MGMT. 416
International Business II
Evrim Tören
Chapter 16
Export and Import
Practices
Export-Why and why not?
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To serve markets where the firm has no or limited
production facilities. Also, the more vertically
integrated plants may export semifinished products
that are inputs for the less integrated subsidiaries.
To satisfy host government’s requirement that the
local subsidiary have exports.
To remain price-competitive in the home market.
Many firms import labor-intensive components
produced in developing countries, or export
components for assembly in countries where labor
is less expensive.
Continued...
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To test foreign markets and foreign competition
inexpensively. The disadvantage is, the competitors
may find out about the firm’s activities, products, etc.
To meet actual or prospective customer requests for
the firm’s products.
To offset cyclical sales in the domestic market.
To achieve additional sales, which allow the firm to
use the excess production capacity to lower per-unit
fixed costs.
Continued...
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To extend a product’s life cycle by exporting
to unserved markets where the product will
be at the introductory stage.
To respond strategically to foreign
competitors selling at the firm’s home market.
To improve efficiency of the machinery by
using it at full-capacity.
12 Most common mistakes made by
exporters:
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Failure to obtain qualified export counseling and to
develop a master international strategy and
marketing plan before starting an export business.
Insufficient committment by top management to
overcome the initial difficulties and financial
requirements of exporting.
Insufficient care in selecting overseas sales
representatives and distributors.
Chasing orders from around the world instead of
establishing a basis for profitable operations and
orderly growth.
Continued...
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Neglecting the export market when the home
market booms.
Failure to treat international distributors and
customers on an equal basis with their domestic
counterparts.
Assuming that a given market technique and
product will automatically be successful in all
countries.
Unwillingness to modify products to meet
regulations or cultural preferences of other
countries.
Continued...
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Failure to provide service, sales, and warranty
information in locally understood languages.
Failure to consider the use of and export
management company.
Failure to consider licensing or joint venture
agreements.
Failure to provide readiliy available servicing for the
product.
Why don’t they export? Problems:
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Locating foreign markets
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Payment and financial procedures
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Export procedures
Locating foreign markets
The first step is determining whether a market
exists for the firm’s products.
The information can be gathered from
government agencies (ministry of trade,
Commerce Department, Trade Information
Center, etc.), or associations and boards
(Association of Businessmen, Tradesmen
Association, Board of Commerce, etc), or
WTO websites.
Export marketing plan
It is same as domestic marketing plan. It should be
specific as;
1.
The markets to be developed,
2.
The marketing strategy for serving them,
3.
The tactics required to make the strategy
operational.
Sales forecasts and budgets, pricing policies, product
characteristics, promotional plans, and details on
arrangements with foreign representatives are
required.
Export pricing and sales agreements
for foreign representatives:
1.
2.
3.
Pricing policies – Noncompetitive prices cause
sales to be lost to competitors, and incorrect pricing
can cause exporters to lose money.
Terms of sale – Conditions of sale that stipulate the
point where all costs and risks are borne by the
buyer. INCOTERMS describe the 13 trade terms
that describe the responsibilities of the buyer and
seller in international trade.
Sales agreement – specify the duties of the
representative and the firm.
Terms of sale
FOB (factory) – all costs and risks from that point on are borne by the
buyer.
FAS (free alongside ship, port of call) – The seller pays all the
transportation and delivery expense up to the ship’s side and clears
the goods for export.
CIF (cost, insurance, freight, foreign port) – The seller quotes a price that
includes the costs of goods, insurance, and all transportation and
miscellaneous charges to the named foreign port in the country of final
destination.
CRF (cost and freight, foreign port) – It is similar to CIF except that the
buyer purchases the insurance either because it can obtain it at lower
cost or because its government, to save FE, insists that it uses a local
insurance company.
DAF (delivered at frontier) – the seller quotes a price that covers all costs
up to the border where the shipment is delivered to the buyer’s
representative. (used by exporters to Canada and Mexico)
CIF and CFR
CIF and CFR are more convenient for foreign buyers,
because to establish their cost, they only have to
add import duties, landing charges, and freight from
the port of arrival to the warehouse.
Miscellaneous costs (wharf storage and handling
charges, freight forwarder’s charges, consular fees)
are incurred for CIF shipment, and simply add
freight, insurance, and export packing costs to
domestic selling price.
Generally, domestic marketing and administraative
costs are higher than export costs.
Pricing the exports
Factory door cost is the production cost without
domestic marketing and general
administrative costs.
The preferred pricing method is factory door
cost, to which are added the direct cost of
making the export sale, a percentage of the
general administrative overhead, and profits.
The minimum FOB price will be the sum of
these costs plus the profit.
Pricing the exports
Price skim – the exporter charges a higher
price if there is little competition in the market
or if the competitive prices are higher.
Penetration pricing – the exporter sets a low
price to gain a larger percentage of the
market.
The decision will depend on the firm’s
objectives.
Sales agreement
It should specify the duties of the representative and
the firm. Special attention should be given to;
1.
Patent and trademark registration (to be safe the
firm should register all patents and trademarks and
the local representative should police them),
2.
What laws will govern a contractual dispute (the
exporter will prefer its country’s laws to be applied,
but it may not be possible).
Payment and financing procedures
How is the payment going to be done?
1. Cash in advance
2. Open account
3. Consignment
4. Letters of credit
5. Documentary draft
1. Cash in advance
When the credit standing of the buyer is not
known, cash in advance may be required.
However few buyers accept these terms,
because they may not want to tie their capital
to an unsold merchandise, and also the
buyer is not sure that he will receive the
order or not. Only very few firms, maybe
those importing custom-made products
would pay cash in advance.
2. Open account
When a sale is made on open account, all risks
are assumed by the seller. So it should be
offered to only very reliable customers.
However, the firm should be aware that the
competitor may have an advantage if it
offeres an open account payment terms.
3. Consignment
Goods are shipped to the buyer and no
payment is done until the goods are sold. All
risks are assumed by the seller. It should not
be undertaken without an investigation about
the buyer and the country.
Multinationals generally sell to their
subsidiaries on consignment.
4. Letters of credit (L/C)
It is a document issued by the buyer’s bank in which
the bank promises to pay the seller a specified
amount under specified conditions in specified time.
Generally, the seller will request the L/C be confirmed
and irrevocable.
Confirmed – Act of a correspondent bank in the seller’s
country by which it agrees to honor the issuing
bank’s L/C.
Irrevocable – A stipulation that a L/C cannot be
cancelled.
Air waybill
The buyer may insist on an air waybill (a bill of loading
issued by an air carrier) issued by the carrier be
presented as a proof that shipment has been made.
Before opening a L/C, a buyer may request pro forma
invoice.
Pro forma invoice - Exporter’s formal quotation
containing a description of the merchandise, price,
delivery time, method of shipping, terms of sale, and
points of exit and entry. The bank will require it when
opening a L/C, and government for import lisences
and FE permits.
L/C transactions
Germany
Bank
→
L/C →
↑
↓
documents
Buyer (Germany)
↑
↓
Customhouse
Broker
↑
↓
Steamship ← Merchandise ←
Line
US
Bank
↑
↓
Seller (US)
↑
↓
Freight
forwarder
↑
↓
Steamship
line
5. Documentary Drafts
When the exporter believes that the political and
commercial risks are not sufficient to require a L/C,
the exporter may agree to payment on a
documentary draft basis, which is less costly to the
buyer.
An export draft is an undonditional order that is drawn
by the seller on the buyer to pay the draft’s amount
on presentation (sight draft) or at an agreed future
date (time draft) and that must be paid before the
buyer receives shipping documents.
The difference between a confirmed L/C and
documentary draft is that the confirmed L/C
quarantees payment and the other doesn’t.
Sight draft
Risk/cost trade-off of export payment
terms:
Risk to exporter
Least risk
Highest risk
Cash in Confirmed Irrevocable
Bank
Bank
advance irrevocable
L/C
collection collection
L/C
sight draft time draft
Cost to buyer
Highest cost
Open
account
Least cost
Export financing
Exporters prefer to sell on riskless L/C terms,
but increased competiton force firms to sell
on credit.
There are private and public sources of export
financing.
Private source
They are commercial banks providing loans for working
capital and the discounting of time drafts.
Banker’s acceptance is a time draft with maturity of less
than 270 days that has been accepted by the bank
on which the draft was drawn, thus becoming the
accepting bank’s obligation, may be bought and sold
at a discount in the financial market like other
commercial paper.
Factoring
It permits the exporter to be more competitive by selling
on open account rather than costly L/C method.
It is the sale of export accounts receivable to a third
party, which assumes the credit risk.
A factor may be a factoring house or a special
department in a commercial bank. The customer
pays the factor, which in effect acts as the exporter’s
credit and the collection department.
Forfaiting
It denotes the purchase of obligations that arise from
the sale of goods and services and fall due between
90-180 days.
These receivables are usually in the form of trade
drafts and or promissory notes with maturities
ranging from 6 months to 5 years.
Forfaited debt is accompanied by bank security in the
form of a guarantee (separate document) or aval
(written in the document).
Unlike factoring, political and transfer risks are borne
by the forfaiter.
Public export financing
Many government organizations provide export
credit guarantees and insurance against
 Commercial (customer goes bankrupt cannot
pay) and
 Political (government overthrown and FE
unavailable to customer) risks.
Eximbank (export-import bank)
It is the principal government agency that aids exporters by means
of loans, guarantees, and insurance programs. It provides:
1.
Direct and intermediary loans; (a) direct loans to foreign
buyers of country’s exports, (b) intermediary loans to
responsible parties (to government agency providing loans for
country’s exports, for example)
2.
Working capital guarantee (to cover their export sales)
3.
Guarantees (repayment of loans protection to buyers of
country’s exports)
4.
Export credit insurance (to protect the exporter against default
on payments and/or political risks)
Foreign trade zones
They are duty-free areas. They are called free
ports, transit zones, free perimeters, export
processing zones, or free trade zones. There
are hundreds of these areas in 72 countries.
The imported goods are brought in these areas
without paying the import duties.
Free trade zone
It is an enclosed area designated by the government of a country
for duty-free entry of any nonprohibited good.
Goods fo foreign origin may be brought into the zone for
transshipment, reexportation, or importation into the country.
Most of them are located close to the ports , but sometimes they
could be located inlands, too.
The goods are free from import tax, but sales tax could be
required.
If assembly or manufacturing is done FTZ usinf imported
components, no duties are paid when the end-product is
exported. Export processing zones are used where there are
cheap labor to be used in assembly, for example.
Export procedures
It requires a lot of documentation.
Domestically; the freight bill and bill of ladding.
Internationally; in USA 35 documents with 360
copies.
Foreign freight forwarders
They are independent businesses that handle export
shipments for compensation.
They act as agents for exporters. They prepare
documents, book space with a carrier, they offer
advice for the markets, import and export
regulations, the best mode of transport, export
packaging, and they will supply cargo insurance.
After shipment, they forward documents to the importer
or to the paying bank according to exporter’s
requirements.
Export documents
They could be categorized into two:
1.
2.
Shipping documents
Collection documents
1. Shipping documents
Shipping documents are prepared by exporters or by their freight
forwarders. With these documents;
goods pass the customs,
loaded on the carrier, and
sent to the destination.
They include;
domestic bill of lading,
export packing list,
shipper’s export declaration,
export licenses,
export bill of lading,
insurance certificate.
Shipping documents are;
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Shipper’s export declaration (SED)
Export licenses
Export bill of ladding
Insurance certificate
Automated export system
Shipper’s Export Declaration (SED)
This document is required by the statistic office. It requires the
following information:
1.
Names and addresses of the shipper and the consignee,
2.
Domestic port of exit and the foreign port of loading,
3.
Description and value of the goods,
4.
Export license number and bill of lading number,
5.
Carrier transporting the merchandise.
SED is presented to the Customs with the carrier’s manifest (list of
the vessel’s cargo) befor the carrier leaves the port.
Export licenses
General export license is any export license
covering export commodities for which a
validated license is not required, no formal
application is required.
Validated export license is a required document
issued by the government authorizing the
export of specified commodities. It is rquired
when exporting scarce materials, strategic
goods, and technology, or war materials.
Export Bill of Lading (B/L)
It is a contract of carriage between shipper and carrier;
straight B/L is nonnegotiable (Air waybills are always
straight), and only the person stipulated in it may obtain
the merchandise on arrival.
endorsed “to order” bill gives holder claim on
merchandise. It is negotiable, and the holder of the original
bill of lading is the owner of the merchandise.
B/L serves three purposes: It is;
1.
A contract for carriage between the shipper and the carrier,
2.
A receipt from the carrier for the goods shipped,
3.
A certificate of ownership.
Insurance certificate
It is evidence that the shipment is insured against loss and
damage while in transit.
Marine insurance may either the exporter or the importer,
depending on the terms of sale. Generally the governments
prefer the domestic insurance companies to keep the income
and FE at home. If the exporter sold on sight draft terms, it is at
risk while the goods are in transit. Then a contingent insurance
may be required to protect it against loss and damage and if it
is unable to collect it from the buyer. Also in case of CFR (buyer
purchases the insurance) a contingent insurance may be a
good idea in case the buyer’s insurance does not cover all the
risks.
3 kinds of marine insurance policies:
1.
2.
3.
Basic named perils include perils of the sea, fires, jettisons,
explosions, and huricanes.
Broad named perils include theft, pilferage, nondelivery,
breakage, and leakage in addition to basic perils. Both
policies contain a clause that determines the extend to which
losses caused by an insured peril will be paid. The purchaser
may require either; (a) free of particular average (excluding
partial loss) or (b) with particular average (covering partial
loss). Obviously the rates will differ.
All risks covers all physical loss or damage from any external
cause. It is more expensive than the prevous two. War losses
are covered under a separate contractç
Premiums
They depend on many different factors, such as;
the goods insured,
the destination,
the age of the ship,
whether the goods are stowed on the deck or
under the deck,
the volume of the business (volume discounts),
how the goods are packed,
the number of claims the shipper has filed.
Automated Export System (AES)
The total cost of paperwork for a single
shipment is $150-$300 in the USA. To
reduce errors and preparation costs, the
preparations could be automated. Which is
the electronic filing sysytem to facilitate the
exports.
Collection documents
The seller is required to provide the buyer with
these documents to receive payment. They
are:
1. Commercial invoices
2. Consular invoices
3. Certificates of origin
4. Inspection of certificates
Commercial invoices
They are similar to domestic invoices, but include
additional information like;
the origin of the goods,
export packing marks, and
a clause stating that the goods will not be
diverted to another country.
Invoices for L/C sales will name the bank and the credit
numbers. Some importing countries will require the
documents to be in the domestic language, then the
firm needs the translated documents.
Consular invoices
Some countries require special consular
invoices.
The firm has to pick these forms from the
consulate of that country, prepare them and
visa them by the consul.
Certificates of origin
Some governments require a document
specifying the country of origin from the local
authorities.
These forms are issued by the local chamber of
commerce and visaed by the consul.
Inspection certificates
They are usually required by the buyers of
grain, foodstuffs and the animals. They are
issued by the local Minister of Agriculture.
Sometimes, buyers of machinery or products
containing special ingredients may require
local institution inspect the product and issue
a document certifying that the product is
exactly as the order.
Export shipments
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Containers
Lash
Ro-Ro
Air freight
Containers
They reduce theft and handling costs.
They are large boxes; 10, 20, or 40 feet in length, that the seller fills in his
own warehouse.
Airlines also provide small containers.
The containers are sealed and opened only when the goods arrive at the
final destination. Containers are picked up by a tracktor-trailer, or a
railroad for delivery to the shipside, where they will be loaded aboard
ship.
From the port of entry, railroads or trucks will take them, often unopened
at the customs, to the buyer’s wharehouse. In most countries, custom
officers go to the warehouse for inspection.
It minimizes the handling time and minimizes the risks of damage and
theft, because the buyer’s own employees unload the containers.
Lash
LASH (lighter aboard ship) is used to take the
merchandise through shallow ports or rivers.
They are 60-foot-long barges (lighters) go to
inland locations, loaded, and come back to
deep water, where they are loaded aboard
anchored LASH ships.
They increase the normal freight charge of the
exporter or the importer.
Ro-Ro
It is a roll on-roll of ship, which permits loaded trailers
and any equipment on wheels to be driven into
specially designed vessel. It brought the benefits of
containerization to ports that have been unable to
invest in expensive lifting equipment required for
containers.
Bigger ships are more used in trade, especially by
China.
Panamax – just fitting the Panama Canal.
Post-Panamax – 44 feet wider than the Panama
Canal, and 200 feet longer.
Air freight
It is faster than any other transportation. Huge freight
planes carry 200,000 pounds which goes in
containers or on pallets.
They guarantee overnight delivery for most of the
places in the world, and it takes at most one hour to
load or to unload the merchandise.
It is more expensive than the ship transportation.
Sometimes it has less costs in insurance, packing,
customs duties, replacement costs for damaged
goods, and inventory costs.
Importing
Importers are reverse exporters; they sell domesticly and buy from
foreign markets.
How does the importer identify import sources?
1.
If there are similar goods in the market, see their labels (made
in ...). Then you can find out about the producers from the
consular of that country, from the chamber of commerces,
from the home pages in the internet, from the newsletters of
foreign ministries, from the trade shows, WTO sources, etc.
2.
Visiting a country, the importer may research products to
import.
Steps in Importing
Customhouse brokers are independent
businesses that handle import shipments for
compensation. They are the counterparts of
foreign freight forwarders.
Functions of customhouse brokers:
1) Their principal activity is to act as the agent of the importer. They bring
the goods through the customs which require knowing customs
regulations and practices. Import taxes are usually paid on the price in
the invoice, but sometimes, officers assess the price. In some cases,
where goods are imported to be re-exported, no customs duties are
required.
2) Other activities Customhouse brokers can provide other services, such
as, transportation, transportation after Customs, following the import
quotas, etc. If the import quotas are filled for the year, the
customhouse broker may;
a. Put the goods in a bonded warehouse (authorized by customs
authorities for storage of goods on which payment of import duties is
deferred until the goods are removed) or a foreign trade zone (where
the merchandise can be stored without paying duty, and wait for the
rest of the year).
b. Abandon them
c. Send them to another country.
The automated commercial system
(ACS)
It is a system that tracks, control, and process
all goods imported into the country.
ACS reduces the paperwork, cuts costs, and
facilitates merchandise processing. The
payments are also made electronically.
Import duties
In all countries, it is more costly to import some
products than others.
The goods are categorized in Harmonized
Tariff Schedule, and each good has a HTS
number.
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MGMT. 416 - Eastern Mediterranean University (EMU), Cyprus