The September 11th terrorist attacks on the United States and additional potential attacks here and abroad require the business community to reassess its international strategies and practices. For many, this will involve accommodating change and managing disruptions in supply chains, inventories, travel frequency and destinations, overseas buying patterns, accounts receivable risk, and shipping and insurance costs. A number of new issues will need to be considered and important questions answered for any business preparing to do business internationally in 2002.

Is Your Supply Chain Vulnerable?

U.S. companies that rely on foreign-made components or material to complete their manufacturing process need to establish a plan should their supply chain become disrupted. And for those companies that rely on just-in-time deliveries, it may be wise to maintain larger just-in-case inventories or identify additional suppliers.

In 2000, U.S. companies imported more than $1.2 trillion in merchandise. Of this, $367 billion was purchased from suppliers in the Western Hemisphere and $257 billion from suppliers in Europe. Asian suppliers provided $485 billion in goods, representing the largest share at 40% of total U.S. imports. Since the September 11th terrorist attacks, the U.S. State Department has identified related security threats in Indonesia, the Philippines, Pakistan, and many other countries. Should ocean shipping lanes be affected in the South China Sea or in the Strait of Malacca — a particular vulnerable point due to its narrow passage between Malaysia and Indonesia — imports from countries in the region and marine vessels en route may be required to take circuitous routes, thereby delaying delivery.

Is Your Product at Risk for Delay?

Manufacturers and distributors who rely on merchandise worth $80 billion from Singapore and Malaysia (the United States’ 10th and 12th largest suppliers), the Philippines, Indonesia, and India might consider alternative strategies for guaranteeing timely deliveries. The dominant products imported by U.S. companies from Malaysia, the Philippines, and Singapore include computer equipment and parts, as well as semiconductors and other integrated circuit devices. However, delays resulting from sabotage in the Strait of Malacca are mitigated since most of these products are shipped to the United States by air and not by sea.

Many of the components used in the assembly of these products originate in the United States, reflecting production-sharing arrangements. Popular U.S. imports from Indonesia include footwear, apparel, natural rubber, and other goods which are often delivered by ship.

Should Orders Be Placed Sooner?

Due to potential civil unrest in particular countries, as well as new U.S. customs and transportation security procedures delaying ocean and air shipments, purchase order lead times on overseas custom-made goods are likely to increase.

Consequently, custom designed electronic components ordered from Malaysia or private label apparel knitted in Pakistan may need to be ordered weeks or even months earlier than normal to ensure delivery by a specific date. This will undoubtedly add to inventory costs. But as many manufacturers well know, unavailable or delayed inputs can slow production schedules to the point of jeopardizing customer relationships.

Will Your Importers Continue Buying at Current Levels and Pay On Time?

During this period of unusually slow global economic growth, coupled with regional political instability and civil unrest, overseas buying patterns may be disrupted. As a result, it is important to identify your most vulnerable target markets and reassess export destinations, focussing on economic strength and political stability.

Importantly, the level of international receivable risk may climb. Commercial risks, mainly viewed in terms of the credit strength of the buyer, involve the buyer’s ability to pay, terms of payment, and the credibility of the buyer’s bank. If the commercial risk is questionable, consider more secure payment vehicles.

Has Foreign Country Risk Increased?

In various parts of the world, country risk, as well as commercial risk, have risen. Country risk involves economic, political, and social risks that are largely beyond the control of the buyer, but can seriously impede or prevent payment. Generally, economic conditions are reflected by growth, inflation, unemployment, balance of trade, and taxes.

Political risks are often assessed in terms of country stability, and sometimes measured by the level of confidence in a government. Social factors usually include social unrest and violence. Should social turmoil envelop a nation, the disruption of activities could put your foreign buyer’s business at risk. And, a new government may impose economic policy that could prevent you from being paid for goods shipped.

Additionally, currency volatility can have a major impact on country risk and could affect your ability to collect anticipated payments. For example, if your buyer’s currency is devalued by half its value and you are collecting in U.S. dollars, it will take twice as much of your buyer’s currency to pay you. On the other hand, if you are collecting payment in the foreign currency, you’ll receive half of what you expected.

Various methods of payment exist that serve as an alternative to an open account without insurance. From least to more risky, these include letters of credit, open account with insurance, documents against payment, and documents against acceptance. In addition to payment concerns, don’t underestimate the need to reassess the short and long-term stability factors of countries in which you have foreign subsidiaries or investments.

Will Higher Shipping and Insurance Rates Be Built into Your Prices?

Due to security surcharges on cargo in a riskier business environment, shipping and insurance costs are anticipated to rise. In fact, some insurance companies have increased the number of countries subject to “war risk” surcharges. This means shipping lines must notify marine underwriters before their vessels move into designated waters, as these vessels may be subject to significant additional insurance premiums. Much of this added expense will be passed along to customers.

September 11th Impact on Trade

Since September 11th, the number of business people traveling by air dramatically declined, but then it began to pick up. How will all the fear of flying combined with additional costs of doing business impact international trade?

At least in the short term, fear probably will continue to keep a segment of business travelers from attending far away meetings in the U.S. and abroad. This, combined with flight delays due to extra time required for security checks, plus the declining cost and adaptability of telecommunications equipment to internet technology, likely will result in an increase in video conferencing.

Consequently, international trade will slow in the short-term partly due to the impact of terrorism and slower economic growth. And although there is no substitute for face-to-face rapport building, improved electronic communication is likely to keep international trade on track.

This article appeared in December 2001. (BA)

John Manzella
About The Author John Manzella [Full Bio]
John Manzella, founder of the Manzella Report, is a world-recognized speaker, author of several books, and an international columnist on global business, trade policy, labor, and the latest economic trends. His valuable insight, analysis and strategic direction have been vital to many of the world's largest corporations, associations and universities preparing for the business, economic and political challenges ahead.

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