Distress Management

CHECKLIST FOR THE SIGNS OF DISTRESS

There are numerous possible reasons for a China venture to find itself in distress, and frequently there are multiple causes at play simultaneously. The aim of management must be to detect the signs of distress early and not only take action but take action quickly and decisively before the problems become unmanageable. The longer it takes to make course corrections, the more dire the situation becomes and the fewer options available. Often this action involves managing or revitalizing relations with your local Chinese partner or vendor, who may have partly contributed to the problem. Sometimes the problem is the changing regulatory or legal environment, and determining how best to react decisively to these changing circumstances will be the key to turning an underperforming enterprise into a success.

A number of tell-tale signs can indicate a venture is in distress. These signs can variously point towards the underlying internal and external causes of the distress; management skills, product quality or competitiveness, shifting market trends, ineffective channels, criminal activity, ineffective or confusing communication, shifting priorities, regulatory barriers, and so on.

• deterioration in relationship with your local partner, vendor, buyer or affiliate
• reduced sales, loss of key customers, growing inventory, growing number of returns
• deep discounting / discounting to secure orders earlier than normally scheduled
• declining forecasts, complaints about competitor in-roads
• progressively tighter cash constraints that cause delays in payment of staff, vendors, and overhead
• late financial statements and declining A/R A/P indicators (days outstanding)
• frequent changes in auditors
• mounting regulatory costs and barriers
• production schedules growing erratic; periods of intense activity, overtime, and rush shipments followed by inactivity
• growing reluctance of vendors to supply product or service / demands for prepayment
• Staff issues: increasing staff turnover especially at higher levels, or staff that used to offer suggestions falling silent
• change in communication styles ( communications become increasingly urgent, confrontational or guarded)

Some of these symptoms are insidious and develop slowly over time before they can be perceived as a genuine trend that raises alarms. Others, such as cash flow, normally provide a more timely insight to the state of the venture. This being said, even cash flow can be misleading in ventures that have large seasonal swings in revenue such that genuine problems are masked by seasonal doldrums that a company has come to expect.

The Restructuring Process
The Trident approach to distressed company management is a logical, practical three-phase approach.

The most important consideration in any turnaround process is that Time is the Enemy. The longer you delay in correcting course, the more dire the cash situation and the fewer the options. The fundamental causes of distress almost never fix themselves.

The Investigational Phase

A foreign company that owns a distressed China venture may already have some strongly held beliefs about the causes of that distress. While those beliefs can be accurate, not surprisingly, they are often wrong or superficial, since they are derived from the filtered perspective of either a foreign head office, or ex-pat staffers whose familiarity with Chinese culture may be limited.

Therefore, the first step in effecting a course change is to confirm through analysis the degree and nature of the venture's distress through fresh eyes.

The typical causes of distress fall into four broad categories:

Product issues
price
quality
features
competition
supply (backorders, lead time)
demand (a viable market doesn't exist)

Marketing issues
lack of promotion
misdirected promotion (lack of localization) / wrong positioning for China

Partner issues
China partner lacks commitment
China partner lacks marketing, distribution, or support capabilities
China partner's methods are at odds with foreign partner's methods / China partner subverts foreign partner's initiatives
China partner's goals are at odds with foreign partner's goals (apparent or hidden, legitimate or nefarious)
China partner's accounting practices are suspect

Regulatory issues
barriers to important markets / protectionism
seemingly unending and unreasonable demands for permits, licenses, etc

Trident's team is qualified to reveal the true nature of the venture's distress, from the perspective of Sales, Marketing, and Operations management as well as forensic accounting. Arising from this objective investigational process, a clear and unfiltered picture of the venture's status will emerge.

The Analytical (Recommendation) Phase

Casting aside preconceived notions about the nature of a venture's distress, and focusing instead on the objective findings of the Investigational Phase, Trident will promulgate recommendations for the foreign company to consider. Of course, one must be open to the notion that the venture is in fact performing as well as can be expected. In other words, underperformance is not a function of management but rather, it is the expectations and opportunity analysis for China that were too high for the product being offered. In such cases, a foreign partner in a China venture may choose to re-align not only its expectations and guidance to investors, but also, its resource allocation and management approach to the China venture.

The range of recommendations arising from analysis could be broad, including:

• No fundamental changes
• Change marketing thrust / pricing / product mix, etc.
• Resolve disputes with China partner
• Terminate China partner / seek new partner
• Change ex-pat management
• Seek cash infusion
• Address regulatory barriers through qualified intermediaries / lobbyists
• Partial or total divestment
• Dissolution and liquidation

The Implementation Phase

Equipped with an objective analysis and recommendations, the foreign investor in a distressed China venture can effectively determine its optimal course. Trident is equipped to implement the chosen course of action(s), some aspects of which may require legal expertise in association with IPO PANG:

• installing temporary local management to manage transition as well as its associated internal and external communications
• resolving disputes with current partners
• new efforts to manage governmental or regulatory issues
• terminating existing partner relationships and identifying, qualifying, and negotiating with new partners
• identifying, qualifying, and negotiating with new investors
• divesting some or all of the foreign company's stake
• conducting an orderly winding down and liquidation of operations