Operating within the EU, a single market, does not involve anywhere near the level of risk or knowledge that is involved in operating in markets beyond the EU borders. While many question the sense of coming out of the EU, some will point towards the trade projections for the EU being relatively flat, or even in stagnation, while trade within the rest of the world is projected to grow. This growth is particularly driven by developing markets.
The following list provides projected 2022 GDP figures in billions of US dollars for some of the largest markets:
Country Billions of US Dollars
China 17,706
India 3,935
Brazil 2,676
Russia 1,840
Indonesia 1,615
Mexico 1,283
Turkey 1,031
Argentina 908
Saudi Arabia 837
Nigeria 656
The challenge is that none of the above are easy at doing business with.
South East Asia is an example of a difficult region of the world within which to operate, and the following percentages from exporters operating in Indonesia as an example, gives an indication of some of the challenges:
Activity % Experiencing Issues
Corruption 13.8
Bureaucracy 11.1
Access to finance 9.2
Infrastructure 8.8
Policy instability 8.6
Government instability 6.5
Tax rates 6.4
Poor work ethic 5.8
Tax regulations 5.2
Inflation 4.7
Uneducated workforce 4.3
Crime and theft 4
Restrictive labour regulations 4
Activity %
Foreign currency regulations 3.3
Insufficient capacity to innovate 2.5
Public health 1.8
The issues detailed above have a real impact on the ability for exporters and financiers to operate within these markets. All of these figures are available online for each and every market around the world.
High Risk Areas
There are many areas of high risk that any UK company operating internationally needs to be mindful of. These include:
Third Party Agents and Distributors
Not only do agents and distributors carry the responsibility of securing business for your company, they operate under your business, you brand and your legal structure.
There are sometimes close connections between business owners of agents of distributors and government officials. These are called Politically Exposed Persons (PEP’s). Not only do you need to be aware of such potential conflict, you need to avoid it. This can also be the case with too close a connection to buyers.
Gifts and entertainment
Under UK legislation, companies are not allowed to offer gifts and entertainment that are disproportionate, otherwise these are effectively seen as a bribe, from which legal action can be taken.
Other high risk areas include;
Donations
Unusual transactions. If it seems too good to be true it probably is
Closed management culture within an agent or distributor
Unusual buyer requests
Large marketing budget requests and samples
How To Enter These Markets and Manage The Risk?
Prior to moving into any market, you need to ask yourself the following questions:
Why export?
What is the business driver – the need to do so?
Where to export – how to chose your markets?
How to get into those markets?
UK & USA websites and data provided by the CIA will provide a mass of country specific data.
Export advice and expertise?
Is your product suitable? Are there any adaptations or different certification required, and what are the cost involved?
Language, sales resources, regulation and finance?
Export cost?
Business risk assessment?
Routes to market?
Planning and execution?
Thoughts on Local Representation
How to find local representation and take the first steps in appointing them:
- Local Department of International Trade offices.
- Research other companies within your sector.
- Beware of recommendations and those who claim expertise within a sector.
- Often local law protects and even gives a positive bias towards local third parties acting as your agents, such as in South American.
- In Saudi Arabia, as in many countries in the Middle East, you will need to declare who is acting on your behalf, particularly where government deals are involved.
- Carry out due-diligence and research into their suitability.
- Agree the business objectives and targets. They are an extension of your sales force, so professional management is required, so benchmark and measure them.
- Often agents can be difficult to get rid of, so it is important to document every requirement, measure and activity in order to be able to more easily implement any necessary changes.
- Already mentioned, but so important it is worth mentioning again, connections to politically exposed persons (PEP’s). Many companies in countries such as Brazil, China and India are state owned, which often is not clear.
- Commissions must reflect the value you are getting, so don’t be persuaded that certain markets demand higher commissions. If there are large commissions on large deals, then there is room for bribery.
- Method of payment should be to where the third party lives or does business in order to avoid tax evasion issues.
- Out of agreed term requests, funding for extra taxes or requests for high value gifts and travel should be a ‘red-flag’ for questionable trading practices.
- Be aware of both the local and the UK law when dealing with third parties, and seek legal advice ahead of entering into any agreements.
Agents and distributors can offer a significant opportunity, but they need to be controlled. In bribery cases, 80% have come about due to a third party intermediary issues, covering the UK, USA and the EU.
UK Bribery Act 2010
See online for full details of the Act, the outline of which is important to understand.
The Foreign Corrupt Practices Act in the USA has been used far more prevalently than in the UK, with some multi-million dollar fines and prison terms. In the UK the Act is implemented by the serious fraud office. While their main focus is serious fraud within major companies, that does not exempt SME’s from being identified and prosecuted.
Legal actions brought against companies include:
- Corporate liability offence or failure to prevent bribery
- Prohibits both giving and receiving bribes
- Company-company bribery
- Bribing foreign officials
- Bribes paid through third parties (agents)
- Facilitation payments
- Extra-territorial application
It is not an acceptable defence to use a local culture involving briary. In countries like China, in order to reduce bribery, the government are taking significant actions to prevent this from occurring.
The question is, do you have adequate procedures to prevent bribery?
For those wishing to trade in USA territories it is worth looking at the USA version of this law called the Foriegn Corrupt Practices Act. In France it is called Sapin II.
Funding Barriers
To reduce the chance of funding barriers, carrying out due diligence is key. Even a Google maps search may establish their premises are something else altogether. How professional is their web site? What do the financial records look like? Cross reference all the information and you can get hold of. One option is to use credit reference agencies, although these may vary in quality county to country, depending upon their laws of disclosure.
You may wish to take out a trade credit insurance policy, directly or through an invoice financier, protecting against protracted default, debtor insolvency, political risk or an outbreak of war. Trade credit insurance, often offering up to 90% cover with the final 10% when the debt is recovered. Quality debt recovery services have local agents with people on the ground who understand the local market and all legal fees are covered.
There may also be a country risk analysis available from a credit reference agency when take a trade insurance policy. It must therefore be questioned, if a trade credit insurer will not provide credit cover, whether you should be dealing with that market?
Foreign Exchange Risk
Agree an exchange rate in dollars, but if exchanges move, then the profit can disappear. Options available to reduce risk:
- Forward Contracts offer a facility where-by you can fix rates between two currencies at a specific date in the future.
- Ask the debtor to pay you in sterling so they bear the risk or any negative exchange variation, however, they may not wish to do this and may come down to your competitive position and how much you want their business.
Payment Terms
In some markets it is deemed necessary to operate under a Letter of Credit, therefore some trade credit insurers may only give credit on that basis. This is a document from the bank guaranteeing payment to the supplier on behalf of the debtor. It must be noted however that the bank will only pay out if all the conditions are met, but with 7% of letters of credit known to be incorrect in some way, they are not an entirely secure option. Letters of Credit can also be costly and difficult to organise.
Overseas debtors may require longer credit terms but try and keep the debt period as short as possible. Where a debt period is longer than your cashflow allows, an invoice financier can advance upto 90% of the value of the invoice and release the final 10% upon payment of the debt.
If for whatever reason you cannot recover the debt, you need to either take legal action, or, accept the loss. Legal action overseas can be complex and expensive, but, the first step is to ensure all of the documentation involved is correct. You need to have a Contract, Terms and Conditions, plus you need to identify the agreed jurisdiction of any legal action. Any legal decisions however made within the agreed jurisdiction will still need to be enforced overseas using local legal help. In the Middle East, any decisions are strictly based on all documentation involved, without exception. You will therefore need your contract, your purchase order, your bill of lading, proof of delivery, your invoice; all original and translated in Arabic. Should you succeed you will only receive nominal contribution to your legal costs, which depending on the value of the debt may make legal action less viable. If you have taken out a trade credit policy then the insurance may pay out once judgement has been found in your favour, and then potentially go on themselves to recover the debt through the courts in the specific country before providing you with the final 10%. Getting legal judgement under UK law is therefore an important part of making any debt recovery, whether it is something you are going to embark upon, or pay others to do on your behalf through insurance, less complex, time consuming and expensive.
Contracts and Terms & Conditions Can Impact Upon Funding
A contract is an agreement between parties stipulating the obligations for each party, and it is enforceable by law. Some of the key points of a contract include:
- A clear definition of the product being provided.
- Payment terms. This must be specific. If it’s 30 days, is it 30 days from the date of invoice, receipt of invoice, from the bill of lading, from the product being delivered, installed, quality checked and signed off? One potential clause called the Pay Grant Paid Clause is dangerous, as this is based upon the debtor paying you when his debt is paid. Where a third-party debtor goes into liquidation and your debtor has not been paid, there has been no breach of contract and therefore no trade credit insurance will cover the outstanding debt.
- Guarantees or warranties being offered.
- Timelines for deliveries and queries. If not, any delays in supply, through potentially no fault of your own, could lead to daily penalties unless the rules are set out clearly in the contract.
- Specify what happens if either party does not deliver, or pay.
- The term of the agreement and what notice is required to get out of it.
- Define which law will govern the contract as well as the juridstiction.
- A ban on assignment clause means the work cannot be subbed out to a third party, something many sectors rely upon, and can also be required in order to meet supply dates for which there may be default clauses. So ideally this is a clause to be removed or have waived.
- Right of set-off is where fulfilment of the order to your customers is delayed, which may be due to no fault of your own. Your customer decides to go to another supplier but in doing so incurs extra costs which they claim against you. This can also include extra costs for the inconvenience, so another one to note and remove where possible.
- Termination clauses can be placed into the contract where there are over-runs or a breach of contract. The impact of this may be no payment for any work undertaken. Termination clauses can also remove any debt liability where either party goes into insolvency.
The key is to make sure the legal jurisdiction is in the UK and the contract and terms and conditions are thorough and understood by all concerned. It is also vital that all documentation procedures for each contract are strictly adhered to.
Ideally find a financier that will fund 100% of your export ledger covering all of your international markets but be aware that some may cap this at a lower level in order to reduce their risk. Find one with a foreign exchange service and consider language and time zone support – speaking the same language in the same working hours as your staff. You may also want the benefits of your trade credit insurance being supplied by your funders, as many trade credit providers also offer debt protection.
It’s vital to go into any markets with your eyes wide open, and if you do and with the right practices in place, the risks are diminished and the opportunity can be significant as well as exciting!