Surprises are inevitable when dealing with emerging markets.
“No matter how big your legal department or corporate compliance group, when doing business in emerging markets, you're going to have surprises, and it comes from places you never expected,” said Richard J. Coyle, executive director of the Emerging Markets Institute at the Samuel Curtis Johnson Graduate School of Management at Cornell University in Ithaca, N.Y.
Mr. Coyle was the case study speaker on emerging markets at the Business Insurance Risk Management Summit last week in New York.
The former senior director for international corporate affairs at Bentonville, Ark.-based Wal-Mart Stores Inc. said the retailer had 100,000 suppliers around the world and “a lot of people trying to find problems in the supply chain on any given day or week.”
So Wal-Mart developed a playbook to handle such surprises, Mr. Coyle said.
The risks of dealing with emerging market are economic, legal, political, cultural/linguistic and reputational, he said.
Economic risks include currency stability and conversion, repatriation of profits, infrastructure development and high unemployment, such as in Greece and Spain, which can cause instability.
Legal risks include land ownership with some countries prohibiting foreigners from owning land. In former communist countries, families could claim they owned land before the communist takeover, he said.
Political risks can include government instability, taxes, tariffs, fees, regulation and protectionism.
“Keep your company politically neutral in case the ruling party changes,” Mr. Coyle said. If there is an upheaval, “then you don't want to be seen on the wrong side.”
Discussing cultural/linguistic risks, Mr. Coyle said: “You must get your advertising message right.” In China, McDonald's Corp. ran an ad showing a customer begging a competitor to accept a discount coupon for a sandwich, not realizing that Chinese consider begging to be “horribly offensive.”
In Africa, Gerber Products Co. sold baby food showing a baby's face, unaware that people there expect to see a picture of the container's contents on the label.
In Southeast Asia, Pepsodent's manufacturer advertised its product made teeth white, only to find out later that people chewed on betel nuts, which resulted in darker that were perceived as attractive, he said.
“These are big mistakes,” said Mr. Coyle. “You need people on the ground who can tell you these sorts of things.”
Discussing reputational risk, Mr. Coyle said Wal-Mart was “always getting requests from environmental groups to stop sourcing certain products from certain countries.” For example, one group called for not importing any furniture from China because it was built from timber harvested in Siberia, causing the destruction of the Siberian tiger's habitat. In another case, a group called for Wal-Mart to stop buying wool from Australia, citing the way it was harvested as being cruel to animals.
Decisions must be made as to how to handle these situations, said Mr. Coyle.
Risk mitigation steps in emerging markets include good government and media relations, conducting due diligence, hiring local advisers, establishing backup plans and obtaining good insurance coverage, he said.