International distribution: ver the past few weeks, I’ve published a three-article series in Global Trade Magazine on the issue. Specifically, they explore (1) the buyback clause in a distribution contract; (2) the question of overseas branding / messaging and who ultimately makes the decisions about it; and (3) avoiding 3rd-party FCPA violations that can ultimately fall back on you, whether or not you were aware of them.
Finding an international distribution partner: choose wisely
Brett Heimburger of Utah’s Governor’s Office of Economic Development (GOED) claims that choosing an international distribution partner is one of the most critical choices a company can make when expanding overseas. And, it’s a choice that most companies must make, given the majority of them lack the resources to develop their own distribution channels in a foreign country. Heimburger likens the relationship to a marriage: the right partner can empower the enterprise, while the wrong partner has a, well, less desirable influence on its outcome.
1. International trade and the escape clause
In my Global Trade article “Examining the International Distribution Buyback Clause,” I advise strong consideration before including an escape clause in your distribution contract.
Some background on the buyback
Companies include the buyback clause because they think it protects them against the effects of a bad marriage. Sort of like a prenup. If the relationship goes south, the multinational and the distributor have a clean split.
Essentially, the clause gives the multinational the option to buy their product back in the event of contractual nonperformance on the part of the distributor. It seems a good hedge; in the event you get stuck with a lousy partner, you deploy your escape clause and you’re out of there.
Why the buyback can backfire
As I argue in a Journal of Commerce article, “Foreign Distribution Partners are Opportunity, not Headache,” a good distributor is worth everything. You should have a long-term relationship in mind — and pardon me for belaboring Heimburger’s original marriage analogy — in which both of you benefit. Unfortunately, by insisting on an escape clause, you may be inadvertently be signaling to a potential partner that you’re not in it for the long haul. Many exporters, after all, use distributors as temporary vehicles for entering a market, later dumping them and setting up their own networks. If a distributor senses you’re using them for immediate gain only, they’ll either walk away, or, worse, decide to play you for the short term.
Some reasons to reconsider
- The clause may be difficult to enforce in the distributor’s country anyway — a local judge could easily rule against a US exporter
- A multinational can typically find ways out of a bad distributor relationship, often with the same level of ease or difficulty whether or not they’ve had their partner sign an escape clause
- The clause can appear to the distributor as antithetical to a quality partnership, and can thus turn away good potential partners and attract poor ones
2. Localization, translation and branding with an international distributor
In another Global Trade article, “The Multinational Branding Tug-of-War,” I raise the question of localization decision-making. When entering a foreign market, a US company must translate their materials for that market. Items requiring translation include the company website, marketing copy, packaging, and labeling. Not to mention the reams of regulatory compliance and legal documentation.
In addition to translation, there is the overlapping but additional issue of localization. Sure, texts must be translated accurately, but they must also be translated with regard to local custom and sensibility. Product presentation, also, may need reworking. I recently heard an illustrative anecdote: Subway found itself failing in the Japanese market until they realized their sandwiches were too big. Japanese, (at least according to the speaker recounting the story), find a gaping mouth unappealing. What’s more, cultural mores made a certain Subway custom off-putting: the preparing of food under the customers’ gaze. Subway moved prep into the back, used flatter breads, and voila! Sandwiches sold.
The localization conflict
The problem, in a nutshell: distributors understand what will work in their market. They don’t want nitpicking overlords crippling their efforts. Multinationals seek control over their brand and the way it is presented across markets. Distributors want the freedom to present and brand their wares or services in a manner that will empower sales by being a perfect cultural fit. Companies want to reign in freewheeling distributors and ensure that all translations, branding decisions, and other changes pass through headquarters. Both sets of needs are valid.
The localization solution
Ideally, of course, both parties will collaborate to leverage the strengths of each. Corporate has a valuable asset in their distributor’s insider knowledge. Distributors can certainly respect a corporation’s liability, and their investment into their brand. If each can respect the needs of the other, they can find the arrangement that best fits their situation.
The company, for example, could establish parameters, and let the distributor have some flexibility within those. Perhaps the company insists on the right of final review, and also forbids any tampering with the corporate logo. Otherwise, the distributor is free to adapt away. If corporate dislikes one of the localization decisions made by the distributor, that particular localization aspect could be reset.
Alternatively, the company could initiate all localization processes. They could hire a translation firm, make all branding and messaging decisions, and otherwise run the localization program from the top down. Then, headquarters could submit their actions to the distributor for review. The distributor may have some very good changes to suggest; the company would be wise to heed them.
A third collaborative arrangement: appoint specific aspects to corporate headquarters and other aspects as the domain of the distribution partner. For example, the distributor might be in charge of developing promotional materials for their country, subject to approval from corporate headquarters; headquarters, meanwhile translates all of their compliance, legal and technical documentation with their trusted translation vendor.
3. Localization, translation, and the FCPA
In my “Multinationals, Distributors, and the FCPA” (Global Trade Magazine, 8//22/16) article, I cover the danger posed by corruption in overseas markets. Specifically, the degree to which multinationals can be liable for actions taken by their distributors.
The Foreign Corrupt Practices Act
The FCPA is a US federal law (many other nations have their own equivalent) that specifies accounting transparency requirements. Its other, perhaps better-known function is the prohibition of bribery. Specifically, the bribing of foreign officials. As per the FCPA, it is illegal for US companies or their representatives to influence foreign officials with money or rewards of any type. And, making things tricky for the US exporter, overseas distributors are typically viewed by the FCPA as a company representative.
The United States Department of Justice and the Securities and Exchange Commission are both responsible for enforcing the FCPA’s transparency and anti-bribery requirements. The SEC tackles those firms that are already subject to SEC provisions domestically — investment firms, for example. The DOJ, apparently, takes on all corporations not covered by the SEC. However, both agencies collaborate: the “A Resource Guide to the U.S. Foreign Corrupt Practices Act” lists the document as a work of both the DOJ and the SEC.
Ignorance is not bliss.
Just because your foreign colleague violates the FCPA without your knowledge does not immunize you from the consequences. For example, Key Energy Services recently agreed to pay $5 million to settle SEC charges. The violations in question were perpetrated by Key’s Mexican subsidiary, but the parent company paid the price. In another instance, Johnson Controls agreed to pay $15 million for violations committed by its Chinese subsidiary.
Robust compliance enforcement: the only solution.
To stay on the right side of the law, a company needs to have a detailed anti-compliance policy. What is more, they need to have sufficient oversight of their overseas representatives that they can catch bribery and shady accounting practices. Regular audits are highly advisable.
Some countries are more corrupt than others.
The more corrupt the country, the more rigorous the scrutiny of international distribution partners should be. Unfortunately, a culture of corruption exerts an outsized pressure on your overseas colleagues. Human nature being what it is, the corruption incentives can sometimes sway the most well-intentioned distributor. When you give them rigid and clear boundaries, combined with thorough oversight, you’re giving them incentives not to take part in corrupt practices. Balancing the scales, so to speak.
International distribution: tricky but worth it
Ultimately, with the right distributors and the proper care taken, your international distribution network can be one of your greatest assets. Donald Fites goes so far as to argue that “the global winners over the next 10 to 20 years are going to be the best distribution organizations.” US multinationals, Fites claims, “know more about distribution than anyone else.”
So, go forth and find good international distribution partners. Then forge an alliance close enough to keep you in the driver’s seat and out of trouble.