Automotive product recalls: Risk management in a time of industry transformation

Product recalls can inflict severe disruptions to company operations, diverting the attention of multiple layers of management, threatening profitability, and risking relations with key customers. Today, product recall risks are getting increasing attention from risk managers – particularly as product innovation, regulation, and complex global supply chain elevate recall risks and make them more complicated to manage.

The automotive sector is perhaps one of the prominent examples of how the product recall risk landscape is changing. Factors such as technology enhancements, the intensity of the competitive landscape, evolving customer needs and expectations, as well as increasing regulatory scrutiny have made product recall risks a concern that goes beyond just quality control. Now, new mitigation strategies and approaches have come into play.

The overarching trend is clear: product recalls are becoming prevalent in the auto sector across all major markets, including the Asia Pacific. In China, recalls surged between 2016 and 2018, driven partly by the Takata airbag recall event. Long-term exposure to high heat and humidity can cause these air bags to explode when deployed.¹  The global nature of supply chains saw the same event impacting other Asian markets such as India. Meanwhile, recalls of both domestic and imported cars in South Korea have hit new highs over the past few years. ²

Vehicles are increasingly designed around the desires and needs of users. This means manufacturers must keep pace with rising consumer requirements around mobility, functionality, economics, safety and services.

As vehicle requirements change, so have recall trends. For instance, with increasing demand for more sustainable cars, product recalls for new energy vehicles (NEVs) – which are more susceptible to technical defects compared to petrol cars– are also on an upward trajectory. In China, for example, close to a quarter of the total 199 recall events recorded last year were for NEVs despite making up only 1.8% of the total car population by the end of 2020. ³

While technology makes vehicles smarter, safer and greener, it also introduces more potential points of failure and vulnerability into the automotive ecosystem. Electrical systems, batteries and controllers are emerging as risky areas. Earlier this year, US authorities announced an electric vehicle recall due to flash memory failures that could interrupt cameras as well as safety functions such as signalling. More recently, a leading battery maker agreed to pay a US automaker nearly USD 2 billion to cover the cost of a recall involving batteries in 141,000 electric cars.

On top of these challenging circumstances, the heightened competition demands shorter development time, lower costs and swift adoption of the latest technological innovations. Taking NEVs as an example, despite manufacturers' endeavour to exhaustively test the cutting-edge technology involved, real-world conditions may lead to unforeseen outcomes and increase the risk of product recalls.

An increased focus on safety and customer protection has prompted regulators to tighten guidelines for automotive recalls, requiring companies to maintain and adapt to newer safety standards. While this is positive for consumers and should be encouraged, it poses challenges for manufacturers and parts suppliers – more so as supply chains spread across the world and protocols vary in different locations.

As regulatory scrutiny increases, recall events could also rise. China recently tightened regulations⁴ for electric vehicle makers a couple of months after a US carmaker ‘soft-recalled’ more than 285,000 of its vehicles in the country.⁵  In addition, the National Highway Traffic Safety Administration (NHTSA) in the US looks poised to take a tougher stance on automotive recalls.⁶

Today's globalised supply chain network can further complicate recall risks. The auto-parts industry has seen tremendous consolidation activities over time. As manufacturers source components from fewer yet larger suppliers, this results in the concentration of risks.  The Takata event is an example of product recalls threatening the survival of a large automotive component manufacturer and sending shock waves through the entire automotive supply chain.

For all its challenges, the auto sector’s tech-driven evolution has far more pros than cons. As Original Equipment Manufacturers (OEMs) and Automotive Parts Suppliers harness technology for product innovation, the first step to minimising recall risks and reinforcing business resilience is to ramp up their monitoring of risk trends on the technology, regulatory and supply chain fronts.

The awareness of global recall trends will enable industry players to make informed decisions and formulate effective early responses. Access to tools and databases that enhance understanding of specific liability risk profiles, and knowledge of different countries’ regulations and risk management practices can help mitigate losses stemming from an evolving risk landscape. It's also crucial to bear in mind the integrated nature of supply chains - sustainable product recall solutions need to cover not just automotive manufacturers, but also retailers, distributors and component makers.

To mitigate the risks arising from new technologies, it's also vital for automakers to implement rigorous testing and quality management process at the earliest stages of product design and development, and ensure a culture of continuous improvement permeating the production process.  

This will help auto manufacturers avoid the trap of the ‘beta mindset’ typically adopted by tech companies, which release new products into the market quickly and worry about fixing bugs afterwards. In automotive product development, where small errors can snowball into massive safety impacts, the price to pay for such an approach is simply too high.

Another crucial step of successful product recall risk management is preparation. Automakers and parts suppliers should structure a sound and dedicated recall organisation internally that can kick into action immediately during a recall event. This should be backed by a detailed recall plan that is tested and improved through regular trial runs that closely model real-world scenarios. The aim is to have the resources in place to ensure that at any time, the organisation can quickly ascertain:

• What product or component triggered a recall?
• To which manufacturer or customer was the product sold?
• Which production batches and how many units are affected?

Automakers and suppliers can also extend their risk mitigation and awareness through partnerships with insurers that have dedicated sector expertise. For instance, by leveraging risk engineers' deep knowledge and vast experience, companies can assess their risk exposure and benchmark their product recall preparedness. There are also protection solutions specifically designed to ensure businesses weather operational storms triggered by recalls, while maintaining their financial stability.  

The more complex the risk, the more innovative and bespoke the insurance coverage needs to be. Collaborations between insurers and automotive product providers can help create tailored solutions for recalls triggered by product failure or design errors.

As the lines between the tech and auto industries blur further, automotive industry players will rightly view the integration of cutting-edge technologies and features into their products as a critical source of competitive advantage. But knowledge of and proactive efforts to mitigate technology-driven risks will also be a key factor in any organisation’s long-term success - commercially, and in its relationships with regulators and customers.

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^{1 Takata Recall Spotlight, NHTSA
2 Korea Transportation Safety Authority
3 2021 Automotive Defect & Recall Report | Stout
4 https://www.scmp.com/tech/policy/article/3144811/china-doubles-down-smart-vehicle-data-regulation-after-teslas-ev-recall
5 https://www.cnbc.com/2021/06/28/tesla-shares-shrug-off-soft-recall-of-285000-cars-in-china.html
6 https://www.prnewswire.com/news-releases/stricter-regulations-and-increased-enforcement-of-product-recalls-under-biden-administration
https://www.scmp.com/tech/policy/article/3144811/china-doubles-down-smart-vehicle-data-regulation-after-teslas-ev-recall -looks-to-impact-all-industries-in-2021-and-beyond-301359142.html
7 https://corporatesolutions.swissre.com/dam/jcr:03ffe018-3e76-4d98-8c9e-f5b7ed24f73a/crisis-management-product-recall-contamination.pdf}