MGMT. 416 International Business II Evrim Tören Chapter 16 Export and Import Practices Export-Why and why not? 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... 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... 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: 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... 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... 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: Locating foreign markets Payment and financial procedures 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; 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 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.