In my last post I gave an overview of the issues raised at a conference on supply chain risks and opportunities. Let’s now drill down a bit to consider how US and other western companies should address these issues as they being emerging and frontier market firms into their supply chains.
Prior to any investment or contracting arrangement, companies will conduct the usual financial & operational due diligence to get an understanding of the nature of their investment. In doing so they should be mindful of several concerns:
- Have suppliers and other 3rd parties had online compliance training?
- Banks must comply with US financial regulations and so do their suppliers. Banks and other US companies must prepare suppliers to be audited by US bank examiners.
- US & Western companies must maintain their “social license” to operate. This requires a deliberate demonstration of corporate social responsibility and should do all they can to purge human trafficking, child labor and other human rights issues from the supply chain.
SUPPLY CHAIN RISK
- The current approach of international insurers to risk management is to understand the interconnectivity of risk. Experts recommend managing risks holistically rather than in silos. This holistic approach recognizes how operational risks impact legal risks and financial risks.
Western executives often complain of corruption and having to pay bribes in order to do business in emerging markets. (Of course for many westerners the answers is to pay bribes—it takes two to tango!) For US companies the Foreign Corrupt Practices Act means a jail sentence if caught making inappropriate payments. Cultivate long term relationship The strategies recommended by the experts at the EFMA conference and elsewhere boil down to the following:
- Cultivate a long term relationship with suppliers to form a basis for trust. Building trust requires playing the long game so companies should budget for the time and resources required to form a long term relationship with suppliers and other stakeholders. It takes spending time in country. The desired outcome is a local partner for the long haul.
- Get the incentives right. This includes not only sharing financial benefits, but also providing knowledge transfer via training and collaboration.
SUPPLY CHAIN DISPUTES
- Implement controls that encourage performance and foster a long term relationship with suppliers.
- Choose the right jurisdiction in which to set up the business entity and to contest disputes.
- If necessary, seek advice on how to exit a market while retaining as much value as possible, and minimizing the loss of goodwill.
INTERNATIONAL TAX PLANNING
- The natural and quite understandable inclination of most multinationals large and small is to locate profit centers in low tax jurisdictions. Some of these low tax states are disparagingly labeled tax havens. It is also not surprising that governments around the world have pushed back against the practice now known as “Base Erosion and Profit Shifting” or BEPS. The Organization for Economic Cooperation and Development has been a leader in understanding the use of tax havens. Companies would be advised to consult the OECD’s guidelines on BEPS and transfer pricing and to heed the advice of tax consultants and attorneys when setting up supply chain relationships in emerging economies.