Market rationalisation and exit risk in global supply chain management

April 06, 2021

Most international supply chains are set up solely with growth and expansion in mind. Decisions are made after careful planning, and are supported by ongoing resource commitments to deliver the desired outcome. Jurisdictions are chosen based on factors such as market potential, logistical efficiency and low manufacturing costs. Relationships are focused on an envisaged mutually beneficial long-term association. Market entry and deal consummation is warmly celebrated, and often widely publicized. The aura is palpably positive and friendly, and is comparable to a wedding ceremony in situations where joint venture partners are involved.

From a legal perspective, the focus is on getting the deal done, and putting in place all of the necessary structures and arrangements to enter the market. Navigating foreign investment requirements, establishing international payment and shipment arrangements, organizing the appropriate structure, optimizing the tax implications and putting the necessary people in place are seen as the priorities. Once a decision is made there is often a haste to get the first product to market, or local product manufactured and shipped, or local service provided. There is usually significant capital investment involved, including by any local joint venture partners.

Internal and external lawyers try to strike a balance between safeguarding future interests on the one hand, and not taking the shine off the deal or prejudicing any business or governmental relationships or customer anticipation, on the other. As a result, it can sometimes be like trying to negotiate a pre-nuptial agreement at the wedding ceremony. In consequence, most international trade and supply chain agreements tend to focus on the basics when it comes to adverse outcomes – there is a dispute resolution framework and some general force majeure protection. The end outcome is comparable to a no-fault divorce system – the relationship is ended without unnecessary rancor or attribution, but the big arguments about property settlement still need to occur.

Market rationalization and exit risk is critical to global supply chain management. This briefing explains why and highlights the factors which can cause major loss and damage. It also considers how best to plan for market rationalization and exit risk in global supply chains during the establishment and operational phases; ensure all relevant issues and risks feature in the decision-making process; and implement any decision to mitigate risk, liability and damage.