“I don't subscribe to the thesis, 'Let the buyer beware'. I prefer the disregarded one that goes, 'Let the seller be honest’. This quip from writer Isaac Asimov is a noble aspiration, but if you are venturing into emerging markets, it's better to be armed. Hope for the best, prepare for the worst.
Control Risks has seen a significant increase in partner disputes because of economic dislocation resulting from the COVID-19 pandemic. Some of the triggers may sound familiar: companies have stopped paying, contracts have been abandoned, supply chains have been broken by bankruptcy, governments have begun meddling, fraud has bubbled to the surface. And when disputes arose, many investors were blindsided by their partners’ disruptive – often creatively disruptive – tactics. Here are just a couple of examples.
Many foreign investors navigate the antiquated government bureaucracies of South-East Asia’s emerging markets by delegating responsibility to a local partner while maintaining oversight. That worked well for a certain consumer goods company in Cambodia. But when it was at odds with its local partner over expansion plans, the financial cost of the paper-heavy nuances of Cambodia’s bureaucracy became immediately apparent. The local partner was responsible for signing off on a transport permit that was required for each truck leaving their warehouse. This became a point of leverage in negotiations, and with the Cambodian partner refusing to give that simple signature, the goods just piled to the rafters.
A couple of clicks on the Transparency International website will show anyone that the Philippines has a corruption problem. For one tech company, the top-shelf compliance procedures it had instituted upon entering the country were of little help when tense negotiations with its local partner suddenly escalated. The local partner slipped a stack of peso notes to the local police chief to enlist his help in pursuing a criminal complaint against the foreign tech company’s country manager. The stakes at the negotiating table had increased – somebody was going to jail – and an immediate solution was needed.
A complication facing many of our clients is that partner relationships are susceptible to changes that are often difficult to predict and bring unexpected consequences. In the above Cambodian example, the company's dispute was counter-intuitively instigated by the very success of its venture and its desire to expand. In the Philippines example, an otherwise routine commercial negotiation brought the unexpected prospect of a country manager spending time in a Manila jail cell. Disputes are also triggered when a company actively seeks to exit its relationship with a partner because of poor commercial performance, changes in strategic direction, or because a partner is unable to meet integrity standards. And disputes are not always triggered by complacency or break-ups. Pushing your own governance standards without due care risks upsetting your partner and can nudge an otherwise happy relationship into confrontation.
So what are companies to do? Detailed analysis of a partner's strengths and weaknesses, some self-reflection of your own vulnerabilities, and assessments of the nuances of the local market can help anticipate how changes in partnership dynamics can escalate into a dispute and how that dispute can damage your business. You need to understand how your business and your partner fit into the local context, and we often recommend that clients ask themselves the following questions when they see warning signs that partner dynamics are beginning to change:
- How well do you know your partner? How detailed or up to date is your due diligence? Knowing a partner’s connections with law enforcement or with a local criminal group as well as their behaviour in previous disputes should inform any negotiations.
- How vulnerable is your business to government interference? To what extent do you rely on your partner to manage these relationships? A well-connected partner can paralyse a business by getting a regulator to drag its feet on an approval or launch a spurious investigation.
- What crisis plans do you have in place? How secure is your access to facilities, data and IP? The cost of a dispute can spiral if, for instance, a hired mob is blocking access to your factory.
- How secure are your relationships with suppliers, distributors and customers? Your partner’s prominence on the local commercial scene may become a liability during a dispute if they convince some of your key customers or third parties to sever ties with you.
- What relationships and resources do you have to balance potential threats posed by your partner? Companies need to think beyond legal tactics and to assess their entire stakeholder landscape.
Answers to questions like these helped one of our clients who was engaged in a protracted commercial dispute with its partner in Vietnam. The dispute became critical when the partner flexed its political clout to impound some of our client’s critical equipment. With project milestones on the horizon, our client could not afford the lengthy arbitration it faced. We helped our client identify its partner’s vulnerabilities and engage with political, diplomatic and commercial figures that could counter the political levers their partner had pulled. This strategy helped overturn the dubious legal decision that impounded the equipment, and our client was able to meet its project deadlines.
This strategy helped our client overcome one of the key challenges of getting into a dispute in your partner’s backyard: you are almost always at a disadvantage, and most stakeholders – ranging from political, to judicial, to media and consumers – tend to be more sympathetic to the local party.
With odds like these stacked in a local partner’s favour, they often have little incentive to live up to Asimov’s aspiration of 'Let the seller be honest' when the chips are down. But being alive to how changes in partnership dynamics can escalate into a dispute and having a dispute strategy grounded in good intelligence can help minimise the damage to your business.