Going Global and Multifaceted Markets

An initial observation is that entering new markets, as with developing new products, requires investment. The near-term macroeconomic prognosis might appear good for funding but risks, especially geopolitical ones, are often underestimated. If all goes well, treasurers should be able to fund expansion. When the consensus for rates to stay low for several more years is so strong, however, financial professionals should be nervously watching the tail risk. Are you well-prepared to provide continuity of funding for your new endeavours regardless of the economic environment?

What about the impact of lower liquidity in the unlikely, or at least unexpected, event that risk materialises? Will your customers still be willing and able to buy your products? Will you be willing to extend terms in difficult macroeconomic conditions? The answers to these questions are better thought through in the relative calm of the planning phase than in a crisis.

The Devil’s in the Detail

Established EMs are heterogeneous in opportunities and challenges, so careful analysis is needed. Piling into favourites such as China might not be optimal for everyone.

Following the lead of aspiring and smaller Israeli multinational corporations (MNCs), which
The Economist
magazine says have developed the art of identifying lucrative niche markets and flying below the radar of their larger competitors, may be preferable.

Africa, for example, is touted as the new frontier. However, the risks and inefficiencies there are very high. MNCs that invest in Africa will need to adapt business models to the African ways of working, in order to contain risks and ensure cash flow. This practice applies in general to EMs, and it is widely unappreciated amongst Western managers.

Partnerships with local experts can be helpful during the learning curve phase, even though they bring their own risks and challenges. There will be cultural differences, but it may be better to learn them through business partners rather than through customer gaffes.

Cash Flow

While new market entry will of course require investment, that requirement should not become an excuse for poor working capital management. A laser focus on cash flow is critical for such adventures.

Treasurers must focus on working capital and cash management, to ensure that cash continues to flow out of target EMs as reliably as possible. This process must start in the initial planning phase, because many MNCs rush into new markets without sufficient planning and end up with trapped cash arising from regulatory or tax obstacles that were not initially built into their plans.

Treasurers must build a realistic picture of the likely working capital situation in the target market. Many EMs suffer from tight liquidity because the roads to build and cities to develop require funding. Treasurers have to drill down to the target customer segments to see if they will have sufficient funding to make payments. It is important to recognise that even though liquidity is often available to large national champions, it is often sorely lacking for small and medium-sized enterprises (SMEs) and retail segments.

Some lucky providers can demand cash on order, or on delivery. If suppliers require funding, however, treasurers need to consider how willing they are to finance their company’s in-market supply chain when the legalities around title transfer may be vague or non-existent. On the customer or distribution side, banks may not be willing to provide supply chain financing (SCF), and the sales team will be upset that you are stopping them from hitting their targets.

Ever-shifting Risk

Treasurers must be proactive in their risk management of EM entries. This focus will be on financial and cash risks, of course, and they must understand the big picture because risk can arise from unexpected and non-traditional sources. A thorough and holistic risk assessment is critical to success.

Risk mutates – especially in EMs. Before the 1997 Asian crisis, many companies believed they had taken care of foreign exchange (FX) risk by selling to Southeast Asian countries in US dollars (USD). When local currencies devalued sharply, they found their non-existent FX risk mutated into credit risk. The distribution partners in-country had not hedged, end customers paid in devalued local currencies, and the net result was bad debts.

Customer credit analysis is also a must. But that may not be enough. I have seen solvent and thriving customers turn into bad or late debtors when their central bank did not have sufficient hard currency to execute the import payments the customer instructed. In other words, commercial credit mutated into sovereign risk.

Culture can create risk, too. Whatever the formal contracts are, they will often be less important than personal relations. Distributors may well ask “so, of course you won’t mind waiting while I sell your products for you?” Over-enthusiastic credit follow-up may result in a loss of face, damaging customer relations. It can be very hard to determine the line between obfuscation and distress.

Treasurers also need to look beyond the traditional risk indicators in many EMs. For example, Alyson Warhurst, chief executive (CEO) of global risks intelligence specialist Maplecroft, has pointed out that
social repression is a leading indicator of sudden regime change
, which is likely to generate financial volatility in EMs. Such metrics may indicate that it is time to tighten credit allocations and bring cash offshore. It is unlikely that risks such as social repression are available on your Reuters or Bloomberg terminals, and most treasurers do not monitor such risks.

Be Prepared


Like any Boy Scout, treasurers should ‘be prepared’ when headed for exotic locations and would be wise to ‘hope for the best and plan for the worst’.

In corporate terms, that would mean rigorous scenario planning and asking hard questions about their destination up front. It also means having clear exit and stop-loss strategies ready should they be needed. These strategies might sound a little like a trading strategy, but the critical difference is that there is no Bloomberg or Reuters screen to chart your way.

Getting reliable information is critical. Feet on the ground are a must, but a visitor often will not know which questions to ask. Locals are not necessarily aware that travellers’ basic assumptions and expectations differ radically from their own so, even with the best intentions in the world, the visitor may remain uniformed about critical nuances.

Bankers, lawyers, and accountants are important sources of information. It is worth remembering, however, that they generally have an incentive to play down the local challenges and talk up the opportunities, because they want you to bring them your business.

Meeting other businesspeople, especially in adjacent rather than competing firms, can be very helpful. Finally, although it sounds a little negative, the author would recommend listening to those cases that failed. Learning from others’ mistakes is cheaper than making your own.

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