When Doing Business in Countries That, Um, Don't Like Us, Here's What You Need to Know
Expanding your business into a foreign market that is occasionally or full-on hostile to the United States poses problems that can limit your success. Here, I'm talking corruption, potential non-payments and currency risks, for starters.
Then there are the endless bureaucratic obstacles you'll face, the ever-shifting regulatory and tax climates and the fallout from geopolitical hot spots: All will add an extra layer of unpredictability which can negatively impact the performance of your company's strategies, business plans and investments.
Where do these things happen? Think countries like Russia, Ukraine, China, Syria, Iran, the Central African Republic, Cuba, Afghanistan and more (the U.S. Treasury, Commerce and State departments currently list embargoes and economic sanctions against 30 nations and territories, in response to alleged trade infractions and state-sponsored terrorism).
To say such actions prompt friction with these countries is an understatement. Yet, despite the resulting challenges, profitable business results can still be achieved internationally, if pursued with diligence and care. First, know what to be aware of and plan for:
A company or brand may be caught in the crossfire of political action simply simply because it's a symbol of America. In Mexico, a social media backlash in Q1 2017 against U.S. immigration policies (including President Trump's wall) urged boycotts against Walmart, Coca-Cola, McDonald's and Starbucks, among others.
Starbucks, responding quickly, answered through its master franchisee, launching a savvy communications campaign pointing out that if Mexicans boycotted Starbucks, they would be shooting themselves and their fellow countrymen in the foot.
The messaging showed that the brand owner, Starbucks Mexico, is Mexican, employs over 7,000 Mexicans, has invested five billion pesos to open 560 Starbucks in 60 Mexican cities and as of last year planned to invest 430 million more to open 60 more restaurants in the coming year and offer an additional 600 local jobs.
Further, the campaign reminded viewers that Mexican Arabica coffee is exported for consumption in Starbucks restaurants worldwide. After an initial customer drop of about 10 percent, the tide turned, as the campaign's message gained traction; interviews with consumers showed that they realized the businesses were Mexican-owned, and the workers, Mexicans. Nevertheless, by May, Starbucks was reporting a drop in sales.
A business where the United States imposed economic sanctions country can be a potential lightning rod for retaliatory action. Russia is a perfect example.
The American business community there is concerned that the pending implementation of still wider sanctions against Russian industry, businesses and business leaders increases the risk that U.S. companies could become the object of retaliation by either government or private businesses themselves.
Although U.S. sanctions have not yet triggered reciprocal actions against American businesses, there is a quiet understanding that American products should be excluded from some bidding opportunities by state-owned and -controlled organizations.
Unfair business practices
An international company doing business overseas can fall victim to business practices that disadvantage foreigners. Such practices nclude IP theft (extremely common in China) and the production of lower-priced copies of popular products. Another big problem arises where a partner appropriates a U.S. company's core technology to build its own product.
Then there are raider-style tactics, where businesses abroad receive pressure from hostile competitors -- sometimes in coordination with local authorities -- that force delays in production, fabricated code violations and more.
As an example, consider Steff Hot Dogs, a Danish-Russian joint venture that sold hot dogs from shiny, silver street kiosks in Moscow and other Russian cities. Though those kiosks at first operated smoothly, the Danish business was effectively forced to surrender its assets and exit the country. In short order, its operations were rebranded and continue that way to this day.
Subway was another victim. The sandwich chain suffered -- at the hands of its local partners -- a brand and asset appropriation similar to what happened with Steff . Blocked from taking legal action by threats from organized crime, Subway spent years of expensive international arbitration before it was able to prevail and return to the market.
Don't get mad, get prepared
So how can businesses prepare for and meet these challenges? Consider five possible actions.
Install best-practice processes from the start. Country-specific risk analyses should always precede a market-entry decision. From there, you should implement a monitoring process that tracks local and global legislation and regulatory, and political developments relevant to your foreign market(s).
Rigorous and realistic analyses should be paired with contingency plans that are routinely updated. While few businesses could have predicted events like the Arab Spring, Russia's annexation of Crimea and Turkey's failed coup d'tat, careful monitoring will enable you to anticipate and respond proactively to many other changed circumstances in a timely and nimble fashion.
Hone your organizational readiness. Companies that succeed in difficult markets have boards and senior executive teams with the necessary leadership and management skill sets to meet the challenges occurring in those markets. Take an objective look in the mirror and be ready to recruit or retain any extra talent required.
Update your force majeure clause. Most international business agreements have these clauses with whomever they do business with: host countries, vendors, etc. The clauses aim to limit downside risk by excusing parties to a contract from liability should some unforeseen event beyond their control prevent performance of their contractual obligations. Still, these clauses are narrowly interpreted. Careful drafting to list a specific type of event can improve the chances the clause will apply. Review your own force majeure clause to ensure that it is specific to the risks of each of your markets.
Consider political risk insurance.
Insurable events include government actions like sanctions, embargoes, contract repudiations, export license cancellations and the confiscation or expropriation of assets. Government sanctions against a business may result in financial damage to it -- something which happened to many companies doing business in Russia either as a result of the post-Crimea invasion sanctions from the West or Russia's response: a ban against food imports from the European Union, the United States, Norway, Canada and Australia.
And while financial damage flowing from sanctions is not an event likely to benefit from a force majeure application, the company's damages may be covered under a broadly written political risk policy.
I've witnessed this firsthand as a shareholder of two international master franchisees in Russia. One was a restaurant company; the other was in real estate management. Both were unable to pay royalties following the 2014 onset of Western governments' Crimea-related sanctions and Russia's counter of a food ban.
Although the franchise agreements included well-drafted force majeure clauses that anticipated sanctions and embargoes, the clauses would not likely excuse performance because the damages suffered were indirect and commercial in nature. Regrettably, neither company had political risk insurance that might have covered their financial damages.
Had I had the benefit of foresight in these agreements, I might have taken each one's force majeure clause and expanded it past the typical exclusions, to add in economic damages that might occur from the occurrences of the kind of events that occurred. But that's not standard, and a lawyer on the other side would have been unlikely to sign that agreement.
So, the lesson is, instead buy political and risk insurance, and pay the premium necessary to cover any economic damages flowing from these events. This is how those two things fit together: Economic damages fall through the cracks of force majeure but political risk insurance will cover it.
Outsource the risk.
If you are an exporter new to difficult markets or you lack resources, you can outsource these challenges and risks to an export agent. Such companies have market-specific experience and will undertake a range of export activities, usually on a commission basis. An export agent can be a good way to get started and up your learning curve in a difficult new market. You will sacrifice some margin but lower your risk.
An example here is Limoneira, a grower and producer of citrus products -- mainly lemons and avocados in California. The company has been growing very quickly in the last decade, especially in the international sector. In order to grow as quickly as the market opportunity said it could, Limoneira purchased land in geographic locations with opposite growing cycles -- California and Chile -- to produce year round.
If the company had enough resources, it could set up individual distributors in multiple global markets. But because it's fast growing, it lacks the international management team to enter all of those countries traditionally. Instead, it decided to appoint export agents to get set up in those markets. Its plan was to get the brand established, then enter other countries through the traditional method once the brand was more established.
That's how Limoneira came to hire an export agent who takes the product and assumes all risk, oversees all distribution. The agent is taking a big piece of margin, but is getting the product out into the market and establishing the brand.
Hostile markets rank near the top of the list in degree of difficulty. They pose risks that can blindside an unprepared company. But they also offer opportunities and rewards for those able to raise their game to meet them on an even playing field.