Why foreign investors should plan for a graceful exit

Many foreign companies go to China intent on making money in a giant market. Often they successfully navigate the many challenges and succeed. Inevitably, though, some fail and, as they try to exit, they come to one last ignominious hurdle from the country that has defeated them: they need permission from local government officials to shut down.

Stanley Chao, principal at Asian specialist advisory company All In Consulting, says there are many regulations in China governing how to close a business, and most companies operating there are familiar with them. However, foreign companies often do not grasp that they cannot go to a local government office and simply announce it is closing. “That creates problems,” says Mr Chao. “That creates penalties. That creates inquiries from the local tax bureau.” In the worst-case scenario, a corporate officer can be arrested if he does not close down a company properly, adds Mr Chao.

The risks of a messy exit  

China is one of the more extreme examples of the challenges a foreign company can face as it sets about quitting a market. But it does provide an object lesson to global businesses on the necessity of carefully charting a graceful exit, no matter where it might be. The risks of not doing so can include legal jeopardy and messy financial entanglements, as well as a sullied corporate reputation.

“We live in a global, very connected world and if you leave customers in the lurch, or worse, with losses, then that will come back to haunt you,” says Charlotte Brown, international business strategist and CEO of consulting firm Adelie Ventures.

She recounts a US company that entered Dubai a few years ago with a splash. It had attracted a lot of press for establishing an operation there having positioned the move as part of its international growth strategy. Unfortunately, once it had settled in, the company concluded that Dubai was not as good a fit as it had initially assumed.

“So the company had to tell all of its advocates in the country that it was pulling out. And that did harm its brand, short term,” says Ms Brown. “But the company was relentless in engaging with its clients and stakeholders and it was transparent about everything.” Eventually, its outreach managed to ease some of the sting of its departure, she adds.

Most companies, though, first tend to focus on the legal issues involved and for good reason, according to Annalisa Nash Fernandez, principal at Domain Americas. “Exiting a foreign market is not as one-dimensional as terminating a contract with a domestic supplier or client. Depending on the foreign country, your company could be subject to ‘evergreen’ clauses, where one renewal can imply an infinite contractual term, or be ensnared in labour lawsuits for the next decade. It’s not as clear as writing a cheque and handing the keys back to the landlord,” she says.

A little local difficulty

One area that foreign companies tend to overlook as they prepare to pull out is their relationships with local economic development and government officials. While few markets have as rigorous requirements as China in this area, experts say it is too important a step to skip, no matter what market the investor is in.

“In the case of a market entry originally negotiated with any form of benefits – anything from tax credits to PR – it’s important not to forget that the exit works the same way,” says Ms Fernandez. “All of those benefits and relationships that were important coming in need to be addressed as you are pulling out.”

It is advice that General Motors (GM) would have done well to heed in South Korea. It is now clear that the auto manufacturer had been having difficulty with its South Korean operations. But earlier in 2018, the depth of the problems was not apparent – especially to local development officials. When Barry Engle, GM's head of international operations, visited the country in January, local economic, business and banking officials were convinced the meetings had gone well and came away feeling reassured of GM’s commitment to the country, according to an account in Reuters.

Weeks later, when GM announced it was pulling out, these officials were left shellshocked. “GM only talked about the difficult situation it was in, and asked for our help, but did not say a word about the closure before,” a South Korean government official told Reuters.

Chastened perhaps, in May GM eventually agreed to a $7bn bailout package with the South Korean government. In exchange, it pledged to stay in the country for at least 10 more years.

China’s harder line

It would have been an entirely different story for GM in China, however, according to Mr Chao. When a business establishes itself in China it has to justify itself to local authorities. “It has to show what it expects its profits to be, how many people it plans to hire and the taxes it anticipates having to pay. The local authority counts on that revenue so there will be questions if the business doesn’t deliver,” he says.  

When a business wants to close, it must again justify itself and explain to the authorities why the plan did not work – for example, perhaps the local competition was too intense, perhaps the cost of the raw materials went up or the exchange rate adversely affected operations.

Then comes the negotiation in which the company usually winds up agreeing to stay open a little while longer or perhaps take measures that the officials suggest could solve its problems.

Sometimes these suggestions actually work out, according to Mr Chao, who describes the case of a US company in a small Chinese city that was manufacturing syringes for veterinary surgeons. The syringes were being exported to the US, but the company faltered when new competition entered the market. When told of the reason, local officials found the company a partner that helped it transform the syringes into a product for children. Eventually the partner bought the factory.  

It was a win for the manufacturer and the local government as well. And it would perhaps be fair to say it was a better outcome than a billion-dollar bailout for a struggling high-profile foreign investor.