27 Apr 8 scams to avoid in international business!
We’re all aware of stories about how firms get cheated in overseas dealings. Businesses complain of it, and there seems to be little way to enforce a company’s rights in overseas markets. Sometimes it’s foreign companies that cheat us, sometimes foreign governments.
While we may not be able to protect ourselves, here are the most popular ones to avoid:
• Pretending to be a buyer
U.S. firms are likely prey. A foreign firm approaches a “supplier” and starts asking for quotes and proposals. Once the U.S. firm feels a deal is in the works, they start to do everything possible to curry favor with their new “buyer.” The “buyer” isn’t a customer at all, but a potential competitor wanting to learn about trade secrets, intellectual property, sales methodology, pricing, service, etc.
Solution: Start with small pilot projects to generate trust and cash flow.
• Needing to register your intellectual property
Many times a foreign buyer, consultant, or agent needs blueprints, technical specifications, source code, ingredients lists or other sensitive items in order to “register your firm with the government.” Handing over the secret-sauce recipe has happened to more companies than we can count. Also, some foreign governments will reveal your technology to local competitors.
Solution: Don’t register through third parties you don’t know well. Keep a piece of your IP to yourself.
• Putting your firm (or trademark) in their name
Burger King, Ford, Car & Driver magazine and Reader’s Digest have been some of the many companies that have been taken by this scam. Firms work with unknown consultants, and the consultants have been known to register the company name for themselves and blackmail the parent company into buying its own name back.
In other words, a Taiwanese consultant knows that ABC firm is planning to enter Taiwan, so the consultant trademarks the name without ABC firm’s knowledge.
Solution: Register your name in any markets you are thinking about. All countries have embassies in the United States where this can be done.
• Show high interest, then stall
First of all, most overseas negotiations take longer than U.S. negotiations. But many negotiating parties like to drag it out endlessly. They may do this because they are working with a competitor, or they may be one themselves.
Solution: Plan on long time horizons to begin with, and do proper due-diligence on your negotiation counterpart.
• Bad payment documents, holding shipment hostage
International trade is most often financed through financial vehicles such as letters of credit (a guarantee from your bank to theirs to pay if shipments are done properly). Regularly these documents are not perfectly completed, and the banks won’t pay if anything is amiss. (For example, a delivery date is one day late.) The customer then tells the supplier that they will get the letter of credit cleared if the supplier lowers his price. The supplier has to decide whether to take less, or have the ship bring back the merchandise
Solution: Verify your payment documents with an expert. Try to use the same bank on the buyer’s and seller’s side. Or open a bank account near your customer.
• Tying up your international rights
U.S. firms are often ignorant as to how international market entry is performed. They can often fall prey to charlatans who offer them a “no money down” deal to export. They simply ask for the international sales rights to your product. When they don’t perform, you have missed a market opportunity and may be blackmailed into buying the rights back from them.
Solution: Start by handing the rights over to, say, just one country. If the intermediary performs, move on to more countries.
• Losing your brand legally
In some countries, it can become impossible to change distribution. You may be finding a distributor in Mexico, for example. When that distributor doesn’t perform, it can be impossible to get out of the relationship. The distributor can argue to the Mexican court that it has taken all risk, and the U.S. firm is needlessly stopping them from succeeding.
Solution: Slow down. Get to know your distributor.
• Dialing for dollars
Sometimes a distributor or retailer will be selling your product for you in their country, and you will get “dialed for dollars.” The conversation goes something like this: “Give us $200,000 now or your product is off the shelves.” You can’t sue, you don’t want to lose the market, and you don’t want to pay blackmail.
Solution: Plan on a marketing budget in foreign countries. Take control over your marketing efforts so no one can dictate terms. Use a marketing mix and have several methods of distribution and sales
available to you.
There is obviously a pattern here. Slow down, do your homework, make real efforts in foreign markets, and prepare to spend time and money. These scams are common overseas, and you’ll often find them right here in the United States as well.