Getting a handle on export risks

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:

• News agencies (i.e. CNN, ChannelNewsAsia);
• Updates from your banks;
• Updates from in-market business partners, local workers or agents;
• Credit ratings of the government of your target market (i.e. S&P, Moody’s); and
• Enterprise Singapore (i.e. iAdvisory Seminars)

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:

• Request a copy of the enquirer’s business licence
• Request a copy of the enquirer’s certificate of import/export authority (only available from certain countries)
• Ask for references from businesses the enquirer has dealt with
• Check out the enquirer’s website
• Conduct searches on the enquirer through the Internet or your known business associates in that market
• Commission a credit report to verify the enquirer’s operations, territory and payment history.

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:

• Competitive risk: If you are exporting to a developing or emerging market, the strengthening of the Singapore dollar will make your goods more expensive and hence decrease your price competitiveness in that market.
• Transaction risk: When you sell goods on extended payment terms in a foreign currency, the conversion of your buyer’s currency into Singapore dollar during the transaction will incur the risk that your final cash receipt may not exactly the amount that you contracted for.
• Currency translation risk: There is no exchange risk if you do not convert your foreign currency receipts or cash-at-bank. However, once you convert them at the year-end for financial reporting, sell your assets or repay your liabilities, you will incur the risk of adverse translation rates which decreases your final revenue figure.
• Risks arising from price list exposure: Prices you publish on e-commerce websites may be denoted in the currency of the target export market in order to better reach out to your potential buyers. Hence, any strong adverse currency fluctuations will affect your eventual profit.

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:

• Perform credit-checks on your buyer. You can engage commercial firms which provide assistance in credit-checking foreign businesses to do this. Your banker is a good reference for such firms. For no-fee ratings, you may explore onlinepublished listings such as Standard & Poor’s rated corporates and Moody’s, to check if your buyers are already rated.
• Put in place a credit risk management policy. This is a cost-efficient risk management approach as it reduces the resources required to assess buyers on a case-by-case basis. It will also help you apply a uniform best practice when dealing with a new counterparty for the first time. For new exporters, a best practice credit risk management policy should cover the following basic areas:
  • Counterparty initiation policies – this requires background checks on new proposed counterparties through available public information, credit agency reports and counterparty financials before agreeing to transact for the first time.
  • Credit authorities and limits – set different credit limits for different credit ratings of your counterparties.
  • Transaction approval process – establish a verification process to ensure that counterparty initiation, contracts, collateral provisions and collection comply with authorities and limits before a transaction is executed.
  • Reserving and capital policy – for instance, covering expected credit losses by taking a charge against earnings which you can reverse if the expected losses do not materialise.
• Take up the Trade Credit Insurance Scheme from Enterprise Singapore to protect yourself against default by your counterparty.

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:

• Centralise all your letters of credit activities with one relationship bank.
• Insist on freely available letters of credit during negotiations. This gives you the freedom to present documents to the bank of your choice. With this option, you engage your relationship bank to help you reduce processing time.
• Improve your letters of credit processes. Experienced exporters often establish a set of internal practices while negotiating letters of credit to reduce discrepancies.

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:

• Establishing close communication with your buyer and choosing a proper logistics advisor;
• Adopting operational safeguards such as proper packaging for vibration sensitive goods;
• Financial mitigation through proper insurance;
• Specifying legal clauses to avoid dispute.

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:

• Intellectual property rights infringement
• Confidentiality breaches
• Misunderstanding of contractual conditions

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:

• The financial impact of such risks can be countered by taking out proper insurance coverage.
• In your contract, you can also specify in your force majeure clauses how your buyer and you should respond and bear the consequences in event of such circumstances. Please refer to Step 6 of this Export Guide.
• Operationally, you can put in place emergency response practices.