Buying Success In Emerging Markets Doesn’t Pay

Buying Success In Emerging Markets Doesn’t Pay
Joel Backaler, 10.07.11, 03:30 AM EDT
Partnering with local distributors is the quickest way to expand across the region, but proceed with caution.

Is it possible to buy success in emerging markets like China and India? Diageo seemed to think so. The world’s largest spirits company was recently charged with making more than $ 2 million in illicit payments to various government officials in India, Thailand and South Korea from 2003 to 2009. The U.S. Securities and Exchange Commission (SEC) estimates London-based Diageo reaped profits in excess of $ 11 million as a result of payoffs to hundreds of officials in India to gain administrative approvals and stock its products in government liquor stores and canteens. The SEC charged Diageo with paying a Thai government and party official $ 12,000 a month to gain favorable rulings in several tax and customs disputes. In South Korea, Diageo allegedly paid $ 86,000 dollars to a customs official to reward him for his help in securing a government decision to grant Diageo tax rebates of approximately $ 50 million. Were all of these wrongdoings Diageo’s fault?

Given that over 90% of Western multinationals operating in emerging markets work with local distribution partners to some degree, it’s difficult for executives sitting in headquarters to be aware of everything happening on the ground in these markets.

Diageo had to pay $ 16 million in fines to settle the charges and did not admit to any wrongdoing, but they certainly aren’t alone. In March, IBM agreed to pay $ 10 million in penalties to settle charges brought by the SEC. In a separate case, Alcatel-Lucent is expected to settle with prosecutors and pay $ 137 million in similar penalties by the end of this year. And, of course, who can forget that Germany’s Siemens paid a record $ 800 million settlement in 2008.

For executives managing Western multinationals in Asia, indirect distribution can be an attractive option. Local partners enhance speed to market and help navigate the nuances of local markets. However, one of the greatest challenges distributors can pose to Western multinationals operating in China and other emerging markets is the risk of violating the Foreign Corrupt Practices Act (FCPA). The FCPA applies to all U.S.-listed companies and it requires accounting transparency and forbids bribery of foreign officials. The autonomy granted to local distributors often leaves the door open for them to violate the FCPA in the Western MNC’s name.

After years of investment and trial and error, the companies highlighted in the following section have come up with creative ways to incentivize their distributors to act in the best interests of the Western MNC regardless of local business norms.

Track Performance by Monitoring End Customers

A U.S.based consumer products company operating in Asia found that its traditional model requiring distributors to submit monthly reports on customers did not provide enough visibility to accurately monitor performance and collect local consumer insights. In response the company developed a mobile phone text message-based (SMS) system to track products and customers in real-time. Each bag of product is stamped with a barcode and a hotline number. Along the chain, the firm gives distributors, resellers and customers incentives to send the barcode of their product to the phone number listed. According to the executive in charge of the SMS initiative, the program “has been a huge success in Asia. The real-time information we have gathered is phenomenal-we know where customers buy their products, how much they buy, and how often. And we have their mobile phone numbers so we can SMS them marketing promotions too.”

Read more …