When attempting to enter new markets it’s easy to have your blinkers on. Managing export risk is all about arming yourself with the right knowledge, reports Donovan Jackson.
Risk is something which affects all businesses, but it doesn’t affect them equally.
When conducting trade domestically, it is far easier to assess third party risk simply because reputations are known, checks can be easily conducted and, if things do go awry, recourse is possible by virtue, at least in part, of proximity.
Things change quite dramatically when horizons are expanded – and with the limited size of New Zealand’s local market, that means a good deal of companies find themselves quickly seeking out international markets for their products and services.
Martin Jones, New Zealand country manager at Atradius Credit Insurance agrees that assessing risk internationally is difficult. “From what I can see, most companies have some level of their own procedures, checks and balances, and will often take the precaution of sending someone to have a look before engaging in international trade,” he says.
But, he notes, unless the exporter is a large corporate with the resources to assemble a multi-disciplinary risk management team, even that seemingly diligent approach can have its shortfalls. “Often, that look is cursory. We’ve seen many cases where someone goes out, meets a buyer, wines and dines, and comes away with an impression of what a good fellow the potential client is.”
While that may be all fine, and even dandy, Jones makes a solid point. “The visitor probably hasn’t seen the factory or spoken with the bank managers; or if they have seen a building, they may not even have assessed if it is owned by the prospective ‘client’.”
Unless your business has an office in the country, Jones adds, it is necessary to rely on people on the ground for information. “There are credit agencies which provide reports, but you still have to decide for yourself if you’re going to send the goods. Certainly, however, credit insurance is recommended – the insurer will check the buyer, check that they are good for the amount you wish to sell. Any alerts should be brought to your attention.”
Exporting is a risky business
Jones has just got started on the risks which face exporters – they are numerous, multi-faceted, and in many cases, entirely pernicious to the extent that they could put even a business with a strong balance sheet in serious jeopardy. Risk and reward has, perhaps, never been more closely associated, as exporters will get excited about the possibility of growing their operation, but could face seriously deleterious consequences.
Barry Squires, head of international business at Westpac and a member of the executive committee of ExportNZ’s Auckland region, echoes what Jones has raised, noting that New Zealand’s bigger companies have always focused on risk.
“The challenge, perhaps, is getting the smaller ones to appreciate that you cannot afford to carry the risk of exporting on your own.”
Squires strongly advises formulating an understanding of, and appetite for, export risk. “If you have a stronger balance sheet and are looking for a higher return, your tolerance might be higher. If the balance sheet isn’t strong, or you’re dealing with volatility, you might want to set the parameters lower. But fundamentally, if you exceed your tolerance and can’t mitigate the risk, don’t take it.”
Both Squires and Jones agree that when attempting to enter new markets, there tends to be a confirmation bias that any potential new customer is a good one. Says Squires, “You have to ask, ‘can I afford to not get paid for the shipment?’. Even if it isn’t a complete loss, you’ll still need to find a new buyer and ship it elsewhere and that can wipe out your margin, even if it preserves the capital.”
Jones adds to that, saying it is crucial to know if the buyer is genuine, as well as their status in the market and track record. “Salespeople care about the top line and can have their judgement clouded. Owners need to be sure that the goods get there and payment is made. If you do have bad debt, recovery can be very hard, particularly in some Asian countries.”
Squires stresses the importance of bringing in expertise to understand and help manage your risks, particularly for newer exporters.
“Yes, it costs money; and the bigger you get, the better the advice you need.”
Greg Fitzsimons, director at Export Finance, backs up what Jones and Squires are saying. “There’s a wide range of risks you face when dealing with overseas customers; our focus falls on payment risk.” With the volatility in the market, he says exporters need to look for some comfort that they are going to get paid. “That generally means bank Letters of Credit – but in many instances, those are just not available from some territories.
“We’re also seeing exporters being pressured to offer extended credit terms; it is a competitive market [for exporters] so they do need to be in a position to offer those terms.”
Risk emerges, notes Fitzsimons, when the export customers requesting extended terms are not providing Letters of Credit. “That is especially the case in some Asian countries, where it can be difficult to get these instruments. In such cases, you’d need to rely on trade credit insurance for that comfort.”
The ever-shifting risk landscape
Like rust, risk never sleeps. Unlike rust, risk is far from one-dimensional. Being a banker, Squires wryly remarks that “the world is a bit of a sorry place economically speaking. We might complain in New Zealand, but certainly it is a lot better here right now than in much of the rest of the world.”
For exporters, that means the possibility of even proven trade partners running into some strife, notes Jones. “You want to maintain vigilance; for our part, we annually review most of the active buyers on which we hold intelligence. Even if a buyer is paying well, we’ll still review them.
“For example, in 2009, conditions changed quickly [in the wake of the Global Financial Crisis]. You do need to be proactive with market intelligence if you want to escape the worst of it.”
Squires says some issues causing concern include the slowdown in Asia, led by China; reduced demand for commodities, ‘dairy is currently experiencing significantly reduced prices’; and volatility even in those sectors which appeared to be on a one-way street.
“Iron ore went mental this week,” he remarks. “But what we are seeing is that what the developed world is doing to stimulate the global economy hasn’t really worked, so you’re seeing some new approaches like negative interest rates and even talk of ‘helicopter money’ (giving everyone ‘free’ money to drive spending).”
Squires says some exporters are experiencing difficulty owing to their customers struggling to access liquidity; that manifests in extended terms or the shifting of finance to Kiwi banks, rather than those in the export market.
“There are more structured transactions coming through; typically, the risk is shared between the export credit office, the bank and the exporter. For local exporters, there is a lot of support to make the necessary arrangements to get products into international markets – but there remain some places you shouldn’t export to unless you have cash in the hand.”
From his perspective, Jones has a slightly more cheerful outlook. “As risk managers we tend to look at doom and gloom but there are also positive aspects. There is moderate growth expected globally – though emerging markets are facing another difficult year, particularly Africa, and the ongoing conflicts in the Middle East.
“Across the Eurozone, we’re expecting insolvencies to drop to five percent, which really means those who were going to go bankrupt have [already] done so.”
The big one is always China.
“Don’t underestimate China. They are down right now but they won’t be for long. That’s the way of the Chinese,” Jones says.
Help is at hand, but finding it can be confusing
As a developed nation which exports a lot (a combined value of goods and services of $67.5 billion went abroad in the year ended July 2015), there is considerable support and assistance offered to New Zealand’s producers. Squires has already mentioned it. However, he makes the further observation that finding the right help can be difficult owing to the sheer amount of it available. It is something of a classic ‘wood for trees’ scenario.
“It can be confusing,” he says, “and while everyone and every organisation has the best of intentions, there isn’t a lot of coordination or a ‘one stop’ place to go.”
His advice is to engage with the many levels of support available in this country. “It comes down to talking to people. Go to ExportNZ, speak to your bank and your accountants, get involved with industry organisations and business councils like the New Zealand China Trade Association. There is a lot of education out there; the chambers of commerce do a good job.”
Squires says every company should take the time to understand basic risk management, as exporting or not, it extends all the way through any business, “Whether that is health and safety, employment relations or financial – you need to understand the risks, work out a risk tolerance, and measure what you’re willing to take risk on and if you have the appropriate controls.”