MANAGING EXPORT RISKS

MANAGING EXPORT RISKSWhat any exporter or business involved in an export-related contract will quickly discover, is that there are a number of risks involved with exporting or participating in an export supply chain. A new market may mean new risks which can fundamentally affect your business. Identifying and managing those risks can help minimise their impact.

Business risks when exporting

This guide should help you understand:■■ What risks you need to be aware of when entering an overseas market■■ How to manage risks, including finance risks■■ How to protect your intellectual property (IP).

Rod Hayes Co-founder and CEO

Balance Utility Solutions

“ There are also a variety of technical challenges to do with the translation of what we do from an electrical and technical compliance perspective into a different jurisdiction. Do not take that lightly. You need to know what you are getting in to. ”

OperatingPolitical

Legal

Contract

Currency

Finance

Reputational

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EXPORT MARKET RISKS You’re likely to come up against different risks when operating in international markets. Depending on the country, some of the key risks you may encounter include:

Operating risks Exporters need to become familiar with the operating environment of international markets, as this can be very different to Australia. Some important things to look out for are industrial relations policies and practices, taxation requirements and import requirements.

Political risks An uncertain political environment can hamper export operations. A trade embargo could affect delivery of goods, civil war or political violence could affect the safety of your staff and partners, political instability could result in defaults on payments, confiscation of property and assets, and blockages in transfer of earnings.

Legal risks Legal requirements and processes can vary significantly across different markets. Some common considerations include local contract law, IP requirements, product liability laws, dispute resolution processes and OH&S laws. Do your research and receive legal advice with in-market knowledge.

Contract risks Differences in contract law between countries means seeking legal advice on contract terms to ensure they are binding and enforceable. It’s also important to understand the local business culture to ensure you have an appreciation of the expectations of doing business with local partners.

Currency risks Adverse movements in exchange rates are an inherent risk of doing business overseas and can lead to a loss of earnings or profit. You can protect yourself by quoting only in Australian dollars, or taking out a foreign exchange facility allowing you to lock in exchange rates.

Reputational risks Entering a new market can also risk your company’s reputation. For example, if you use offshore manufacturers or agents, any unethical behaviour on their part could reflect poorly on your operations at home. Or if your product’s IP is breached, counterfeit or poorly-made substitutes could undermine the reputation of your brand.

Will Shrapnel Founder HeliMods

“ In different markets, different geographies, there are different expectations around product and services. So there are challenges in understanding cultural differences, or preferences in and around how work is done and how it’s delivered. ”

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KEY COUNTRY RISKS Risks vary significantly by country, with certain risks more pressing in some countries than others. Here’s an overview of the opportunities and risks of some key Australian export markets.

India

■■ India is Australia’s 4th largest export market, importing more than $16 billion in Australian goods. Its large and young population and strong growth trajectory present significant opportunities for Australian businesses.

■■ Austrade reports a lack of transparency and significant bureaucratic burden in procurement practices a risk of doing business in India. Regulations are said to change frequently without consultation and can be inconsistently applied.

■■ The World Bank’s ease of doing business gauge ranked the Indian business climate 77th out of 190 economies in 2017/18. Enforcing contracts, paying taxes and starting a business are particularly difficult. Despite this, India has been one of the top 10 improvers in business conditions for two years in a row, after implementing 14 sizable business regulatory reforms in 2017/18.

South Korea

■■ South Korea is the 11th largest economy in the world, and Australia’s third largest trading partner.

■■ South Korea’s business climate came in 5th out of 190 economies in 2017/18 on the World Bank’s ease of doing business gauge, outperforming most other advanced economies.

■■ After a corruption scandal in 2016 and widespread protests, South Korea’s change of government has introduced new measures to improve democracy and social justice.

■■ Instability in North Korea poses the most significant security threat.

Source: Department of Foreign Affairs and Trade, India Economic fact sheet, December 2018; Austrade website, Export Markets: India, accessed May 2019; Austrade, Doing business in India Managing business risks - bribery and corruption, 2013; The World Bank, Doing Business: Measuring Business Regulations, 2019; Austrade website, Export Markets, Republic of Korea, accessed May 2019; Thomas Kalinowski, Sang-young Rhyu, Aurel Croissant, South Korea Report: Sustainable Governance Indicators 2018

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KEY COUNTRY RISKS China

■■ China has been Australia’s number one export destination since 2009, receiving more than $106 billion in Australian goods.

■■ However, its economic growth is slowing: 2018’s yearly growth of 6.6% was the weakest in 28 years.

■■ The World Bank’s ease of doing business gauge shows that China’s ease of doing business is rapidly improving. In 2017/18 it ranked the Chinese business climate 46th out of 190 economies – up from 78th in 2017.

■■ However, Austrade warns that Australian businesses may face various risks in China, including criminal charges for engaging in activities that may not constitute crimes under Australian law. It’s prudent to engage local experts who understand and can advise you on Chinese legal practices.

Japan

■■ Japan is the world’s 3rd largest economy after the US and China, and our 2nd largest export destination and trading partner, receiving more than $71 billion in Australian exports.

■■ Despite its size, it has comparatively weak economic growth compared to its peers, due to competition from other high-tech producers, a declining population, very low inflation and a shrinking workforce.

■■ Japan’s business climate is generally on par with most other advanced economies. It ranked 39th out of 190 economies on the World Bank’s ease of doing business gauge for 2017/18. However, paying taxes, starting a business and getting credit can be challenging.

■■ Australia and Japan entered into a free trade agreement in April 2014. The FTA gives more than 97% of Australian exports preferential treatment into Japanese markets.

Source: DFAT China Factsheet, December 2018; Reuters, “China’s 2018 Growth Slows to 28-year low, more stimulus seen”, 2019; The World Bank, Doing Business: Measuring Business Regulations, 2019; Austrade, Export markets: China, accessed May 2019; DFAT Japan Factsheet, December 2018; IMF, Japan’s Economic Outlook in Five Charts, 2018; The World Bank, Doing Business: Measuring Business Regulations, 2019

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STEPS TO MANAGE EXPORT RISKS There are no shortcuts to avoiding risks in export markets. As with any other business risk, you will need to follow a robust process of risk management to ensure your business is in the strongest possible position to cope with risks.

1 Do your homework The first thing you need to do is identify the potential sources of risk in your chosen export market. Export Finance Australia’s Country Profiles are a good place to start. The World Bank publishes a range of data on individual country risks and the Department of Foreign Affairs and Trade (DFAT) continually monitors the effects of political changes on Australian businesses.

2 Develop a risk management strategy While it’s impossible to predict all risks, you can make a reasonable assessment of the likelihood and impact of most scenarios that could affect your business. You then need to identify steps you can take to avoid or mitigate the most critical risks, or minimise their impact. Ensure your risk management strategy is as clear and simple as possible, and that everyone in the business is aware of what they need to do.

3 Seek adviceYour bankers, lawyers, insurers and accountants will be able to give you advice about the risks you may encounter in overseas markets. It’s also a good idea to try and find on-the-ground advisors in your target country, or a business who has dealt there before, so you can learn from their experiences. Your industry association or business chamber can also be a good place to start.

4 Monitor and reviewRisks may change over time and you need to ensure you are aware of this and have updated your risk management strategies if necessary. It’s important to regularly monitor the risks that have a potential to affect your business in different export markets.

Visit the Austrade and Export Council of Australia websites for more detailed information on how to manage risks in export markets.

Darren Charles CFO Calix

“ We do spend a lot of money on protecting our IP, working with a local patent attorney that makes sure we have international patent protection as well. We are constantly developing the technology and so go through a process where we continually refresh our patents. ”

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PROTECTING YOUR IPSafeguarding IP can be a challenge in foreign markets. But there are solutions you can use to protect and enforce rights to your IP, at home and abroad.

Choosing the right IP strategyIdeally you would like to protect every aspect of your product and brand, in every market you export to. But this approach can be prohibitively expensive and time-consuming.

It’s important to understand the real value of your product and prioritise protecting that in the markets you care most about.

IP solutionsHere are some of the solutions you can use to protect your business IP:

Patents

■■ Patents provide protection for new inventions, giving you exclusive, legally-enforceable commercial rights to their use.

■■ You can apply through IP Australia, then take out a Patent Coorporation Treaty (PCT).

■■ Or apply directly in the countries in which you want protection.

Trade marks

■■ A trade mark protects the ‘mark’ used to identify your product, like logos, letters, numbers, phrases, smells, shapes, pictures, movement, or packaging features.

■■ When protecting a trade mark for export, it’s important to consider also protecting its translation in the local language – or any Asian language characters that could represent your brand.

Design

■■ If your product relies on its design or packaging to differentiate it in the market, you can protect the exclusive right to use it commercially, licence it, or sell it.

■■ Generally, you’ll need to file protection for designs in each country.■■ The World Intellectual Property Organization also offers centralised applications

for up to 100 industrial designs at once.

Enlist expert adviceConsider engaging a lawyer who specialises in international IP protection, and who has a connection with, or experience in, your target country.

That way, you can ensure you are using the most appropriate and cost-effective IP strategies for your business.

For more information on protecting your IP, download our Intellectual property specialist paper.

Source: Wine Australia

James Douglas Carbon Revolution

“ We’re obsessive about confidential information and protecting technical know-how in the factory. So, lots of security around that. We don’t let anyone in; we don’t let anyone take photographs. But protecting IP is hard and it is expensive. ”

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MANAGING FINANCIAL RISK Having strong processes in place to manage risks can help minimise their impact on your export business.

When exporting, it’s essential to have strong financial systems and internal controls in place – particularly for key processes, like quoting, project management and payments. This can ensure greater operational efficiency and the ability to make better decisions – as well as making it easier to identify and rectify any risks or issues.

Reviewing contractsCreating a standard due diligence process will help you to understand the financial impact that each new export contract or purchase order will have on your business.

Some of the questions you should be able to answer include:

■■ Can your business support the financial terms of the contract?

■■ Does the customer have a record of paying on time?

■■ Can your business absorb any late payments?■■ If there is a dispute, does your business have

a dispute resolution process?

Know the risksUnderstanding how every export contract or purchase order will impact your business – both positively and negatively – will help you to manage financial risk.

Here’s what to look for:

Payment schedules If possible, try to get a deposit or part payment upfront.

Payment terms Are they the normal 30 days, or a much longer 120 days?

Delivery Be careful not to deliver your product or service overseas without first ensuring you’ll receive payment.

Credit terms Think carefully about offering credit to an overseas buyer, especially if you haven’t dealt with them before.

Cancellations Export contracts often get cancelled, so you should ensure that you’ll get paid for any work done.

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ACCESSING FINANCE Having access to the finance you need to service export clients and grow your business can help you manage your financial and business risks. If you’re new to exporting, or exporting to a higher-risk country, your bank may be unwilling or unable to provide additional finance.

That’s where Export Finance Australia may be able to help.

Our finance solutions Export loans

An export loan can be used to fund capital expenditure, and help you meet the finance demands of a growing export business.

These loans are available for pre and post-shipment finance, and can be tailored to meet the costs of your order and to cover your payment terms.

Bond facilities

You may be required to provide a bond when providing goods or services to your export customers. Export Finance Australia can provide bond facilities to help you secure your next export project, working with your bank to provide a guarantee – or providing a bond directly to your buyer.

Export Working Capital Guarantee (EWCG)

An EWCG is a guarantee we make on your behalf to your bank, to give them the confidence to offer you finance.

Once the EWCG is in place, your bank will set up an account so you can use customer payments to make your loan repayments. EWCGs can be used to help you secure finance both before and after you ship your products or deliver your services.

Simon Gorman Managing Director

CCB Envico

“ Export Finance Australia took the time to understand our business. Working with them has helped us assess our rigour around reporting, so it has certainly helped us improve our processes. Without their underlying support we would not have been able to undertake the approximate 10 projects worth $50 million dollars in contracts secured over the last four years. ”

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POWER IN THE PACIFIC

Case study: Balance Utility SolutionsExport Finance Australia’s bond facility provided Balance Utility Solutions with the security needed to build a hybrid power station in Micronesia.

Providing sustainable utility solutions is the driving force for renewable energy-focused business Balance Utility Solutions (Balance).

Balance won a contract to build a hybrid power station for an integrated coconut processing facility and the energy supply to an unelectrified island in Micronesia. To secure the project, the business needed to provide Advance Payment and Performance Warranty bonds.

“There are two fundamental challenges when trying to get bonds from a banking provider,” said Balance’s CEO and Founder, Rod Hayes.

“One is jurisdictional comfort and a lower project risk appetite. The second is the cash requirement. Banks mostly require full cash backing. For us, there is no way that we could do that for what would be 18 months.”

Rod said that the business had good relationship with its bank, and was happy to support the project if Export Finance Australia was a part of the transaction. We provided the business with three Advance Payment Bonds and one Performance Warranty Bond, totalling US$1.06 million.

Rod Hayes Co-founder and CEO

Balance Utility Solutions

“ Export Finance Australia being prepared to back the project with a lower cash backing was really important to us being able to take on this project. The process worked really well for us and gave us an outcome that enabled us to take on this significant project.”

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Discover how Export Finance Australia could help your business take on the worldExport Finance Australia is Australia’s export credit agency. We offer finance options by working with your bank to provide supplementary finance, or support when your bank may be unable to help.

To find out more about how we could help your business, go to exportfinance.gov.au or call 1800 093 724.The information in this document is published for general information only and does not comprise advice or a recommendation of any kind. A person or entity should seek their own independent legal and financial advice. While Export Finance Australia endeavours to ensure this information is accurate and current at the time of publication, Export Finance Australia makes no representation or warranty as to its reliability, accuracy or completeness. To the maximum extent permitted by law, Export Finance Australia will not be liable to you or any other person for any loss or damage suffered or incurred by any person arising from any act, or failure to act, on the basis of any information or opinions contained in this document.

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