TT Talk - Emerging market challanges for logisticians
Many logistics operators over the last decade have invested in exploring lucrative opportunities in emerging markets, such as the Middle East.
Markets in certain sectors in countries in the Cooperation Council for the Arab States of the Gulf (colloquially known as the Gulf Cooperation Council or GCC) continue to out-perform the global average, with extensive investments being made in the creation of new infrastructure, giving rise to large scale expansion and logistics operators relying on the region for growth opportunities.
In a sluggish global economy, such opportunities are rare. Expansion of operations into such markets, however, does not come without risk and comprehensive due diligence should be completed prior to your business making contractual commitments.
Ease of doing business
Assess thoroughly how easy it is in practice to conduct day to day business in the chosen country. An initial source of information could be the World Bank’s ease of doing business index for guidance. However this should provide only a starting point.
Availability of a skilled workforce
In many operations, there will be sound business requirements for skilled local workforce. If sufficient skilled personnel are not available, it will be necessary to carry out appropriate training. Furthermore, it is important to assess whether the local workforce will find the proposed roles attractive. If there is a fundamental requirement to bring a skilled workforce from local or regional operational centre, consider what Visa requirements are in place; some jurisdictions maintain a complex and costly Visa system.
Local legal system and regulatory requirements
Investigate the local legal system and regulatory environment, how it operates and whether each are conducive for your company to undertake its intended business activities. Some jurisdictions have extensive requirements to complete the simplest of tasks, with powers of attorney often required, all of which can come at an unexpected expense. Additionally, take account of the fact that many jurisdictions have no provision for recovery of legal costs for a successful litigant, whether bringing or defending a claim.
Local market structure
It is prudent to consider how a given market is structured. Some markets are substantially centralised, others more fractured, but in any situation there may be unfamiliar stakeholders holding influence over market conditions. It is frequently the case that mature global markets are influenced by multi-national shippers, whereas emerging markets have a different structure, perhaps being heavily influenced by a much larger number of smaller entities.
Whilst this inevitably creates a more difficult and less certain platform for your business to operate, broader considerations arise, such as the predictability of a given entity to satisfy its legal and financial exposures.. It can also prove difficult to perform simple business searches in certain jurisdictions, such that you are unable to clarify whether you are trading with a financially stable, asset driven business or what is essentially a ‘paper’ trading company.
Know your customer
Where businesses take the decision to expand into unfamiliar jurisdictions, there is a fundamental requirement to know your customer (KYC).
Be certain who you are trading with, ensure that all available background checks are completed. Conduct local investigations and seek to obtain references for the companies with whom you intend to trade. Notwithstanding the expense, consider meeting with the company at their primary place of business. Secure details such as their full trading style(s) both in English and local language, the names of Directors, banking details and original copies of insurance documents.
Always formalise contractual arrangements with each party signing any agreement, even where short term or spot hire arrangements are concerned. Seek to incorporate a familiar law and jurisdiction clause. Where disputes arise, such documents are essential in evidencing a contractual relationship between your business and your customer. Whilst this may sound an obvious requirement, this will often be a fundamental standard to evidence what service each party contracted to undertake and form the basis to apportion liability. The absence of such documentation, where for example a business arrangement has been finalised through a series of emails, can be fatal to a dispute in certain jurisdictions, either leading to vastly increased legal costs in trying to establish a contract or simply result in the case failing.
Where high value cargoes, contracts or the use of assets are concerned, it would be prudent to exercise heightened levels of vigilance. For cargo shipments, consider engaging pre-shipment surveyors to ensure adequate stowage and securing. Where carrying equipment is concerned, where appropriate, obtain and analyse pre-shipment samples of the cargo to provide a degree of certainty that the description offered by the shipper meets expectation.
In the event that there is an issue with either the cargo, carrying equipment or a combination of both during transit, the maritime carrier will generally have no contractual relationship with the actual shipper and will therefore seek recourse from the NVOCC/freight forwarder. Where due diligence has not been fully performed, this can leave the latter with the unenviable task of attempting to recover losses from a company which either has no means or insurance to meet the claim, or is domiciled in a jurisdiction where it proves financially unviable to make a recovery.
We hope that you have found the above interesting. If you would like further information, or have any comments, please email us, or take this opportunity to forward to any colleagues who you may feel would be interested.
We look forward to hearing from you.
Risk Management Director, TT Club