Bernard Kasriel, CEO of the world's largest construction materials company Lafarge, opened his presentation to analysts of the company's 2004 results with an unexceptional photograph of one of the company's cement plants.
It looks tidy and well-kept. A sign beside the access road shows the plant is ISO 9002 compliant, and promises 'customer satisfaction using our reliable quality products'. A further sign, closer to the plan, says 'Safety First'.
The next image in Kasriel's presentation is the same plant - after 26 December 2004. The main building is standing, but all around it is wreckage, for the plant is only 500 meters from the coast in Aceh at the northern tip of Sumatra, Indonesia. It was devastated by the tsunami.
French-based Lafarge is one of the few multinationals with a presence in the area. It began in the first half of the 19th century in France as a lime exploitation enterprise founded by Auguste Pavin de Lafarge, and has been operating internationally since the 1860s, when the company supplied lime for the building of the Suez Canal.
Lafarge acquired its Indonesian subsidiary PT Semens Andalas in 1994.
The Aceh plant, which had been built in the 1980s, was designed to resist an earthquake of up to force 7 on the Richter scale. In the event, it stood up well even to the 26 December earthquake which was force 9. A telephone call from the plant afterwards to another part of Lafarge was reassuring; there had not been much damage. Then came the tsunami.
"You can really see how huge the waves were because they have damaged the building of the plant up to 20 meters high," says a Lafarge spokesperson from its Paris headquarters, who visited the site two weeks later. "One of the most remarkable things about the scene was the stark division between the devastated areas, and those which were unaffected."
Fortunately, the day of the tsunami was a Sunday, so only 40 employees and sub-contractors were working, but many of the total personnel of 625 lived on site or nearby in the regional capital of Banda Aceh. After the tsunami, many of them were missing, and the plant was severely damaged.
Crisis management
The immediate response came from Thomas Ehrhart, managing director of PT Semens Andalas, who was in the capital city, Jakarta. He immediately mobilised a search and rescue team and medical help, and chartered a small aircraft to fly to Banda Aceh, the provincial local capital, where he arrived on Monday and met other people from the company.
A Lafarge employee had a large, undamaged house in Banda Aceh, and she offered it as a crisis centre and shelter for the surviving employees and families. "The phone lines were cut, but word of mouth worked quite well," says Lafarge's spokesperson. "As soon as the rescue team led by Tom Ehrhart reached the site, people came down from the hills near the plant and others came to the employee's house in the city of Aceh."
Lafarge has a commercial office further south in Medan, from where it was supplying cement to the whole of Sumatra. Its distributors provided three trucks to take food, water and medical supplies to the victims.
A small chartered aircraft made two flights a day. The company also hired a campus at Medan from the Ministry of Forests at which around 450 employees and their families were housed temporarily.
Kasriel immediately authorised $1m to the company's subsidiaries (it has others around the Indian Ocean but Indonesia was by far the worst affected) for relief measures and emergency work. In January, he went to Medan and the Aceh cement plant to demonstrate the group's support, but the company did not publicise the trip. It clearly decided to keep its relief efforts discreet.
Within the company, though, there was a great sense of solidarity. Business units and employees in the operations outside the US raised EUR600,000, of which half came from individuals. This money will be spent on long-term community rebuilding projects, such as resources for local schools, training programmes and the restoration of the mobile clinic for local people set up by the plant.
Three months later, the company reported the toll. Of the 625 members of the plant's personnel, 424 were safe and well, but 201 were dead or missing and 160 children were orphaned. The homes of 326 families were completely or partly destroyed. The plant was still out of operation, but teams were working to restore life and business to the area. This involved assisting employees, cleaning up the site, restarting the supply of cement to the region and identifying projects for reconstructing homes and community facilities. In Paris, Lafarge has appointed a vice president to coordinate the supports offered to the local business units.
Disasters such as the East Asian tsunami and the World Trade Center attack are so extensive that solidarity seems to overcome many obstacles, even if there is some waste due to lack of coordination. In Lafarge's case, its localised business structure and short supply and delivery chains mean that the losses have not had a serious knock-on effect.
Because of the nature of its business, the group is closely involved with local communities. It has a highly developed sustainable development policy and is used to working with civil society organisations. It has good trade relationships on the ground. All of these factors, though not typically core responsibilities for the risk manager, enabled Lafarge to respond to the tsunami in a way that helps protect the long-term viability of its business in Indonesia.
Costs and insurance
For Lafarge, the tsunami is not financially a material event. In its 2004 filing with the US Securities and Exchange Commission (SEC), the group reports that total sales of cement and other building materials during the year were EUR6.8bn. By contrast, for the Aceh plant, it has written off EUR38m assets, of which most is covered by insurance.
The group retains frequency losses as self-insurance or within its captive programmes, and only transfers severe exposures to the insurance and reinsurance market. It has two insurance programmes, one covering North America and the other covering operations in the rest of the world.
The main insurance programmes in Europe, Africa, Latin America and Asia primarily cover property risks, machinery breakdown and business interruption.
Total insurance protection amounts to EUR16bn, states the group in its SEC documents. The highest probable maximum loss (PML) is estimated at EUR112m, which is insured.
The group has two reinsurance captives. One, set up in 2000, covers the frequency risk of the group's subsidiaries, and retains EUR2m per casualty claim and EUR5m per property damage claim. The other originated from the acquisition of the Redland and Blue Circle groups and mainly handles the past risks incurred by those businesses. An insurance captive was set up during 2004 to cover property risks affecting the group's principal subsidiaries in the European Union, as well as the US assets inherited from Blue Circle.
Despite the Aceh loss, the group was able to renew its earthquake coverage for the period from January to June 2005 inclusive, on the same terms and conditions as before the disaster. It had already gained more favourable terms on renewal of its property insurance programme from 1 July 2004.
The total cost, including self-insured risks, was 3.56 per thousand of group turnover in 2004, a reduction of 9% on the previous year.
Business interruption
Lafarge's business interruption risk resulting from damage to insured property is generally considered to be low. "Given the size of our manufacturing network in most countries and within each business activity, our plants are generally in a position to help each other out," its SEC report states.
In the case of Indonesia, Lafarge's Malaysian teams have been supplying Aceh from their sites and by ship.
- Lee Coppack is the editor of Strategic Risks' sister publication, Catastrophe Risk Management.
POTENTIAL DISRUPTION
Many businesses are in a different situation to Lafarge as regards potential business interruption loss. Supply lines and distribution chains are extenuated and more vulnerable to broken links, while the margins for delay in production have been cut to almost nothing. Even in the building industry, fast track construction contracts have become widespread and depend on just-in-time practices to reduce project duration and so costs. If specialised material or components are delayed, it can cause them a problem, says John Eltham, business unit leader of the special risks unit at London based independent broker Miller.
It was not even a catastrophe, but the commonplace event of just one tanker breaking down and grounding - in a critical waterway - in November 2004 that threatened the Christmas present supply chain of Sony PS2 PlayStations from China to the UK market. It took three days to re-open the canal, and Sony hired Russian cargo aircraft to airlift supplies to the UK to meet demand and stop competitors grabbing market share.
Sony's games business has a relatively small range of products, including PlayStation 2 hardware and related software, and it is dependent upon year-end holiday season demand. As a result, factors like 'delays in the release of highly anticipated software titles and insufficient supply of hardware at this time of year' can have a negative impact on the financial performance of the segment, as its 2004 SEC report states.
Most property insurance policies would not respond to a loss like this.
They generally require the insured business to have suffered some form of physical damage itself to recover business interruption losses. Only specialist covers like marine delayed start up (MDSU) or trade disruption insurance (TDI) may pay for losses which result from late deliveries, for example.
Eltham says that common perils that have disrupted supply chains include natural catastrophes such as storms, earthquake and tsunami, transit risks such as route closures, and political risks including terrorism, war, embargo, confiscation and border closure. "Increased dependence on offshore outsourcing and contract manufacturing has significantly increased vulnerability to political risks."
