Manufacturers and sellers, seeking to distribute or manufacture products in China, India, Korea and other Asian countries are sometimes at a loss when trying to verify the reputation or veracity of the distributor, agent, vendor, service provider or sub-manufacturer they are expecting to do business with. Normal credit checks or simple due diligence may not be enough when doing business with channel partners half way around the world. This is a problem as the risks of using an unreliable channel partner are great not only from a legal or business standpoint but from a reputational one as well. Is your company willing to sacrifice its hard earned reputation when contracting with an unknown or at-risk channel partner?
Obviously, from a manufacturing standpoint, there are risks as well. Do sub-manufacturers or component manufactures have the requisite knowledge and reliability to properly manufacture the products to sell into the market? Companies selling internationally need to comply with all applicable manufacturing standards, including international standards that are applicable to the relevant industry. Such standards may call for testing, certification, even certification of third-party service providers. When sub-contracting manufacturing out to a third party in another country, a company needs to make certain that it manufacturing processes are conducted in light of all regulatory requirements and that the processes address all legal issues.
The concerns a company has regarding its international channel partners obviously many- or should be many. Here are a few areas of risk that should be addressed:
- Is the company actually in business?
- Is the company in financial distress?
- Is the company in legal or regulatory trouble?
- Does the company have a good reputation?
- Does the company have ties to the government that might expose it to political/regulatory risk?
If using a distributor or third party retailor to sell or promote your products, a number of product related risks are also of concern. Such as:
- Is pricing competitive?
- Placement- are placement ads proper?
- Is sales floor representation adequate?
- Is there proper after sales support?
- Is service delivery services adequate?
- Are trademarks used properly?
Manufacturing Risk and Issues
There are numerous risks a company faces when subcontracting to a subcontractor abroad. Such risks include:
- Does the subcontractor comply with all required manufacturing standards?
- Does the subcontractor provide for various types of testing of devices, components, and material at different stages of the manufacturing process?
- Does the subcontractor assure through testing that the specifications?
- Does the manufactured device meets design and performance specs?
- Has the subcontractor conducted validation of testing processes in accordance with applicable international regulatory guidelines?
International Third-Party Service Providers and Associated Risks
It is common for manufacturers, to use third-party service providers to provide service. . Many US or European manufacturers do not have the resources or facilities in all countries to provide direct service without using international third-party service providers, especially in . This is especially true in Asia. The use of third-party service providers, of course, inserts a third party in between the manufacturer, and the end user or consumer. It can be another source of risk! Therefore, the following processes should be required of third-party service providers:
A report from the third-party service provider should include information such as:
- Information on the product repaired
- The nature of the work performed
- The equipment and materials used to repair the product, if any
- The identity of user and service
- The place and date of repair
- The condition of the product as received
- The testing performed
- Information about their procedures, employee training, and quality assurance
- Indemnification for liability created by improper servicing of the service-provider
Seeing the risk above, what can a company do to mitigate the risks it faces when choosing a channel partner? Simple credit checks are not enough. Nor is basic due diligence. The risks associated with a company’s goodwill and reputation are far more important to trust everything on a credit rating report or even an insurance policy. It is recommended that a company looking at using a channel partner consider retaining a consulting company or risk management company that can provide detailed on the ground services covering the following:
- Extensive Due Diligence ( a Country expert is needed) covering the following areas:-Investigative Due Diligence, Enhanced Due Diligence ( when more detailed information is required) and Commercial Due Diligence
- Brand Protection Services including: monitoring for unauthorized brand and trademark usage; monitoring for sales and counterfeits and monitoring for trademark infringement
- Competitive Intelligence- due diligence on the competition as well
- Market Due Diligence- a review of regulatory, political and cultural risks
Risks facing companies using channel partners in different parts of the world can be daunting. However, when a company takes the time and effort to consider the risks involved, it can mitigate the risks by taking the proper steps which includes using outside consultants to handle due dilgence as well as brand protection and product presentation issues. One such consultant is the risk management company – Erudite Risk. For more information on Erudite Risk please go to its website www.Eruditerisk.com
Bryan Hopkins is a Special Counsel to Lee & Ko in Seoul, Korea. Formal law professor at Sejong University and former General Counsel at Samsung Electronics America. He has extensive experience in management of complex commercial litigation, compliance, eDiscovery and risk management.