International OperationsSales, Distribution and Manufacturing

Different International Sales Strategies

Do It Pay Someone Help Someone Sell Let Someone

Let SomeoneElse Make/Sell& O P t f

Let Someone

Different International Sales Strategies

Yourself Sell Someone SellFor You Sell For You & Own Part of

That SomeoneElse Make/Sell

DirectSales

SalesRepresentative

C i i d

Franchise

Di t ib t

Distributor

Di t ib t

JointVenture

Li i

Licenses

Li M k /Hire

Employees

CommissionedAgentsSolicitOrders

AKA

DistributorSells By

PrescribedMarketing Plan

DistributorResells

For Profit

AKASupply or

Licensee isJointly Owned

By You andAnother

Can Be A:Corporation

Licensee Makes/Sells Product,

Pays Royalty

More FlexibleCompared toManufacturer

Representative

Supply orMarketingAgreement

Special Cases:OEM

Private Label

Corporation,Partnership, LLC

or Other

Special Cases:Teaming

Agreements

Compared toSale of

Technology

Special Cases:Know-HowShow-HowPrivate Label Agreements Show How

$ $

2

Agent/Rep. vs. Distributor/DealerAgent/Representative Distributor/Dealer/Agent/Representative Distributor/Dealer/

LicenseeEnd Customer is the Customer Distributor is Your Customer

No Inventory InventoryNo Inventory Inventory

Places Orders Purchases for Own Account

Commissions Markup

Doesn’t Handle $$ Handles $$

No After Sales Services After Sales Services

Limited Local Assistance Local Assistance with MarketLimited Local Assistance Local Assistance with Market Conditions or Manufacturing

3

Control and CostsControl and Costs

Subsidiary

JVControl

Distributor

Agent

Cost

4

Manufacturing StrategiesManufacturing Strategies

Domestic Production Foreign ProductionDomestic ProductionPros and Cons

Foreign ProductionPros and Cons

Do it yourself or let someone handle all/part of it

Let someone handle all/part of it

Ownership of Machinery Ownership of Machinery

Employees Employees

Ability to Control Ability to Controly y

Competitors

5

Manufacturing StrategiesManufacturing Strategies

Additional key issues:y• Title to the WIP and products• Bailment• Technical assistance agreements• Technical assistance agreements• Intellectual property negotiations• Product development• Minimum order quantities• Level load/On-demand production• Pricing arrangementsg g

– Cost plus– Fixed fee

6

Managing The RisksManaging The Risks

1. Performance Risks1. Performance Risks2. Channel Conflicts3. Financial Risks4. Supply Chain Management5. Intellectual Property6. Risk Allocations 7. Dispute Resolutions8 Mergers & Acq isitions8. Mergers & Acquisitions

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1. Performance Risks

Performance Risks: Pre-qualifications

• Business/Marketing PlanBusiness/Marketing Plan (Initial and Annual)

• Credit Checks• References• Distributor Growth History

S i R l t d Fi ld• Success in Related Fields• Clear with Social/Environmental Affairs• Whether they work with competitors• Whether they work with competitors• In-person meeting in their office

9

Performance Risks: Term

• Length of Initial Term• Renewal

– Automatic (Evergreen) Unless not Renewed

– Expire Unless Renewed Affirmative

• Impact of Distributor/ManufacturerDistributor/Manufacturer Investment

10

Performance Risks: Termination

• Grounds – Breach Only? – Cessation of Business?Cessation of Business?– Insolvency/Bankruptcy? – Change of Control? – At Will?At Will?

• Notice/Cure Period• Effective Date

Liquidated Damages• Liquidated Damages• Non-payment Termination

Provision

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Performance Risks: Marketing Obligationsg g• Distributor Efforts

– Commercially Reasonable– Best Efforts

• Distributor’s Expenditures– Staffing– Marketing– Advertising

• Company Effortsp y– Distribution Obligation– Company Contribution

12

Performance Risks: Minimum Sales

• Exclusive vs. Non-Exclusive• Penalties for Failures to

M tMeet• Inventory Levels• Local modifications• Local modifications

13

Performance Risks: Training

• KindsS l– Sales

– Installation – Support

• ExpensesExpenses• Locations• Frequency• Annual Sales MeetingsAnnual Sales Meetings

14

Performance Risks:Performance Risks: Demos, Shows, Visits

• How Many?• At What Cost?

15

Performance Risks: Literature/New Media

• Legal:– AuthorshipAuthorship – Copying– Printing– Translating

• Local custom• Web sites/Social MediaWeb sites/Social Media

16

Performance Risks:Records, Reports, and Audits

• Records– Sales– Customer Information

W t I f ti– Warranty Information• Reports

– Market OverviewCompetitive Reports– Competitive Reports

• Audit Rights

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2. Channel Conflicts

Channel ConflictsChannel Conflicts

Manufacturer• Two or More Channel

Members Compete for the Same Business Channel A Channel B

• Examples Include:– Direct Versus Channel– Channel Versus Channel

Channel A Channel B

• Destructive When Margins Erode

Customer

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Channel Conflicts:Exclusivity

PROGRAMS TO MANAGE CHANNEL CONFLICTPROGRAMS TO MANAGE CHANNEL CONFLICTSaturation Policy

Many channel partners with relatively easy requirements for

th i ti

Limited PolicyFew channel partners with exclusive or quasi-exclusive t it i

LimitedS l ti

authorization. territories.

LimitedSelectiveSelectiveSaturation SelectiveSaturation

Selective PolicyModerate number of resellers. Specific requirements. Some territory overlap.

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Channel Conflicts:Ex Territory Sales

• Territory• Ex Territory Prohibitions

– Forbidding Sales Outside ofForbidding Sales Outside of Territory

– Forbidding Marketing Outside Territory

– Forbidding Transshipping/Gray Marketing

– Website prohibitions• Manufacturer disclaimer as to

grey market goods

21

Ch l C fli tChannel Conflicts:House accounts

• House accounts– If Exclusive, Even as to

Company?p y– Specific Lists – Channels– FieldsFields

• Distributor with retail outlets• Competing products

22

Channel Conflicts:Post Termination Consequences

• Inventory– Sell off– Buy BackBuy Back

• Transition Assistance• Carryover Services• Customer Lists• Customer Lists

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3. Financial Risks

Financial Risks: Prices

• Scheduled Prices• Discounts Off List• Changes to Price Schedules

– Unilateral vs. Mutual– When Effective– Frequency– Most Favored Customer

Clauses• Resale Price Maintenance laws

vary widely

25

Financial Risks:Payment Terms

• Payment Due– In Advance– On Delivery– Net 30

• Type– Check

L tt f C dit– Letter of Credit – Wire Transfer

26

Financial Risks: Taxes and Duties

C t D ti• Customs Duties• VAT, Sales, and

Other Product TaxesOther Product Taxes• Withholding Taxes• May impact decision

to manufacture instead of solely distributedistribute

27

4. Supply Chain Management

Supply Chain Management: Forecasts

• Frequency• Coverageg• Binding vs.

Non-Binding• Component Liability

29

Supply Chain Management:Management: Orders

• Format• Minimum Order Size• Frequency• Lead Times• Reschedules• Reschedules• Cancellations• Component LiabilityComponent Liability

30

Supply Chain Management: pp y gDelivery

C i S l ti• Carrier Selection• Risk of Loss

– WarehouseL di D k– Loading Dock

– In Transit– FOB– FCA– FCA– EX WORKS

• Import and Export Licenses and Approvals pp

• Insurance Costs• Broker Fees

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5. Intellectual Property

Intellectual Property Issues: Products

• “Products” Definition– Fixed

Flexible– Flexible

• Product Changes– New Versions and Upgradespg– Fixes, Updates, Releases

• Localization

33

Intellectual Property Issues: Rights Granted

• Making/ManufacturingMaking/Manufacturing• Copying• Modifications• Translating• Combinations

34

Intellectual Property Issues: Ownership

• Product Modifications• Enhancements, Add-ons,

C bi tiCombinations• Localizations and

TranslationsTranslations• Documentation and

Literature

35

Intellectual Property Issues:Enforcement

• Policing Third Party Infringement

Right vs Duty– Right vs. Duty• Allocation of Expenses • Allocation of Recoveries

36

Intellectual Property Issues: T d kTrademarks

• OwnershipO e s p• Use• Quality Control• Registrations

37

6. Risk Allocations

Risk All tiAllocations: Customer Support• Installation• Installation• Maintenance• Support

– Tier 1/Level 1 – Tier 2/Level 2– Tier 3/Level 3

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Risk Allocations: Indemnification

• Indemnity by Manufacturery y– Intellectual Property

(Except Combinations and Modifications)

– Manufacturing Defect– Design Defects

• Indemnity by Distributor– Intellectual Property From

Combinations and Modifications– Misrepresentations and Fraud

Ad ti i I j i– Advertising Injuries• Trademarks?• Have the products been cleared from an

IP perspective in the distributor’s country?

40

IP perspective in the distributor s country?

Risk Allocations: Disclaimers

• Customary and Typical– Merchantability– Fitness for Particular– Fitness for Particular

Purpose• Atypical

Non infringement– Non-infringement– Error Free (software)– Uninterrupted (software)

41

Risk Allocations:Risk Allocations: Limitation of Liability

• Exclusions – Consequential Damages– Punitive/Special DamagesPunitive/Special Damages– Lost Profits/Lost Revenues

• Loss of Data • Caps• Caps

– Fixed Amount– 1X to 3X

Time Period– Time Period

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7. Dispute Resolution

Dispute Resolutions: Governing Law

• What Governing Law Means• What Governing Law Doesn’t• What Governing Law Doesn t

Mean• Which Jurisdiction?

D– Dangers– Drafter of Contract– Compromise – Benefits of International

Arbitration

44

Dispute Resolutions: Venue

• Not Same as Governing Law• Fixed Locations• Alternative Locations• Bifurcated Locations

45

M &Mergers & Acquisitions• Termination Rights and

Obligations• Change of Control• Distributors May Be Seen As a

Cost Item by Strategic Buyers

46

Take-Away Items

• Consider Global Strategy Up Front

• Get Correct Legal Advice Up Front

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ContactContactIan KesslerOwnerSanukSanukE-mail: ian@sanuk.com

Amit KumarAssociate General Counsel; Head of Licensing and Business TransactionsAssociate General Counsel; Head of Licensing and Business TransactionsTaylor Made Golf CompanyE-mail: amit.kumar@tmag.com

Clark LibensonClark LibensonPartnerAllen Matkins Leck Gamble Mallory & Natsis LLP

E-mail: clibenson@allenmatkins.com

Ethna PiazzaPartnerAllen Matkins Leck Gamble Mallory & Natsis LLP

@

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E-mail: epiazza@allenmatkins.com