As much as general competitive pressures and cybersecurity threats present enduring risks for TMT companies, the effects of the COVID-19 pandemic in combination with geopolitical and economic instability have been particularly challenging for an industry that leans heavily on international trade for its success.
Many TMT company boards find themselves facing new ways to sustain growth and profitability and, with the changes in direction and strategy, a changing profile and weighting of risks. Three risks have become particularly significant for TMT companies over the last couple of years.
Rising interest rates and higher inflation in most major international markets are an issue for any organization, in any sector. Softer consumer spending has made revenue and profitability targets harder to achieve with, in some cases, a knock-on effect on investor confidence and market capitalization.
This has been a particularly tough pill to swallow for TMT companies, many of which have previously experienced – and perhaps only ever experienced – steady or rapid growth.
As a result, we see many companies reviewing their cost bases. Solutions such as intelligent automation and debt reduction are potentially on the table, allied to refinements of risk management and financing approaches to accommodate prevailing changes in trade, credit and liability risks. As of course are headcount reductions (see “Workforce upheaval” below).
Because TMT markets are global with certain geographic concentrations, increasing tensions between China and Taiwan and the continuing Russia/Ukraine conflict have had a particularly adverse risk impact. U.S. and Canadian companies will also be watching closely for developments in recent discussions among the BRICS (Brazil, Russia, India, China, South Africa) countries about moving away from the dollar as their standard reserve currency.
The most obvious impact for the TMT industry has been supply chain volatility ─ complicated by issues arising from the pandemic ─ particularly the availability of semiconductors. With that though, we are also seeing shifts in regulation and legislation, perhaps most notably the March 2023 changes in data privacy laws in China that will require any company handling Chinese data to obtain Chinese government approval.
Growing insurance market political risk capacity over recent years does, however, give companies the opportunity to hedge some of the effects of the broad current crop of geopolitical challenges. Another area of risk management where we are seeing and anticipate further strong growth is intellectual property and specialist media protection.
What is also apparent though is that current levels of volatility and uncertainty are provoking many companies to reconsider the locations of production facilities. After years of offshoring, we are seeing organizations looking to move semiconductor fabrication closer to their home base, bolstered in the case of U.S. companies by the passing of the CHIPS Act in 2022. From a risk perspective, this is the first time, or the first time in a while, that many companies have built or are building in-country fabrication facilities, giving rise to the need to factor in, for example, new specialist construction, property and environmental risks alongside related exposures such as marine cargo and business interruption.
For a sector that has grown accustomed to consistent growth, the recent trend of workforce reductions has often been a new experience. Media headlines emerging from the likes of Meta and Google show their extent and just how wide-ranging the effects of some of these layoffs can be.
Unfortunately, downsizing and right-sizing are facts of business life – even if the TMT sector has been somewhat insulated from them in the past.
Staff reductions, while often necessary, can be counterproductive if steps are not taken to reduce risks to company performance, reputation and long-term viability. It is also important to review insurance such as employment practices liability coverage to better protect the organization from any claims from employees.
For an industry in which the use and application of data has been central to growth, the answers to many of the questions posed by the changing TMT sector risk landscape may stem from an area of comfort.
Data and the risk models developed over the last decade give us the ability to examine a full portfolio risk financing strategy, while drilling down into and differentiating for individual areas of risk. With these top-down views of risk, TMT companies should be in a stronger position to balance what they spend on risk transfer and how much risk they retain in an environment beset with broad macro-economic and political challenges.
Willis Towers Watson hopes you found the general information provided in this publication informative and helpful. The information contained herein is not intended to constitute legal or other professional advice and should not be relied upon in lieu of consultation with your own legal advisors. In the event you would like more information regarding your insurance coverage, please do not hesitate to reach out to us. In North America, Willis Towers Watson offers insurance products through licensed entities, including Willis Towers Watson Northeast, Inc. (in the United States) and Willis Canada Inc. (in Canada).
