Three risk pressure points for businesses active in a modern Australia

The Australian economy is continuing to feel the effects of two important dynamics – the steady march of globalisation and digital disruption. While both are a huge opportunity for businesses active in this country and aboard, they come with significant risks that need to be managed closely.

In this article, we analyse three of those risks – intellectual property protection; cyber risk; and diversified supply chains – and recommend ways for businesses to mitigate them in order to keep growing in a sustainable way.

Regional advantages

Australia has long been hailed for its resources and its privileged location that facilitates trade in the Asia-Pacific region. Today’s businesses can boast a variation on these themes: intellectual capital and expertise in a variety of industries, from financial services to renewable energy, set Australia apart in the world’s fastest growing region. The Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) will broaden trade possibilities across the region, and strengthen Australia’s position as a regional leader.

Calling all leaders

Australia’s high standards when it comes to areas as varied as sustainable agriculture, data privacy or minimising the risk of modern slavery across supply chains make a difference at home and abroad. From modest breakfast staple Weetbix topping 50% sales growth in China to Atlassian joining the Manila start-up scene, Australia’s businesses can lead the way in setting quality standards, and in supporting the development of economies across Asia Pacific.

Managing regulatory instability

One of the key risks facing businesses aiming to expand regionally is understanding the markets they are targeting. Going beyond considerations of local preferences and competitive pricing, the most severe risks of investing in developing economies are related to regulatory instability, and enforcement of rules regarding debt recovery and restructuring. We pay close attention to these areas when advising our clients with regard to their expansion strategies.

IP Protection

We also keep an eye on the litigation landscape, particularly when it comes to IP protection. A recent case that has caught the media’s attention is that of American wind turbine maker AMSC, which lost more than USD 1 billion in equity and half its global workforce after the theft of its intellectual property following its decision to shift manufacturing to China.

There is without doubt a balance to strike when it comes to manufacturing abroad and particularly in China. Historically, China has been viewed as a problem jurisdiction for IP owners.  The perception that the Chinese intellectual property regime does not help international owners to protect their rights in China has seen some entrants to local manufacturing neglect to position themselves to take advantage of improving facilities for  protection of their intellectual property. China is making significant progress to ensure valuable IP can be and in fact is protected, for the benefit of international and national trading entities. China is not alone in its efforts to build a strong IP system, and there are several other jurisdictions that are high risk for counterfeiting and piracy in which rights owners fail to take the proper precautions and so miss out on the support of improving IP laws.

Entering a high-risk jurisdiction (from an intellectual property protection perspective) requires a different approach to jurisdictions in which the enforcement of intellectual property is more straightforward. Some risks can certainly be managed with robust contractual protection, including clear ownership statements, assignments of developed rights, audit rights and governance mechanisms, delivery-up obligations and robust confidentiality undertakings. Any such contractual provisions need to be in place before you launch your relationship, when both parties are incentivised to start the relationship on a sound footing.  But to be effective, these provisions need to be supported by practical measures.

What do these practical measures look like? Organisations generally conduct due diligence before starting a new relationship – in an arrangement that exposes your intellectual property, your due diligence should be tailored to that.

• If you are developing new IP rights through your arrangement, consider who will perform the development, where are they located, how you will record created rights, who will own created rights, what IP registrations are advisable and what licensing rights are granted, how will you manage the relationship in terms of communications, how will you exercise audit rights?

• If you are entering into a licensing or manufacturing arrangement that involves the disclosure of your IP and confidential information, consider who will have access to confidential information, what information they will receive, how you will audit   information management by the counterparty, what rights the counterparty will have to use your IP rights and confidential information, does the counterparty act for any of your competitors or have a track record for providing the goods or services that your organisation provides? 

• Regardless of the nature of the arrangement in every jurisdiction where you are operating (and particularly those that are high risk for your intellectual property), have you conducted freedom to operate searches before launching new products and services, do you have a policy that ensures you are registering or otherwise protecting new IP rights on creation (this is particularly important for brands in China, where rights generally flow to the first to file), do you know what your competitors are launching and registering in each of your jurisdictions (both at launch and on an ongoing basis), and do you have an action plan ready to deal with potential infringers (which plan may differ across jurisdictions)?

Whatever the nature of the arrangement, the answers to these questions can be used to build contractual mechanisms and processes within your organisation to help manage risk attaching to disclosure of intellectual property rights and confidential information. Robust business processes when combined with tailored and well-drafted contractual provisions can be used to mitigate the risk for an intellectual property rich organisation of entering into a high-risk jurisdiction. 

Another key risk related to establishing a presence abroad is localising supply chains in order to streamline operations and minimise waste. While contributing to the development of a global circular economy companies keen on safeguarding supply chain integrity and brand equity must pay particular attention to data privacy standards and to modern slavery risks.

The upcoming Modern Slavery Act will likely impose reporting obligations for all major businesses; first tier suppliers may be in scope if the UK example is followed, raising the bar for ethical sourcing.

In a region characterised not only by high growth rates, but also by wildly varying regulatory landscapes and an above-average incidence of corruption, bribery, and human rights abuse, Australian companies need to manage their risks smartly to drive sustainable investment strategies.

Re-thinking ESG

ESG (environmental, social and governance) has been the new black in the investment world for quite a while. The good news: 50.6% of Australian managed funds qualify as sustainable, and the trend does not seem to be fading, with financial institutions seeking to minimise their investments’ carbon footprint, and on the lookout for funding candidates.

Some of the Australian businesses that may access these funds have a regional or global outlook, and are an active part of, or connected to, the tech start-up scene. However, their number is limited.

A winning strategy may be to match shareholders’ expectations at home to investment strategies abroad. Public opinion demands a higher ethical bar, and a growing focus on green investments. With green bonds performing above average, this could be another win-win scenario for financial institutions seeking to grow their portfolio and improve their reputations as backers of sustainable development in the emerging world.

What’s the catch?

Once again, the regulatory landscape might prove to be challenging. However, when companies manage their risks smartly, they can achieve both an increase in revenue and a cut in their production costs, as many Japanese conglomerates are finding out in Vietnam.

While Australia’s businesses have a golden opportunity to lead sustainable development across the Asia-Pacific region, the potential benefits of such a strategy are not limited to revenue figures and a reputational boost. Perhaps the most important upside is the exposure to different business environments, and the innovation this is likely to prompt.

From a digital perspective Asia-Pacific, similarly to Sub-Saharan Africa, has leapfrogged into digital currencies and mobile money. While Australian financial institutions and retailers grapple with the best way to design and manage digital transformation, their customers may be buying fashion items on WeChat (an integrated social media, payment and news platform), or investing in cryptocurrencies through South Korean exchanges. Asia-Pacific has some lessons to teach, and Australian businesses expanding in the region can choose to test them within their strategy and operations, all the while maintaining the benefit of a solid structure at home.

Nevertheless, there are certain risks to keep in mind when expanding abroad. New mandatory breach notification laws that came into effect in Australia on 22 February this year prescribe high standards across not only Australian businesses, but also their supply chains, exposing businesses to fines of up to AUD2.1 million for unreported breaches irrespective of location.

Another salient risk is a potential lack of competitive edge when faced with local technologies. The learning curve may be steep for an agribusiness seeking to grow and market organic coffee from Kenya unless they can master M-Pesa mobile payments, and smoothly integrate them in their financial operations and distribution chains. The opportunity, if seized early and well-managed, is considerable: high margins for a premium product, and a boost in reputation for supporting sustainable development abroad.

Margin call

Sustainable growth is within reach for Australia’s businesses, as is a boost in their reputation at home and abroad. While all expansion involves a degree of risk, it can also bring great opportunity.

To find out more about our risk advisory offering, see Risk Ready hub. You can also speak to one of our advisors below.