some countries have seen an increase in vandalism and theft, as security presence is lessened.
Risks from nature
Idle facilities are particularly at risk from natural disasters, as critical manpower needed to prepare and respond to extreme weather events may be unavailable at short notice. In places like Japan and China, which enter their typhoon seasons in early summer, unmanned and ill-prepared facilities can delay a company’s window to rebound, causing financial harm, loss of market share and reputational damage.
Historically, high levels of business losses also occur when operations restart following an idle period. These losses stem from improper shutdowns, especially one that was rushed due to a quickly changing situation as with COVID-19, or because safety training and precautions have been de-prioritised as businesses look to jump-start operations and speed recovery.
The lesson is that when facilities are idle, existing risks do not disappear. And in fact, these risks change and, in many cases, become more pronounced as employees are not around to mitigate them. While pausing operations, risk managers should ensure that essential personnel are maintained, an active security strategy is deployed, fire protection methods are in place and maintenance of machinery is undertaken periodically. Most importantly, risk managers should maintain the mind-set that the majority of loss is preventable, even when a facility is idle.
As the economy rebounds, some businesses will run heavy machinery harder than normal, while others will retool or refit in reaction to new demand for products, as we have seen with personal protective equipment and sanitizer. While this agility is admirable, it can also create new risks.
These include shrinking their shutdown periods to create greater output and cutting down on time for necessary maintenance. In many instances, machinery is less attended as staffing levels remain low, with companies respecting safe-distancing protocols.
Meanwhile, facilities are being repurposed as entrepreneurial thinkers find new uses for machinery, storage or packaging space. These changes impact the effectiveness of existing fire prevention and security approaches, which were designed to support the original business functions.
Keeping pace with risk
The challenge for risk managers is to keep pace with these transformations, ensure the businesses’ risk mitigation strategy is in step with change. It is vital that risk managers pause and reflect on the real risks posed by business transformation.
As businesses across Asia fight to remain resilient, existing and new business risks need to be managed. While the pandemic will be top-of-mind, other property risks have not disappeared. Complying with governmental standards is not sufficient to ensure resilience, businesses must strive to have plans in place that align with true business risk. Businesses that stay vigilant and proactive in risk prevention will be the long-term winners.
Mr Nantha Marimuthu is vice president, operations engineering manager, Asia and Ms Yong Seek Ying is vice president, division engineering manager, Asia Pacific with FM Global.
This article was originally published in Asia Insurance Review's October 2020 Issue.