It's Time to Trim Your Global Sales Sails To Reduce Risk

Ed Marsh | Mar 22, 2022

Tl;dr - Global sales have grown consistently for 10-20 years for many American companies. They are profitable and have provided diversification. There's global change afoot, however, that changes the calculus for some export sales. While still an appealing market opportunity, it's worth considering risks and making prudent adjustments. 

Volatile and Therefore Risky

It's a chaotic geopolitical world these days.  We face domestic friction and turmoil as well as international. Supply chain issues, logistics and freight costs, raw material and component shortages/allocation, producer pricing inflation, and of course war in Europe are all impacting business.

On the one hand, recency bias tells us that things are and will be fine - these are just blips. On the other, it's clear that inflation isn't transitory, and that chip COVID shortages from shutdowns will now be potentially exacerbated by energy rationing and the availability of neon that is produced almost exclusively in Ukraine.

Recency bias may be distracting us from threats rather than simply restraining us from overreacting.

And it's likely to get worse. We know from history that there will be some kind of a blow-off top - probably in markets, geostrategic alignments, and society. (If you haven't read Neil Howe's Fourth Turning I recommend it for the perspective it provides. We couldn't have named Trump, or COVID, or Ukraine as catalysts 30 years ago, but we could have known that this decade would be tumultuous. There's great strategic value in this sort of high-level understanding of trends.)

Because it's going to get worse before it gets better, it's important to take some time to think about your global sales posture in the short and medium terms.

Risk Diversification or Concentration?

I've long advocated for global sales as an operational and strategic opportunity for industrial manufacturers. Exporting offers many benefits including revenue growth, lessons learned abroad to improve business at home, and market/currency diversification.

For companies that deliberately pursued it, it has yielded exciting growth, profits, and employee engagement. And globalization created supportive frameworks to easily undertake that work. Digital marketing has reduced barriers to connecting with global buyers, government programs supported export development, and trade policies generally simplified transactional aspects. That doesn't mean every market was appropriate for every company. In fact, for nearly two decades I've discouraged US manufacturers from chasing the Chinese market - at least until they were well established and profitable in various other global markets.

But clearly, it's evolving.

While I'm sure that advanced American manufacturing will continue to develop exciting international revenue, it's also important to recognize some significant changes.

The positive buzz around globalization and trade has aged. There's increasing recognition of some legitimate downsides to open trade (more on the US import side, than export - but friction increased for one will impact the other) and a reaction to it. Made in America and reshoring trends are strengthening.

That's been accelerated by the recognition that ultra-efficient supply chains are also exposed and brittle. Our outsourcing of most pharmaceutical APIs (active pharmaceutical ingredients), fertilizer, chips, and rare earths have all created recent angst. There's geopolitical insecurity in reliance on imports. As we're recognizing that, so are others (e.g. our export target markets.)

Those are long-term strategic considerations. But recently there's another class of risks that have arisen quickly and unpredictably. These are political and property rights related risks.

Unpredictable Risks

Put aside your political philosophy or opinion on any particular situation. The fact is that many of the seemingly settled legal premises of property rights upon which many companies have established and run international business are now subject to reevaluation.

The rapid, seemingly impetuous, and potentially vindictive seizures of property, freezing of funds, and sanctions of trade create large exposures for exporting companies with pending transactions and overseas offices.

Certainly, there have been rare instances in the past of regimes nationalizing foreign-owned business assets. That's not new. But it was unusual and generally foreseeable.

Recently however, risks have become less foreseeable. COVID created real challenges for the movement of people (even preventing some from returning home from business trips abroad.) Canada's seizure of assets and freezing funds happened suddenly and without warning. Simple bank transfers and SWIFT transactions can be quickly interrupted. And sanctions can turn carefully planned and appropriate transactions into illegal ones overnight.

You might argue that it doesn't pertain to your company as you're entirely virtuous in your business practices. And you'd probably be right. But it's not just you, or even your direct customer, that determines the risk. Here are some examples to consider:

  • If your buyer suddenly loses the ability to transfer funds to you, or access to USD to pay you, or experiences a sudden and massive depreciation in their local currency vs. invoice currency, they simply may not be able to pay you. That's independent of your years of mutually rewarding business, their ethics or commitment, or your legitimate claim. They may be simply unable to pay.
  • If you sell products that are at sea when sanctions are imposed, then what happens with your letter of credit? What happens to customs clearance? Are you in violation of export controls if you've sold with INCOTERMS which retain your ownership control until delivered vs. when shipped? These are complicated questions that might eventually be resolved in your favor, but for small and medium-size companies the cash flow considerations and legal costs are significant.
  • What if assets owned by your foreign subsidiary are suddenly no longer "exportable" and can't be repatriated? Or frozen? Or seized?
  • Or if American citizen employees are detained/arrested to be used as bargaining chips?
  • How about rapid and extreme fluctuations in currency valuation?
  • And how about inflamed emotions that might cause local administrators to take actions on their own which you'll have little recourse to challenge?

If you have overseas operations, assets, or employees, you're exposed. If you have long lead times and ocean transit times you're exposed.

Some Common Sense Steps

Does all of this mean you should halt export sales? No. However, it does mean that you should challenge assumptions, conduct some stress tests, brainstorm areas of risk, and take some specific mitigation steps. Beware of recency bias!

Some possible steps to consider:

  • Repatriate as much capital as you can from any overseas operations. Don't leave them illiquid and unable to operate, but don't leave excess cash exposed to seizure, currency depreciation, or inability to convert/transfer. Certainly, there are tax considerations to weigh, but they may be secondary at this point.
  • Consider the disposition of any significant inventory. Could you move it to other nearby markets? What would duty and logistics considerations entail? Is any inventory now in violation of evolving export regulations?
  • Ensure that ALL receivables (even domestic, given broad business volatility) are adequately insured. That insurance must protect against various causes of non-payment (including things beyond bankruptcy of the buyer) to protect you. Ensure that the definition of default is appropriate for your business circumstances.
  • Revisit corruption, compliance, and FCPA policies with your entire team. In difficult and challenging circumstances there may be a temptation to cut corners to get out of a jam. Give your team clear guidance, and management blessing, to make the right choices even when they're hard.
  • Carefully review corporate travel policies and your Duty of Care obligations. 
  • Seek outside expertise on compliance issues to ensure that pending deals don't create exposure in a rapidly changing, complex compliance environment. Check every buyer against the various Denied Party lists for every transaction to catch any changes.
  • Adjust terms of sale to reduce risk of rapid changes that could occur during manufacturing and/or transit.
  • Perhaps you should suspend business in some markets - according to social pressure if that's your inclination, or more importantly according to your own judgment of risks and business ethics. You can always harvest leads, nurture relationships (remembering that export controls cover technical information as well) and build momentum for sales at some point in the future.

Your advisors - legal (including local legal), accounting, freight forwarding and customs brokerage, insurance and health/safety - should be consulted regularly about meta conditions and specific market/transaction details.

Don't Screech to a Halt, But Pump the Brakes

American-made products, particularly capital equipment and durable goods, will always find eager buyers around the world. Export sales can be more profitable in some cases, and may help to reduce market-specific cyclicality. 

So don't withdraw with the intention of eliminating risk exposure by ceasing all global sales.

However, the world as we approach the end of Q1 '22 is different than it was five years ago. Your business growth plan needs to recognize that.

There are some simple, prudent steps you can take today to dramatically reduce the risk of loss from sudden changes, while still keeping your global sales effort active.