It’s a reality of business today: many of the products sold in the U.S. are part of a global supply chain. There is even a debate surrounding what percentage of a product has to come from the United States in order to be labeled “Made in the U.S.A.”
“Unless they are very small, most manufacturing and distribution companies in the U.S. are involved with at least one other country,” says Debra F. Scalice, vice president, Millennium Corporate Solutions.
“Importing from China alone has increased from $109 billion in 2001 to $365 billion today — that’s huge; almost a 300 percent increase. Obviously the removal of U.S. manufacturing jobs has had multiple impacts, and among these is increased international risk,” Scalice adds.
Unfortunately, she says, many U.S. companies are not fully cognizant of the consequences that may occur if they are not covered properly while conducting business with and in other nations.
Smart Business asked Scalice about some of the exposures businesses face and what they can do to minimize them.
Why is international risk such an important topic right now?
Many U.S. manufacturers are fighting to stay alive and they are often resorting to smaller, niche markets, leaving their old product skews behind and innovating new products or parts, which are imports. They must change or face extinction via lack of competitive price points. Nearly all U.S. companies are involved to some degree with importing or exporting. All too often, U.S. companies think they are protected from various liabilities when in reality they are not. It is easy to misinterpret your coverage. Countries have very specific mandates about the types of coverage you need to have and who is legally able to provide that coverage — Mexico is a good example. If you don’t have a Mexican insurance company and something goes wrong, you’re going to jail.
What are some of the risks involved with property exposure?
Typically, international property exposures are similar to domestic exposures. You need to know where the property is located, whether there are any nationally mandated coverages, availability of coverage subject to increased hazards, if the property is adequately covered while in transit, and if you are using the shipper’s coverage or purchasing your own.
Are there any time constraints regarding the arrival of your property? What if the goods arrive at the harbor and half of the product isn’t there? Or, has the product been substituted using trickery? What level of risk are you prepared to take on yourself? On the other hand, if you are exporting, what happens if the companies you are exporting to owe you money and disappear? Can you handle the financial loss or will you need credit insurance?
What key factors about liability exposure do companies need to be aware of?
If you’re manufacturing in the U.S. and your policy says you have worldwide coverage and protection, don’t let that lull you into a false sense of security. It probably means you’re only covered for lawsuits initiated in the U.S. Let’s say you sell something in Europe and someone gets hurt. You think you have worldwide coverage, but if you don’t have proper international liability in place, there could be terrible financial consequences.
Liability exposure for importers is another consideration. There are many domestic carriers who are not interested in covering imported products. So if you’re an importer and something goes wrong with the product you imported, you will be held accountable, as there is no domestic manufacturer to seek financial restitution from. It is very difficult to sue in other countries, which are often ‘developing.’ Who will you sue in that country? Are they even liable according to their laws? What if the products you’re bringing in and selling to your clients start to fail? This is a nuance of international business you can’t insure for, but you have to contemplate the risk.
What are some considerations for traveling overseas for business?
In today’s world, you do not want to be walking around a foreign country without proper risk assessment and coverage. Let’s say you’re a salesperson who travels to London for your boss; you and your boss decide you should live there temporarily. The employer needs to cover you for workers’ compensation in that country — it’s a human resource issue. Or let’s say you’re the CEO of your own business and you’ve excluded yourself from workers’ compensation insurance. You go to Europe and something happens to you — you have a car accident or a health event, or a political act takes place. Who will pay to bring you back to the U.S.? Kidnap and ransom are also real concerns. If you are an American traveling abroad, you are a target. There are hotter spots than others in terms of exposure, but it’s actually quite common and happens all over the world. For any executives who are traveling, you need to ensure that risk management techniques have been employed to help assure your safety and that the right coverage is in place.
How can companies ensure that they are protected properly?
Talk with your international attorney and a diligent insurance broker who will show you how to protect your interests. They will help you determine your own risk tolerance, where you are exposed, and what needs to be covered. Seek a broker familiar with international risk who will know the insurance vehicles available to cover international risk. Equally important, the broker will help you understand what is not covered. This is a very dynamic and fluid area so it’s important to keep in touch with your broker on a regular basis to ensure you are properly covered at all times.
DEBRA F. SCALICE is vice president, Millennium Corporate Solutions. Reach her at (949) 679-7139 or firstname.lastname@example.org.
With uncertain markets, what seems today like a good international business deal could turn into a major loss tomorrow.
To protect your business against volatile currency markets, consider hedging, says Jeannie Kao, executive vice president/division manager, International Banking Division at Bridge Bank.
“When negotiating with a foreign buyer or vendor, what is on the table now might make you money today,” says Kao. “But the only way to guarantee that profit is to lock in the exchange rate so you know that when you do get paid, your margin is protected.”
Smart Business spoke with Kao about how hedging can impact your business and how doing business with an EX-IM-affiliated bank can help you gain access to capital.
What is the first thing to consider when thinking about doing business overseas?
Think about where you are in this trading relationship. Are you a buyer or a seller? Do you have more negotiating power when compared to your counterpart, or do you not really have a say? If you are a small company dealing with a large company, your negotiating power is weak. But if you are a bigger company dealing with a smaller vendor, you’ll have a lot more say.
You also need to evaluate yourself. Look at what you are selling. Are you buying offshore, as well? What currencies will you be dealing with? Do you need financing? What kind of instrument will you use to conclude the sales transaction? Your banker can point out things you may not have thought of and suggest instruments to help you secure and protect yourself.
How can hedging help a business protect itself?
Due to recent volatility in currency markets, the U.S. dollar is no longer the king of currency. Ten years ago, companies didn’t want to deal in foreign currency because the risk was too great, so they only dealt with companies that would take U.S. dollars. But today, when you want to get a good deal, sometimes you have to pay, or buy, in the local currency of the market you’re dealing in.
A simple hedging scenario is a forward contract. Let’s say, today, pricing per unit on your foreign transaction is $1.41. But you won’t be paying for 90 days. Today, you may be getting a good deal, but if the exchange rate goes up to $1.45 in this scenario, your margin has suddenly diminished, and you may now be losing money. To protect your costs on transactions like this, get a forward contract to ensure that your costs are locked in
So your strategy should be to manage this process closely, rather than to take what could be costly chances. Many businesses choose the latter, and if by chance the market swings in their favor their profit margin will widen. But if the market goes against them, their margins could disappear completely. It’s not worth the risk.
How can the Export-Import Bank of the United States help a company do business overseas?
The EX-IM Bank is the official export credit agency for the U.S. Its primary aim is to promote export activities, but it is a small agency.
Commercial lenders in the market, however, have contacts with exporters. So the EX-IM Bank names certain commercial banks as delegated authority lenders to provide lending to exporters, with the EX-IM Bank providing a 90 percent guarantee on loans that these particular commercial banks make.
For example, if a commercial bank is not a delegated authority lender, it wouldn’t even look at using international receivables as collateral for lending because those receivables represent a higher risk. So they only want to consider domestic receivables as potential collateral.
A company that is heavily into exporting doesn’t have much in domestic receivables but does have foreign receivables, making it difficult to get working capital from a regular commercial bank. So the EX-IM Bank designed this program in which, if commercial banks are willing to lend to exporters, it will guarantee the lender 90 percent of the loan, and the commercial bank is only exposed to 10 percent of the risk. That makes it easier for the commercial lender to help the exporter. And the exporter still deals with its own bank; EX-IM only comes into play if the loan goes into default.
What should a business look for when doing business with a bank?
Look at the banking relationship. Businesses tend to think that, if they’re importing or exporting, they have to go to a global bank. There’s nothing wrong with that, but if a business is small, it may not get the attention it needs to help it structure deals. At a bigger bank, smaller companies tend to get lost.
By going to a bank that caters to smaller companies, you can get the attention that you need to move your business forward. Your bank can do so much more than just provide you with a loan. Look for a bank that really wants to help you and that can ask the right questions to urge you to think through the details of what needs to be in place to achieve your business objectives.
Find a bank that will get to know your company. It should really understand what your business model is, and what kinds of products you do and don’t need, and provide you with an honest assessment.
By finding the right bank to partner with, your business can take advantage of the growing opportunities in international markets.
Jeannie Kao is executive vice president/division manager, International Banking Division at Bridge Bank. Reach her at (408) 556-8375 or Jeannie.Kao@BridgeBank.com.