Risk assessment and mitigation action plan ensures smooth China plant divestiture for European outdoor product leader

The project was for a leading European company of outdoor products specializing in high-grade compasses and other navigational equipment that considered a divestment of their plant in Shenzhen, China. Before making the final decision, the company needed a better understanding of the implications of such a decision.

ARC Consulting was contacted to perform a risk analysis and mitigation action strategy for such action considering the implications on labor, legal, administrative, taxes, financials and existing environmental permits.

Hands holding a compass

The information provided by ARC Consulting helped the client to set out the options at hand and ultimately to decide whether to divest the production plant in Shenzhen or not. In addition, ARC Consulting outlined additional alternative processes on the divesture as well as information regarding the required timeline, associated risks and costs of each scenario.

The information provided about the consequences of a potential divestment helped the client with guidance and actual facts to support the decisions in each option as well as minimizing the risks and costs of a potential divestment.

ARC Consulting used a methodical approach based on 3 steps:  Data Collection, Analysis and Recommendations.

During the Data Collection phase, two consultants were on-site at the client’s production plant to gather all the relevant documentation, conduct interviews with key personnel and to understand the processes of the factory.

In the Analysis phase, the gathered documentation was reviewed from a legal perspective to cover any possible labor, social insurance or other indemnification liabilities.

Finally, ARC Consulting outlined the Recommendations to the client. The recommendations included all possible paths of divestment, the detailed processes needed and a timeline for each scenario with a clear description of the risks and challenges and how to mitigate these.

ARC Consulting presented 3 potential options of how to execute a potential divestment:

  • Option 1A was to stop operations directly and sell-off all assets
  • Option 1B, a variation of the first option, was to stop operations and try to find a buyer to take over the operation
  • Option 3 was to sell off the assets and operations to a buyer.

For each of the options, a thorough analysis of administrative requirements, employee contract settlements, costs, timeline, specific actions, future financial implications as well as risk and mitigation strategies was outlined.

The final recommendation was to follow option 3, find a buyer and sell 100% of the assets and operation to this buyer. The process time was expected to be at shortest, 7-10 months, and the estimated cost was lowest compared to the other options. Regardless, it was stressed that any process selected should be done according to the government regulations because any mismanagement can lead to the organization being blacklisted and prevented from doing business in China ever again.

  • Provided the client with a complete overview of all potential risks, costs and challenges of a potential divestment in terms of labor contracts, environmental permits, management severance pay, suppliers and customers’ contracts as well as a strategic overview of the global organization.
  • A mitigation action plan on how to proceed in order to avoid the unnecessary risks and how to cope with the legal requirements.
  • Options on how to proceed in different scenarios along with the associated risks and time required in each of the scenarios.
  • An overview of the main differences of a potential factory divestment between Europe and China.

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