Even if you have successfully handled the risks of doing business in Singapore, it does not mean you will also successfully handle the risks of exporting. Exporting will expose you to a different set of risks which are likely more difficult to assess and manage than the domestic risks you are used to. However, you can manage risks well with good prior planning. Risk management is not about removing risks altogether. It is about putting yourself in a better position to handle risk when a risk event occurs.
To develop your own export risk management plan, you need to identify the risks first, and subsequently assign a weightage to each risk subject to the potential effect of its occurrence, on your business. For certain types of risks, you can buy insurance coverage such as credit risk cover, country risk cover and transit risk cover. For other types of risks, you can adopt business practices to mitigate the impact of unfavourable incidents.
We highlight only the most common risks which exporters are likely to encounter. In addition to relying on this guide, you should also do your homework by:
Your objective is to develop a risk management plan which is customised to your own unique business, and is as comprehensive as possible.
Risks can be classified into the following types:
War or conflict could cause your buyer to default on payment, your goods to be delayed, destroyed or even lost. Strikes or other social unrest affecting ports, shipping lines, airports and rails could cause your goods to be trapped at customs. Unforeseen regulatory changes could result in the sudden confiscation or rejection of your goods. The political stability of the country you are exporting to is of paramount concern as, rules and policies in some foreign countries can change overnight.
Tips for countering country risk
Your best defence is to keep yourself constantly informed and updated of the economic and political situation of that country, especially its trade, customs and exchange policies which will affect you as an exporter. In this way, you can change your tactics accordingly and take preventive measures. To keep yourself forewarned and forearmed against the instability of your target market, the types of information you seek should relate to the following aspects of your export country:
Some information sources and ideas to help you keep abreast of the latest developments in your export market:
Failure to meet demand due to inadequate production capacity - This is the biggest and most common risk first-time exporters usually face. Once you fail to fulfil a customer order, your credibility will be damaged; hence you should always review and determine if your production capacity is able to meet the demand before agreeing to the sale.
Rejection of goods due to price tactics of unscrupulous importers - Some buyers employ the tactic of rejecting the shipment of goods due to poor quality, in order to pressurise sellers into negotiating lower prices. Thus, a good practice is to ship samples of your goods to your buyer to ensure that he agrees to the quality of goods. By specifying that you will be producing the main consignment to the same standard as the sample, it will be difficult for your buyer to reject the consignment later.
Misunderstanding due to cultural and language differences - Many exporters assume that other cultures understand business and conduct business the same way, especially seemingly similar countries like China and Malaysia. The best way to minimise misunderstandings is to gain a full appreciation of the differences through frequent visits to your intended country of export.
Fraudulent enquiries or offers - Remember the old adage that “if it looks too good to be true, it probably is too good to be true”. Many unsolicited enquiries or offers may be from competitors or rivals previously unknown to you and their motives may range from wanting to benefit from your efforts to covert attempts to discover information about your manufacturing secrets, quality control or pricing. Be extremely selective when dealing with unsolicited enquiries or offers. Some steps you may take are:
If in doubt, you should turn down the enquiry or seek professional advice.
When financial risks occur, they directly affect your cash flow and destroy your potential revenue.
Unfavourable currency movements – Exchange rate movements directly affect your cash flow, profit, and balance sheet. You should be aware of the following kinds of currency risks:
Hedging considerations - As you mature as an exporter, you may wish to consider developing a proper hedging strategy to minimise your exchange rate losses. There are several hedging techniques available. We recommend that you seek proper financial advice when you begin to develop your hedging strategy.
Payment defaults - Your payment risks will arise on two fronts: from the buyer and from processes. Fraudulent buyers will cause you not only monetary losses but also reputational damage, especially if the in-market retailers are counting on your buyer to distribute your products. Recommended verification and background checks are:
Payment delays - Even if the buyer is genuine and a good paymaster, payment delays can still arise through poor processes. Delays in payments negatively affect your cash flow and thus your production cycles. Some ideas for tightening your processes are:
Logistics risks can occur if you do not plan and prepare the transport of your goods in advance. Please refer to Step 4 of this Export Guide. Some ideas on how you can reduce your logistics risks are:
Legal risks arise when there is no proper contract signed between the exporter and the buyer or if the contract is inadequate in scope. Signing a comprehensive export sales agreement can help you manage, protect yourself against or even avert many types of risks.
The most common legal risks which may arise are:
Please refer to Step 6 of this Export Guide.
Such risks include natural disasters, accidents, national disease emergencies, theft and in the recent years, financial collapses of banks and governments. While they do not occur often, it is impossible to avoid them altogether. You can, however, manage them in certain ways, particularly their consequences: