Why Asian TMT companies are recognizing the importance of insurance and a risk management approach

Alongside rising internet penetration and technological advancements, Asian telecommunications, media and technology (TMT) companies are increasingly expanding outside their core markets to seek out new sources of growth. As the scope of their operations widen, so will their exposure to risks — be it in new technologies or new markets. This will increase the need to implement strategies to mitigate unanticipated financial and business impacts of these risks.

Operational expansion: striking the risk/reward balance

TMT companies in such developing markets as India and Thailand are faced with narrow margins stemming from intense price competition, which makes it necessary for them to expand their market size or seek alternative growth outlets. But achieving this is not straightforward, as unstable macro-economic environments can lead to high economic and political risk, while under-developed transport infrastructure or legal institutions contribute to operational and vendor risks.

When it comes to geographical expansion, TMT companies need to manage the challenges of entering a new economic, investment, operating and regulatory environment. Operators can face high government-imposed merger fees and hefty advance tax payments that will have an impact on cash flow and speed of expansion. Failure to plan for these extra operational costs can have major repercussions on their strategy and financial performance.

The B2C marketplace invested in logistics in 2015 to circumvent external express delivery providers

For some TMT companies, the risks to expansion are on the operational side. In India, for example, it costs an e-commerce vendor 50% more to ship an item than to use a slower delivery method (e.g., road or rail), where passenger traffic is prioritized over freight. This has forced e-commerce players to re-think free express shipping offers and find more financially sustainable ways to differentiate their customer services. Some companies have chosen instead to invest in verticals such as data analytics and supply chain management to forecast customer demand and react quickly to dispatch orders. But only the most successful e-commerce companies, such as Snapdeal, have the scale to look beyond their core business to cope with these operational risks. The B2C marketplace invested in logistics in 2015 to circumvent external express delivery providers, enabling it to reduce delivery times by 70% in a more cost effective way.

New technologies invite new challenges

Asian TMT companies in more developed markets are also diversifying their businesses in pursuit of new growth opportunities, with technological advancements at the core of their strategies. In 2015, major contract consumer electronics manufacturer Foxconn decided to replace 60,000 factory workers in China’s Jiangsu province with artificial intelligence (AI) developed in partnership with 34 other Taiwanese companies. The affected workforce represents but a small fraction of the estimated 100 million workers employed by the country’s manufacturing sector, but the likelihood of labor unrest and clashes with international human rights groups will rise as more companies are driven to such measures to cope with rising cost pressures. This could potentially create friction between TMT companies and the local community, as well as the central government, which will in turn impede businesses’ ability to monetize their AI investments through mass market adoption.

Meanwhile, Baidu and Xiaomi are investing in driverless cars and constructing drones, entering new areas in the world of the internet of things (IoT) that are not yet governed by a specific regulatory body or law. However, as these technologies start to gain mass market acceptance in the future, companies will need to tweak their business models and products to align with evolving regulation.

TMT players target fintech

Insurance policies that include provisions for data theft and privacy violations are likely to be in high demand

A complex, intertwining relationship between industries only serves to exacerbate existing risks and complicate risk management procedures. TMT companies are forming an ecosystem that combines devices’ hardware, software applications and over-the-top (OTT) applications, multiplying the openings for malicious users to target. In more than one instance, malware disguised as app updates on the Android operating system have been found stealing users’ mobile banking information. Microsoft’s latest Security Intelligence report finds that four Asian countries — Bangladesh, Indonesia, Nepal and Pakistan — were among the five locations with the highest malware encounter rates in the world, heightening the challenges of regional expansion into frontier markets.

This is closely linked to a key feature becoming commonplace: the integration of mobile payments and e-commerce features into chat applications. LINE, WeChat and Kakao are just some examples of widely used messaging apps that have adopted user interfaces allowing consumers to conduct one-click payments over their chat platforms. While convenience and exclusivity are driving companies to establish such an “ecosystem,” it increases the risk of end users’ mobile accounts being compromised and used for unauthorized purchases. These companies must therefore invest heavily in security to mitigate these risks to remain credible in the eyes of consumers, and to reduce the costs of responding to security breaches. Insurance policies that include provisions for data theft and privacy violations are therefore likely to be in high demand as OTT chat companies expand into the fintech market.

TMT move into fintech

In the same vein, changes to regulatory guidelines in the banking sector have led to the licensing of TMT companies as specialist banks, exposing them to greater financial technology risks and much more stringent regulatory environments. Chinese internet giants Tencent and Alibaba were granted online-only bank licenses in early 2015, and South Korea followed suit later in the year, licensing two consortiums led by Kakao and telecoms operator KT as internet-only banks.

This trend, likely to emerge elsewhere in Asia as countries exploit high internet penetration to revitalize the stagnating banking sector, means that TMT companies stepping into fintech will no longer process just person-to-person (P2P) transactions, but much more complex transactions for consumers and corporates, and therefore store a lot more sensitive information. In 2015, 25.05M mobile users in China experienced some form of payment-related virus, and Tencent’s research arm has found that 326,000 out of 16.7M new mobile viruses in 2016 were related to payments — a worrying trend for TMT companies.

Data risks will only rise from here

IBM’s latest study finds that a single data breech will cost companies USD 4M. As companies amass volumes of sensitive user data — which are then carried across various legal jurisdictions — they take on a greater responsibility of ensuring that user data is not left unprotected and vulnerable at any time. TMT companies are undoubtedly invested in state-of-the-art cybersecurity software, but even so, the risk of a security or data breech is never fully diminished.

The increasingly complex web of connected devices means the fear of privacy and security breaches will stay at the forefront of any data-driven economy. Data collection comes in all forms, and TMT companies will find that administering the acquisition and utilization of sensitive data could prove more risky than expected. The application of biometric identification, for example, has faced some challenges. Facial recognition technology used by online-only banks to authorize new account holders can be rejected as a result of regulatory scrutiny, thereby diminishing their competitive advantage.

Although the expansion into new areas is crucial to long-term growth, it is yet to be seen whether the opportunity in the fintech market is big enough to offset the additional regulatory and security costs.

Summary

As the region with the highest number of connected people and devices and a strong appetite for multifunctional OTT ecosystems, Asia provides a fertile ground for TMT companies to overcome market saturation and price competition through scale and diversification into new sectors. However, moving into new markets and new technologies incurs unpredictable risks, and investment in pre-emptive insurance and cybersecurity protection will be crucial in navigating unchartered territory.


 

Sirikit OhSirikit Oh is the Managing Director for Asia’s Technology, Media and Telecommunications practice.

Categories: Asia, Tech Media Telecom | Tags: , ,

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