Would a global expansion make or break your organisation?

Global ExpansionWith the mining boom all but over, commentators are hungry to seek the next driver for Australia’s growth. And with a fast growing middle class in Asia seeking more products for consumption, the Asian Food Bowl becomes an obvious source of potential.

This Asian potential was reinforced with the 2014 trade mission by the Prime Minister and 600 or so of his closest allies. Such strength in numbers demonstrates the importance with which both the government and many industry leaders place on Asia’s thirst for consumption as our country’s future. Confirmation of trade deals with our second and fourth largest trade partners, Japan and Korea respectively, will provide momentum for expanding these markets.

Risks in global growth

It’s not hard to envisage the growth potential that exists with these trade agreements in place, but it’s naïve to assume that global expansion obeys business-as-usual conditions. The risks of doing business in different countries can be vastly different to your domestic operations.

A natural starting point for assessing growth opportunities is to understand what a particular location offers in terms of opportunities, including overall costs, infrastructure, government policy, legal framework, incentives, tax breaks and human capital, to name a few factors. These, strategic points of difference also present unique risks.

Cultural differences

Those who have done business in Asia will be acutely aware of the importance of cultural intricacies in getting the deal done. Be it the way a business card is presented or the extended sessions of Saki consumption. There is no doubt that culture is both different and important. The risk of not understanding or misinterpreting cultural differences be a big factor in determining your success.

Political risk

Political or sovereign risk refers to the stability of the governing bodies in your chosen markets. In some countries there is a potential for changes in government policy or regulation, which could result in increased cost, trade embargoes or in extreme cases nationalisation of foreign assets. In extreme instances, political instability can even result in terrorism or civil war.

A great example is Fiji Water, an American owned business that grew rapidly exporting Fijian aquifer water. However they fell afoul of the Fijian Government who sought to significantly increase export duties. A Director was deported and the plant shut down for a period. Ultimately the business needed to wear an increase in tax from approximately 0.3c/L to 15c/L.

Regulatory Risk

Not only can Asia’s legal systems be very different from our own, but contract interpretation, or the ability to enforce contracts, also varies, as does your ability to pursue your legal rights.

Whilst importers in Australia are responsible for product safety by local legislation, exporters shouldn’t rely on similar measures being in place in the countries they sell to, particularly for food products, where the product liability obligations in different jurisdictions vary.

Exchange rate risk

For a risk that is so widely known, with control measures widely available, it is amazing how many organisations still get this wrong. All too often I come across organisations who think they can predict the currency market, or alternatively decide to wear the risk because the cost is too high. Financial institutions and specialist providers are well armed to manage this risk on your behalf.

Food security

Australian Food and Beverage companies’ food governance standards are some of the most stringent in the world, and as a result provide a point of competitive advantage in attempts to grow globally.

As Aussie businesses expand their market footprint, the challenge is to ensure food security within these territories.  We need to ensure there is the technology and capabilities to ensure the safety of products and processes to levels commensurate with the expectations in Australia. Not doing so can have severe impacts on your reputation both at home and abroad.

——

By no means is this an exhaustive list of risks associated with global expansion; we haven’t even touched on those associated with security, the environment, climate change, or infrastructure. It does, however, highlight the importance of understanding and seeking to build resilience against these risks, for successful international expansion.

There is also another side of the coin to think about – insurance.

Identifying, assessing, and mitigating risks associated with your global expansion can be the difference between success and failure.

As your organisation undertakes this process you should also assess your existing insurance arrangements, as the compliance and insurance regulations may vary greatly from one country to the next. Failure to comply with local insurance regulations may have serious consequences, even potentially causing insurance policies to be declared null and void by local authorities. Some companies are discovering that they don’t quite have the cover they thought.

One of the main problems companies come up against is when countries strictly prohibit non-admitted insurance and require risks located in their territory to be covered by locally licensed insurers. Additionally, non-admitted insurers are prohibited from paying claims in some countries, so local policies are becoming more important, especially for local Directors whom think they have the appropriate coverage under the ‘global’ insurance program. For example, who is going to reimburse the legal costs of Directors in defending a wrongful act.

So, are you telling me to ditch the global expansion idea…?

Of course not. The complexity of risks at play and the insurance implications might make the whole strategy of global expansion seem all too hard. But the process of managing these risks is no different. A logical and organisational wide risk management framework will provide a basis for ensuring that the most critical risks are understood and are allocated an appropriate level of resource to manage them, especially where you know risks are not transferred to the insurance market.

Additionally, corporate citizenship and sustainability increasingly enter the picture, as company brands and reputations are now more frequently made and lost in the court of public opinion, through mediums like social media. By following a structured approach you will have a greater insight of your risk profile and will be better placed to make decisions to achieve your international growth objectives. It may even identify new or greater opportunities than first anticipated.

So, have you considered the risk and insurance implications of expanding globally? Contact one of the Victual team today to gauge the value you can drive through risk management.

Or have you ever wondered how does your organisation’s risk maturity stacks up against your counterparts’ in the Food and Beverage industry? Take our Risk Maturity Survey and receive your free, personalised Risk Maturity Report to find out.