Overview: The risks involved with going global.
I’m Geoff Runcie and at the start of 2015, I was lucky enough to be involved in a series of sessions with the International Trade expert, Murdo Beaton. We were accompanied by Abdul Mann, whose team has built a range of international trade solutions under the brand EDGE. Abdul helped to explore some of the ideas Murdo presented in his answers about Top Risks involved with going global.
Today you’ll hear one of ten questions presented to Murdo, but if you want access to the entire session or future sessions, there is a link at the end of this blog. Alternatively, feel free to drop me an email on Support or visit www.edgectp.com. A full transcript of this session has been provided below.
OK gentlemen, today I’d like to discuss the risks in international trade.
There are several risks in international trade that one has to consider. Personally I don’t like the word risk too much because all of these things are manageable, and they only become an actual risk when somebody does something they shouldn’t have done. So the word risk, OK fair enough. Now, what are they then?
There are risks involved with going global itself. For instance, the business could overstretch itself. It could actually enter the overseas market without having considered whether it has the necessary financial resources with which to do. Entering into any new market requires a level of financial resource to back it, and if that financial resource isn’t properly managed then that could be a risk to the business. There is also, of course, the risk in terms of the customers that are identified in the overseas market:
- How good are they?
- How financially sound are they?
- How sure are we that we are actually going to get paid?
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After all, that is what we are doing this for! If there is a threat to our money being able to come back home, then we really have to seriously consider why we are doing this. So, here is what we would call a buyers risk involved here as well. There are also issues regarding the country with which we are trading.
- Is it a stable country?
- Politically stable?
- Economically stable?
- What’s its regulatory framework in terms of my service or product?
- What are the taxation issues that I may be confronted with?
So yes, there are country issues that we have to consider as well. Buyer issues we have to consider and business issues that we have to consider. In some markets there can be a lot of regulatory obligations. Now, that word would immediately suggest that anything that has got a regulatory framework is somewhere I don’t want to go. Well unfortunately, if you want to run a business in today’s global market you have to accept the fact that regulation is something we must contend with, and regulation is now becoming part of a business model.
So when you say that, you’re talking about what documentary requirements you need in order to be able to clear customs in the other country.
Yes indeed, what documentary requirements you have, or the product itself. Does it have to be registered in a foreign market? Are there any export restrictions on the product? Or indeed on the service? Or indeed on the technology in terms of export control as administered by our own UK government. Indeed, likewise administered by other governments in other countries. So these are issues that could actually present the company with a problem. But again, all of them are ones that could be relatively easily overcome. We could put systems into place to help us administer these issues but the main thing is to be aware of them.
What about the situation that a lot of people worry about, apart from getting paid which is paramount and number one, where they could possibly use instruments like Letters of Credit to try and offset some of that risks. What about when goods go missing or they don’t arrive at a certain location? Is there insurance that people should take out? Also, taking that a little bit further forwards, if it’s broken and it needs to be returned to be fixed before it gets sent back to the country.
Yes indeed. We are aware of the fact that when we talk about export, we are talking about geographical distances, and in that sense we are talking about the need for transportation. And in that sense we are talking about transport contracts that will exist between the supplier (i.e. the exporter) and the carrier, be that marine carriage, aviation carriage, road carriage. Yes, these carriers are in actual fact main players in the global supply chain, and these carriers operate under terms and conditions, and they do have contracts with all exporters who use their services.
These contracts, certainly in the main modes of transport (marine, aviation, road and rail) these contracts are influenced by international conventions, which in actual fact stipulate the liabilities that the carrier has when they actually engage in the transportation of products from A to B over foreign borders. So, these limitations give certain protection, but again the exporter has to be aware of what are the limitations in terms of the contract that they might have with that carrier and it’s up to the exporter then to determine whether or not the compensation that they would expect from a carrier in the event of loss or damage is adequate to the value of the product that they have assigned the carrier to transport. If not then they are able to take out additional insurance cover to protect their interests.
What about when you’ve sent a widget to an overseas market and it’s working fine for a week or so then it breaks down and they say “Can you come along and fix it or I’m going to send it back to be fixed.” Are there complications with that Murdo?
When you actually supply widgets to a foreign entity, or indeed any entity in the domestic market, you will also be doing that under a supply contract. Your supply contract, depending again on your buyer, is likely to include some terms relating to warranty. On that basis, if your product fails to meet the expectation of the buyer then the buyer may have certain rights to seek compensation from you. If the product actually fails and requires to be repaired then it will have to be repatriated to your home base to be repaired and then returned to your customer. But all that would depend on the terms and conditions of your supply. I.e. did your warranty allow for this or did your problems arise after the warranty expired? So the supply contract is very important in determining what’s going to happen when these unfortunate occasions may actually arise.