Turkey: Global Risk Management and Decision-Making in a Crisis

Atakan Arica

Friday, September 09, 2016

Whether responsible for R&D, sales, operations, supply-chain, finance, marketing or human resources, we all have to consider risk management in our work. Things get especially challenging when you add the global context and have to figure out the risk parameters of a foreign country. One of the challenges we typically don’t expect in global risk management is a coup. Considering the current situation in Turkey as an example, what risks or opportunities face a U.S.-based service provider or company? And, what should you do when affected by swift changes in a host country?

I had an interesting summer; I was visiting some of my very promising potential clients in Turkey in early June, and by July 15, 2016, there was coup d’état attempt to remove the current government in charge. Almost all my work overseas stopped at this moment, hinging on a country in significant transition. Since then, I have been reading everything I can get my hands on and talking to my clients to understand their sentiment.

In addition to management consulting work, I also teach three distinct but strategically related MBA courses at Lake Forest Graduate School of Management. My average student is 38 years-old and all the faculty members I work with are Business Leader Faculty® with significant professional experience and academic achievements. I wanted to reflect on what I teach my students in Global Business and convey my life experience as a global consultant in developing economies.

In our global business class, we ask our students to start creating a business plan for a product or a service line that could be produced and sold in a foreign country. I always ask students to evaluate the political context as well as the military and legal framework for the host country. My students sometimes ask why this part of the exercise is needed. My answer is that we always need this information to measure stability, risk and sustainability for investment purposes. And the recent events in Turkey are a perfect example.

What is the current situation in Turkey?

  • There was a coup d’état attempt to overthrow the current government in Turkey by a faction within the Turkish Military forces. The coup was stopped by the mobilized public, police forces, and the remainder of the Turkish Military within a few days. There were over 300 people killed and thousands injured during the clashes in Istanbul and the capital of Ankara. The Turkish parliament building, the Turkish president’s residence, the Turkish National Intelligence Service, and many other strategic assets were also attacked and bombed.
  • The government is using Marshall Law to establish control: The Turkish government and the parliament immediately passed a state of emergency order, a Marshall Law declaration for three months giving the security services sweeping authority to find out what had happened and to stop further attacks. As of mid-August of 2016, there are more than 70,000 people either arrested or purged from the Turkish Military, and government agencies such as ministries of education, interior, economy, justice, and the Foreign Service.
  • Any organization, large or small, became a target of investigation. With the broad powers granted by the Marshall law, security forces have the authority to shut down a company and the founders/owners could be arrested if there was any evidence leading towards coup support. Directly after the coup, the Turkish stock market had double-digit losses but recovered some since then. The Turkish Central Bank has infused the market with over 50 billion Turkish lira (about $16 billion USD) to stabilize the markets. The USD/lira parity stayed within a relatively small wavelength given the fact that there was a significant event.
  • There are significant changes to foreign policy. According to western news sources, Turkey seemed to distance itself from the EU and NATO allies after the coup. There is also a new rapprochement with Russia where Turkish President Recep Tayyip Erdogan has met with Russian President Vladimir Putin after the downing of a Russian military jet by the Turkish Air Force last year. In addition, Turkey has almost normalized its relationship with Israel. Given the fact that Turkey is geopolitically located in a very volatile place in the world (its border neighbors are: Armenia, Georgia, Azerbaijan, Iran, Iraq, Syria, Bulgaria, Greece, and Russia and Ukraine across the Black Sea), any attempt at changing foreign policy has a direct impact on their economy. Moreover, at the end of August 2016, Turkish military and US forces have also conducted joint military attacks in Syria against the terrorist organization ISIS, signaling that as NATO partners, both countries work as coalition partners.
  • The Turkish government is trying to attract more foreign investment through public meetings with their Ministry of Economy, Foreign Direct Investment (FDI) organizations, and their business organizations. In addition, I expect that they will be coming with robust incentive packages for foreign investors and foreign companies.

What are the risks and opportunities for a U.S.-based company?

If you are a U.S.-based service provider or company in a time of a crisis of this magnitude, you will have to deal with other risks that you haven’t before. When we try to analyze, we come up with a long list of items.

  • Financial and Currency risks: When Marshall Law is imposed on the public during these extraordinary times, people go back to basics and flock to the markets, gas stations, and banks. Cash is king until stability comes back and any business debt or purchase can wait. That means, as a company, you may need reserves to support your customers, and you may have to extend deferred payment options or start forgiving debt in your account receivables. These actions may yield very loyal future customers or cost a significant amount of money for your shareholders. In addition, based on how you price your product or services, either in the local currency or the USD, you may lose some business because you may no longer be an affordable alternative in the market place. This concept also applies in your supply-chain contracts.
  • Communication Risks: How you communicate with your local and expat employees is critical during the crisis. Since you may not be seeing what they are experiencing, your expectations for their performance may be too high. In addition, any public announcement from your organization should be carefully crafted based on what happened and should take into consideration the general public sentiment and views of the local government.
  • Legal Risks: While you may not have any issues operating legally in your domain in a foreign country, any suppliers, local partners or employees you deal with may cause issues during and after the crisis. You may not know early enough that your local partners may be investigated. That is why we suggest a rather detailed due diligence when it comes to local partners, employees, and suppliers.
  • Supply-Chain Risk: If you are sourcing locally and your supplier is in trouble because of the events, you may have to have a plan B to continue your operations. You may remember the significant production delays Honda Motor Company experienced after an earthquake disrupted their supply-chain in Japan.
  • Domestic Brand Risk: Your brand in your domestic market can take a hit if you are operating in a country whose business practices may be too tolerant compared to what we allow in the U.S. Examples are underage workers, corruption and bribery, or unfit working conditions. After the events in Bangladesh with child textile workers and a building collapse, many U.S. retail brands had to either stop producing there or had to put stop gap measures in place to control their production since they had a significant backlash from the public in the U.S.
  • Decision Risk: Developing economies are more dynamic and full of surprises than what we deal with in the U.S. That means that the circumstances change faster and volatility is larger in terms of currency rates, taxes, compliance aspects, pricing, and rules and regulations in the marketplace than the U.S. It is sometimes difficult for the mature market leader to make those quick decisions without physically being in the host country. This leads to either a no decision or to a hasty decision that may have undesirable outcomes.

Now What? Decision-making in a Foreign Crisis

If you had to deal with a significant event such as the coup attempt in Turkey, there is quite a range of options for you to consider for your company’s operations overseas. Change brings threat and opportunity together. We can examine the extremes based on your risk appetite.

Let’s not forget, these are options for the marketplace you are in and not suggestions. Your circumstances may require a hybrid approach as well.

  • Pack your bags: If you do not see yourself operating in the marketplace in the next 5-10 years, simply pack up and move your operations to different country. You may lose your initial investment and have damaged pride, but you can always use the experience for other markets. In addition, you may sell your business to one your suppliers or any other local entity. You should, however, be aware of depressed asset prices for times like this.
  • Status quo is good: Stay put and play the wait and see game for as long as you can. You will determine the time based on your financial opportunity cost, intangibles such as developed relationships with other organizations and your company’s predetermined patience. If you make that decision as a leader, make sure to manage the expectations of your corporate board and your shareholders as well.
  • Reallocate your resources: While you are idle in the host country, you can actually take some of your resources and work in neighboring countries. The host country may not produce as much revenue as you may like during the crisis, but the surrounding areas may become a full replacement for your financial opportunity cost.
  • Double down on your bet: You have taken a chance and have invested significant time, effort and resources in the host country expecting a significant return before the crisis. Why not double your efforts and gain further marketplace where others are leaving. Since cash flow is limited during the crisis, most asset prices are usually depressed costing far less than normal times, which means opportunities for growth. In addition, host countries such as Turkey will have incentive packages to stimulate the FDI and the economy where your growth opportunities may be financed by new programs. You can also protect your investment by financing and insuring with US government programs such as OPIC.

In conclusion, the global risk that we examined is not always easily quantified. You need boots on the ground to really understand what your risk analysis. The connection you have with your local employees, your customers, suppliers, and your network will help you determine the severity of the risks and opportunities associated with operating in a foreign zone.

Atakan Arica Turkey Global Risk ManagementAtakan Arica teaches Global Business and Cultural Diversity, Leading Organizational Change, and Business Analytics and Research at Lake Forest Graduate School of Management. Atakan is Managing Director of Arica International Corporation, a boutique firm focusing on management consulting, international business development, and project management. Atakan has turned around organizations by defining clear strategic goals based on their missions, identifying performance metrics, communicating to stakeholders, and executing their strategic plans. Learn more about Ata, his experience and insights by connecting with him on LinkedIn.

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