My European History degree thesis was on
the continuance of business with Hitler’s Germany during World War Two. It
taught me that business generally continues even in the most difficult political
circumstances, although its ethics can often be called into question.
I spent several years from 2004 advising a
UK manufacturer of incinerators whose enquiries were coming from all over the
world, including George Bush’s axis of
evil, except for North Korea: Gaddafi’s Libya, Ahmedinijad’s Iran, and Saddam
Hussein’s Iraq. Countries in different levels of turmoil but still with a need
to trade. The Libyan order was supplied with the help of a well connected British
consultant who spent half his life there. The Iranian order was completed through
a Greek consultant just before sanctions were increased on Iran. The Letter of
Credit (LC) costs were exhorbitant, mainly because the payment had to be routed
through a London based Iranian bank. But the Iraq project was more soundly
based, and this is the story.
My client had just acquired a UK competitor,
and as part of the acquisition they inherited a $350,000 USD for 20 standard incinerator
units for the Ministry of Health in Iraq. It was potentially very profitable
business and they were both excited by it and at the same time daunted. It took
a couple of meetings for them to produce the LC that applied to the order. It
was from the Trade Bank of Iraq, owned by JP Morgan, and was stacked entirely
in favour of the buyer – the Ministry of Health in Baghdad. These were the key
terms of the contract and LC:
·
80% payment to be made on
delivery of all 20 units to Baghdad, overland from Amman port in Jordan and to
include all insurance.
·
20% payment to be deferred ‘until
all units were installed and in use’ at some indeterminate time in the future.
·
A 10% bid bond was required
just to take part in the tendering process
·
A 20% performance bond was
required to ensure that any equipment supplied would perform to standard, and
would also be paid/refunded either partially or in whole at some indeterminate
time in the future
·
No British manufacturing plates
were to be visible on any machine in case they were captured and destroyed by
insurgents.
All of the risk was for my client, who
stood to lose all $350,000 if anything went wrong in transit, or if payments
failed to materialise. The LC had been arranged by an intermediary in Baghdad
who has since proved to be one of the
most honourable people I have ever known. Of course we had no way of knowing
that back then, but I advised my client that we could not accept the LC on
those terms. The manufacturer was clearly nervous about losing a large and
profitable order, but I persuaded them that it had to be re-negotiated so that we
could reduce their exposure to risk.
So I picked up the phone to the
intermediary, and told him that as the LC as it stood was unworkable we needed
to find an alternative arrangement, either a complete set of amendments to the
LC or by agreeing a deal that would enable us to cancel the LC. We declined to
pay either the bid bond or the performance bond. I know that his LC charges in
Baghdad were likely to be very high, and immediately suggested that the LC
would cost us both unnecessarily. He accepted that, and agreed the following
schedule:
·
The 20 incinerators would be
sent in three shipments: the first containing four units, and the second and
third each containing eight.
·
Each payment would be by
telegraphic transfer into my client’s bank.
·
50% of the value of the first
four units would be paid before shipment from my client’s factory, with the
balance payable when the shipment reached Amman in Jordan, plus the 50% deposit
for shipment two. The deal was repeated for each of the following shipments.
·
The intermediary arranged
overland delivery and insurance from Amman to Baghdad and the installation of
each machine.
·
The maximum financial exposure
to my client at any one time was $70,000 USD .
All payments were made on time. All
shipments arrived in Baghdad on time and the incinerators were distributed
around various hospitals in the city. Orders are still being received from the
same source, but that fact that my client could demonstrate they had units on
the ground in Baghdad encouraged further
orders from both the British and US military.
The situation in Baghdad during that time
was extremely dangerous, to the point where the intermediary had to send his
British wife to live in Jordan until things calmed down. Their lives had been
shattered by the war but they found a way to manage in those very difficult
circumstances. He was especially pleased to be championing the supply of
British goods into Iraq because the war years had led to the importation of what
he regarded as sub-standard products from many different parts of the world.
During his youth the Iraqis liked to buy British because it had a quality stamp
to it, and a certain prestige. So the incinerator story is a success story for
both British manufacturing and British exporting!
The
lessons learned?
1.
If a deal looks wrong, you can
normally change it. Business is about negotiation.
2.
Business is also about risk.
Sometimes a business deal is about minimising the degree of risk rather than
taking no risk at all. This was a calculated risk that paid off.
3.
People do business with people.
The intermediary is a regular visitor to the UK and my client had the good
fortune to get to know him and his family, just as he became familiar with the
quality of their machines.
4. British quality is globally recognised and we should be shouting it
from the rooftops!
