Part 1 - Introduction to Market Access
In this white paper I consider what market access is, provide an overview of trade compliance, Federal Acquisition Register (FAR) flow downs, the value of continuous monitoring and the origins of laws impacting market access. I visited with Travis Miller, General Counsel (GC) to introduce the topic of market access and how companies are responding to these new and morphing requirements.
We began with what I thought was a straight-forward question - What is market access? It turned out the answer was a bit more complicated, as Miller explained. He related that market access really means the ability to sell a product into a given market. However, it is up to whomever might be in charge of allowing certain products to enter into the market, dictate what controls are put in place and what the requirements may be for entry. It can be defined by law or industry standards.
Miller stated, “when we think about market access, we take a very pragmatic approach. There are the legal requirements, there are physical steps you have to take to bring a product to market and all of this occurs before we even get to the question if anybody ever wants to buy it.” In the current business environment, the access to global markets is something that companies continually struggle with. They struggle with it from a legal regulation, commercial consumer, customer and, even now, from a political or geopolitical standpoint.
Obviously, these hurdles must be overcome. I asked Miller how can and how are companies responding to global market access requirements? He said there is a growing realization that one product may not qualify to be sold into multiple markets. There may be different component, manufacturing, financial or environmental requirements.
Now overlay all these different legal or trade requirements on the current social media platforms and you have a situation where a company can get into legal/trade/reputational hot water very quickly. Social media amplifies these issues. Further, different brands can mean very different things in different markets. Miller gave the example of the brand “Made in Germany” which may connote quality and craftsmanship, yet after the Volkswagen (VW) emissions-testing scandal it might mean something very different outside Germany. He said, “if the concept is that German cars are made by cheaters, other folks that are within that same region can encounter enhanced scrutiny and punishment and a negative effect.” A key response is compliance because if “you can’t show that at least you’re not acting in a negative bad way and that you are meeting those industry standards and norms, you may well be assumed to be a cheat as well.”
Interestingly, one business response to the limitations placed on market access have been to “go local”. Miller said, “you see a lot of conglomerates or large brands have really spent an incredible amount of time, wealth and energy is to create the appearance of being local even though they might be an international brand. What they’ve done is they’ve found brands that appeal to or that are domestic in nature and that have that value.” It has now moved to manufacturing and “Supply chains and domestication of producing items are becoming more centralized and localized and specific regions or hubs.”
With the Trump Administration’s burgeoning trade wars, there is greater fragmentation of the global access capability. We have previously lived in an era of open trade access. Now countries, such as the US, are starting to retrench from that position. Yet Miller sees it in a broader context as he believes it is “really a global phenomenon designed to protect and secure data assets to secure your innovation and to secure your market. For the Supply Chain this obviously means increased complexity in sourcing. Miller closed by noting in a recent article in Fortune, entitled “Tomorrow’s CEOs Will Come from an Unlikely Place: The Supply Chain”, author Nader Mikhail said, “the CEO’s of tomorrow are going to come from the Supply Chain, because this is the corporate discipline which must have the ability to analyze and understand those risks.”
Maintaining Market Access: Part 2 - Trade Compliance
We next turn to the topic of trade compliance and how this new era of trade wars has created challenges in supply chain compliance. It is not clear if the era of robust free trade is at an end or if there is a blip brought on by the policies of the Trump Administration. Whichever it might be, it is on the forefront of every company in the international arena and every Board of Directors of those companies. Miller suggested it could be seen as a “rebalancing” of trade in that the United States was clearly the biggest player in international trade. However, with the current US administration, many countries and indeed companies outside the US are looking for more reliable, stable trading partners. He said, “China and the European Union trading block are the two kinds of dominant peers to the United States at this point. As these rebalances and shiftings occur, there is a certain backlash against the perception that these free trade agreement activities have somehow harmed domestic populations. This could well continue for a substantial period of time.”
This insight led me to inquire “do you have any suggestions on best practices to ensure market access for US companies?” Miller believes the restrictions to market access will likely come through additional regulations, as “each market that you want to access has fundamental differences that are reflected in the law they have passed. It also includes how a country may have developed industry standards to comply with those laws. Equally important is the way that they treat law breakers.” Miller provided a generic example of shipping a product to Europe, as “it’s a single most, influential trading block in the world. They have domestic priorities towards safety, recyclability, the ability to decrease consumption and then domesticate and recyclability and production from waste materials that’s kind of end of life. The have closed loop recycling initiatives.” If your product does not align to those initiatives, it may receive a difficult regulatory reception.
He contrasted the European market with China and the Far East. Here, Miller said the priorities are “sustained domestic economic growth and ability to uplift their population, to invest internally. That is, to use that kind of industrial revolution that they are going through as a way to springboard to greater economic development. This means they will desire intellectual property and they will want your company to be involved in domestic investment. This means you will need to have a local presence; one that is at least partially controlled or if not entirely controlled in many instances by individuals that are loyal to that regime or that country.”
Interestingly, Miller observed that even with political gridlock, international trade can remain robust because if Washington or other national political centers are gridlocked, it can suck all the wind out of the air. This means no new laws are passed and the side effect is that less regulation is passed. One need only consider the US or UK governments about now to confirm this point.
Yet for businesses involved in international trade, the key is how they react. Are company’s nimble and agile enough to take advantage of market opportunities which appear or respond to new regulations? Miller said that as new trade barriers arise, “what’s going to happen is the business is going to have new metrics. An effective business, the kind of business that’s going to continue to exist and is going to thrive in this economy is going to find what that regulation is actually driving it. This means there is an opportunity for efficiency. This will allow companies to be more profitable.”
Miller concluded, “As cost to change and shift focus increases, you may well see companies start to domesticate business. This could lead to increased job markets and lower unemployment. We are seeing companies investing in these new workers.” Another way to consider it is that companies are “recreating themselves in more jurisdictions.” But the key is to have both the information and the metrics to do so. This is where the need for robust Supply Chain information and data comes into play.
Part 3 - Continuous Monitoring in Trade Compliance
What is the value of continuous monitoring in trade compliance? I discuss this topic with Jared Connors, Subject Matter Expert in Corporate Social Responsibility (CSR) at Assent Compliance. Connors began with questionnaires, which he believes have gotten a bad name and even have been called “a four-letter word” in supply chain compliance. Typically, it begins with a company conducting an outreach campaign to collect self-declarations from suppliers to better understand their internal practices and their potential impact for risk assessment. How should a company think through using adverse media for monitoring a supplier evaluation today?
Connors said, the three most often used criticisms he has found are that (1) “questionnaires often get a bad name because of the way they might be administered or how they ask questions because they might not be necessarily getting at the right drivers to understand the internal management procedures and policies of an organization.” This initial criticism is then (2) compounded as often, “a company will not understand the value of the information received from those questionnaires and when comes when questionnaires are not written very effectively.” A final criticism (3) is frequency. Simply put companies are not monitoring their suppliers on a regular basis.
Connors said one of the answers for organizations is to move toward continuous monitoring, “what companies can do is they can be informed of public information against supplier behavior, whether it be directly covering things within the questionnaire or looking at the supplier as a whole by openly reviewing public record sources on the supplier. To see what’s coming out against them, whether it be a credible blog source or an actual media outlet or an NGO report.”
We then turned to some of the information which Connors believes a company can or should screen for in this monitoring process. Connors began by noting that CSR, sustainability or Environmental, Social and Governance (ESG) “cover a lot of areas. Yet the three main focus areas of CSR and ESG are on economic, environmental and social issues.” Connors believes this means you need to “understand what the economic viability of your supplier and how they are impacting their local community.” This would include financial insolvency issues, social issues and labor rights. Under environmental issues, “your organization would need to understand how they are impacting the environment or how their products are viewed also as impacting the environment.” This can be the physical pollution of a river of the makeup of a product such as a battery.
This list of issues makes clear that when you are screening your suppliers, you need to look at a wide variety of risk classifications. Your organization could use a questionnaire and “take those risk categories and turn them into public record reviews for those suppliers.” This could be one way to gain insight into supplier ethics and business behavior. You could also take another approach where you review social media and then see what risk categories might pop up. With the machine learning of an AI-based adverse media program this could allow you to expand the way you review your supply chain.
Connors turned to a couple of examples. The first was around conflict minerals or responsible minerals. Many companies have been reporting on this for several years and collecting data on upstream suppliers such as smelters or refiners. Yet Connors said that your organization might be six to eight layers removed from those level so gathering information on your downstream suppliers has become more of the norm now. Yet without continuous monitoring your organization might miss Office of Foreign Assets Control (OFAC) announcements of adding persons or entities to its sanctions list. If such person or entity had supplied component parts to one of your products and you continued to use that product, you could be in violation of the law.
The second area was in reviewing social media to ascertain if a supplier had complied with the substantive aspects of modern slavery legislation. Connors stated, “You can search a supplier about your expectations as laid out in your Supplier Code of Conduct around recruiting fees, overtime hours, expectations, forced and bonded labor. From there move to use terminology that should be contained within the policy and terminology that may be picked up by a reporter, an NGO may be evaluating labor practices internally. By utilizing the language that is consistent with industry standards, you will have better results searching for supplier behavior because there’s a lot more out there on even some very small companies.”
Part 4 - FARs flow downs
How do the regulatory requirements of the Federal Acquisitions Regulations (FARs) impact access to markets and supply chain compliance? Flow downs are one the things that bedevils compliance practitioners in many disciplines, including supply chain compliance. The most basic question is how far down must you go? FARs compliance is certainly becoming more challenging but Miller sees government contracting and FARs requirements becoming even more challenging. These changes are beyond simply contractual requirements and have moved towards more programmatic requirements on prime contractors. The flow downs make it “equally important on the subs who are servicing them to make sure that they have all the materials and fully secure supply chains in a way that we’ve never really seen come out of any procurement entity, let alone the US government.”
These programmatic changes are in a wide variety of areas including the various modern slavery acts, counterfeiting issues, anti-money laundering (AML), cybersecurity, data privacy demands and, of course, anti-corruption compliance. Some of these are moral and human rights issues, such as the modern slavery initiatives, but others are more national security focused such as a desire to protect US intellectual property (IP) rights. These are most sensitive around military security such as jets, weapons and similar types of products but it can extend out to oil and gas producing technology. The flow downs are critical because this is where many foreign actors will try and penetrate companies that have lesser cybersecurity protections in place.
One need only consider the Target Corporation data security breach to see how this can play out in the real world. Target was hacked through a HVAC vendor. The resulting fallout caused massive losses of data and massive costs to Target. It also massively disrupted the lives of Target customers.
Yet Miller believes that supply chain compliance can respond to these changing government requirements and, when properly executed, can provide a business differentiator to a company. The key is how you enter the relationship with your flow downs. It all begins with a risk assessment to understand where your organization may be vulnerable. From there move to robust due diligence on your third parties. Here, you may want to take more time evaluating your counterparties, third parties, subcontractors, or even those that you are doing business with as customers so that when the time comes and the ink is on the contract, you can move quickly. In the supply chain, the ability to move quickly, to respond quickly is a critical element of not only those down your supply chain, but of the lead company itself.
Miller emphasized, “I always talk to all of my clients, both internal and external that in relations to government contracting, it is a different business. Even if you are producing exactly the same product, it is a different business and should be treated as such. The type of programs you put into place, the way that you manage it, the way that you cost something, the type of employees that you handle top to bottom. It’s just an entirely different business. If you treat all your flow downs the same, I guarantee you’re going to find yourself in a bad place, on the wrong side of an enforcement action because the rules of the game are just so different.”
All of these challenges also create a barrier to market entry and market access. Miller noted that on the one hand, “it means there is a whole lot of work to do if you want to try to sell into or work in that particular market.” However, “the flip side to that is if your organization has established a supply chain compliance program, it’s an awfully sweet spot to be in because your competitors have a whole lot of work to be able to do the same thing that your company is already doing. This means the more you can institutionalize your compliance programs, the more nimble and agile your company will be to respond to a variety of situations.
As a lead organization, you do not want to be purchasing programs, a bunch of counterfeit goods or devices which fail. Miller said that this “causes consumer distress.” You do not want to allow people to peer into your data and to steal your technology or your IP as that is “foundationally a bad thing.” This is why robust compliance is going to make you a better company. Miller concluded by noting, “being able to institutionalize the compliance programs that make sense across the company is great. Then being able to go a little further, either in a subsidiary, a standalone entity, or in a specific business unit or function that can handle those additional pressures and requirements is what I really see as a best practice and what I would advocate for most.”
Part 5 – Chemical and Product Compliance
James Calder, Vice-President of Compliance and Regulatory Programs explained how chemical and product compliance impacts access to markets and supply chain compliance. Calder began by explaining that in many ways, modern supply chain compliance was driven by the need for listing of chemicals in products from an environmental safety perspective. He believes that understanding the origin of these laws and regulations can provide a very strong baseline in making better decisions for your business. He related there are a variety of laws which have created compliance requirements on the substances used in products. Many of those laws have come from waste laws. He cited to examples like the European Union (EU), which instituted REACH laws (Registration, Evaluation, Authorisation and Restriction of Chemicals) and the US which has RoHS (Restriction of Hazardous Substances) Directive, which is focused on electronics.
The regulatory goal is the reduce human exposure to toxins and toxic materials. Calder provided the example of “reducing exposure to those electronic products when they’re being recycled or recovery during the waste process. The way to mitigate that exposure is to design them out of the products themselves. Then you have a law like the REACH law, which is probably the most complex and largest chemical laws in the world. There are so many different laws out there and they have been amalgamated into this one law, to provide clarity and lack of complexity for businesses and for enforcement.”
A key challenge for the supply chain compliance professional is that there are different concerns and different maturity levels in chemical regulations. Europe and the EU are seen as very concerned with environmental regulation while countries in Africa and the Far East are seen as more focused on economic growth. Calder agreed this is a challenge and related this brings in the additional complexity of origin. This has led to the need for the supply chain professional to have full visibility into its supplier chain and their manufacturing process.
Essentially, a company must prove that none of those substances are used in the production of those products, regardless of where they are produced. Regulators want that proof at the point of import for aftermarket inspections that banned products, substances and chemicals are not being used in the manufacturing process. Now lay on top of that the regulatory concerns around competition and a level playing field and you can begin to see how complex this entire area can be and why there is a need for a robust compliance system for chemicals and products.
It also means that enforcement will be rigorous yet based on differing standards, with enforcement agencies literally across the world investigating, making an assessment and then levying a fine or penalty if appropriate. This portends that the risk management response must be equally robust. As I posed to Calder, “how does either the compliance practitioner, utilize the compliance programs to mitigate risks?”
Calder began by relating that the laws highlight the goals and expectations from the various actors that involved. He provided that example in customs enforcement might require “a checklist requesting information on certain products before they clear customs? What they’ll expect is certain documentation. The response for you to provide is to demonstrate certain due diligence and documentation that shows you due diligence and ensuring these banned chemicals are not in your product.” He went on to relate, “a lot of the people at customs, they are going through the checklist. This means if you are not able to provide that documentation, they may stop you from entering the market. You have to have some kind of demonstration of due diligence. Otherwise you’re not checking their boxes.”
A next level up in the enforcement regime might be about your process. For instance, do you have an established process in place that ensures these products or these substances are introduced through the product? The next step might be spot testing where regulators will use certain analytical techniques or analytical laboratory techniques to assess the risk of certain substances being in products.
All of this means your program, process and documentation must be robust. Your documentation will be reviewed for its quality and trustworthiness. Calder concluded, “if you have that and you have a consistent process in place which is meeting all the due diligence expectations, then you will be presumed to comply with these laws. You need to prove to them you have done it; you have an adequate risk manage process and that you have evaluated your products do meet the regulatory requirements. It is all designed to show you are “a good actor”.”
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