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Introduction
Exporting is the standard exchange of products or services for money. Exporting is a straight forward, less risky expansion into new markets with an existing line of products
It is easier to sell MTR products in US by exports than make them in USA
Exports require local marketing either through an independent middlemen or by a wholly owned sales subsidiary
Exporting
Methods of Exporting
Indirect Exports via Export management companies or trading companies Direct exporting using a foreign agent or a distributor Direct Exporting by using wholly owned sales subsidiary Direct sales, including mail order and ecommerce
Indirect Exports
Exporting through Export Management Company(EMC) or Trading Company EMCs are independent agents who develop foreign distribution network, work with agents, take care of customs etc EMCs lower overhead costs of exporting Firms also fail to learn from foreign markets Firms may become dependent on EMCs Firms can change EMCs or have limited commitment to EMCs if exports are too successful
Marketing Control
Selection among the methods of exports depends on the level of marketing control desired
Brand Reputation, Brand Equity & Future brand value is at stake Higher level of control implies use of an exclusive agent or Wholly owned sales subsidiary E.g: Absolut Vodka in US with Seagrams as an agent Intel, Samsung in India with a wholly owned sales subsidiary
Product Shipment-Transportation
Usually handled by a freight forwarder in combination with a shipping agency Freight forwarder might specialize in certain types of products or countries, they pick up from factory & send it across the border Transportation of goods from factory to a foreign country requires clearing through customs of the importing country
Exporter
Purchase Order Letter of Credit or draft (trade) acceptance
Government
Export Declaration Export License
Exports Bank
Exporters Draft Commercial Invoice Consular Invoice Insurance certificate Ocean(Airway) Bill of Lading
Foreign Government
Certificate of Origin Customs invoice Consular invoice
Export Pricing
Export pricing is lot more complex than domestic pricing Pricing depends on the terms of shipment, mode of shipment, insurance costs, payment methods etc. In addition transaction costs have to be added. Export pricing has to consider Price Escalation in the chain of export sales
Terms of Shipment
Ex-Works(EXW): Seller agrees to deliver the goods at the point of origin or some specified Place. Buyer bears all other charges Free Alongside Ship(FAS): The price of the goods include changes for delivery of goods alongside a vessel at a port Free on Board (FOB): In addition to FAS, seller loads the goods on the vessel to be used for shipping Cost & Freight(CFR): The price of goods includes the cost of transportation to a named overseas port
Trade Credit
The price quoted depends very much on what credit arrangement can be made. A high price can often be counterbalanced by advantageous trade credit terms, especially when the seller takes the responsibility for arranging the trade credit Credit is particularly important in export of expensive items Airplanes, Machinery Airbus, Japanese Keiretsu etc often persuade their government to provide credit to the buyer
Price Escalation
Final selling price abroad is usually much higher than at home market due to Price escalation. Home Price + transportation costs + Tariffs + exchange rates fluctuations + foreign distribution costs + foreign retail markup + other costs = Foreign selling Price!! Hidden costs also add up to the final selling price
Bribes, negotiation costs, credit charges etc
Tariffs can be lowered by making the product fit into a lower tariff category I.e. Knock down kits Vs finished products, Lowering the quoted price etc
Domestic Example Manufacturing net Transport, c.i.f. Tariff (20 percent c.i.f. value) Importer pays Importer margin when sold to wholesaler (25 percent) on cost Wholesaler pays landed cost Wholesaler margin (331/3 percent on cost) Retailer pays $ 5.00 n.a. n.a. n.a. n.a. 5.00
1.67 6.67
Notes: a. All figures in U.S. dollars; c.i.f = cost, insurance, and freight; n.a. = not applicable. b. The exhibit assumes that all domestic transportation costs are absorbed by the middleman. c. Transportation, tariffs, and middleman margins vary from country to country, but for purposes of comparison, only a few of the possible variations are shown. * Turnover Tax
Windows 98
Diapers
117.99
13.52
123.94
5.03
179.79
5.42
211.20
6.86
264.46
10.55
SOURCE: Norihiki Shirouzu, Luxury Prices for U.S. Goods No Longer Pass Muster in Japan, Wall Street Journal, February 8, 1996, p. B1; and Elizabeth Fleick, The Cost of Europe: Buyer Beware, Europeans Are Getting Mad as Hell about Prices, Time International, December 13, 1999, p. 38.
Dumping
Dumping is defined as selling goods in a foreign country below cost
Typically done when there is excessive production & the seller wishes to clear inventory. Also to gain foreign market share
Countervailing Duty is imposed by the foreign country to counter dumping Anti-Dumping laws are enforced to prevent dumping, as dumping often is harmful for trade Reverse-Dumping occurs when a firm sells below cost in it home country. Often when it has a cash cow abroad & home market faces tough competition
Local Distribution
Find a local distributor and avoid creating a new distribution network Sometimes new distribution channels have to be created Local distributors may or may not take ownership of the goods. Many distributors handle customs clearance, provide storage and transport goods to retailers Finding the best distributor is a challenge
Trade Fairs, Government Agencies will help find distributors
Screening Distributors
First movers often have a task of screening for good distributors. Late movers may lose on getting the best distributors (First mover would have signed an exclusive contract) Screening Criteria
Prior Experience Services Offered Marketing Support & Strength Financial Strength Working Relationship Exclusive or Non-Exclusive
Personal Visits
Its is best to visit the foreign country to select the best distributor. Here are some tips:
Talk to users & retailers to get their opinion and preferences on distributors Visit these distributors and see their facilities Look for a distributor who has a key person for your line of products, who will champion for your product
Once decided on the distributor, negotiate a contract in accordance to the local laws & regulations
In Some countries, trust is more important than the legal rules. Cultural differences affect the nature of contract
International Finance
Finally there is the issue of payment for exports Payments in local currency exposes the exporter to foreign exchange risks Local Currencies may not be easily convertible to home currency, in such cases Financial Swaps have to be considered Creditworthiness of the importer/buyer must be checked. Alternatively goods can be exported via Letter of Credit (LOC), which guarantees payment to exporter
Expand product line and add more costly features Shift sourcing and manufacturing to domestic market Exploit export opportunities in all markets Conduct conventional cash-forgoods trade Use full-costing approach, but use marginal-cost pricing to penetrate new/competitive markets
SOURCE: S. Tamur Cavusgil, "Unraveling the Mystique of Export Pricing," Business Horizons, May-June 1988, figure 2, p. 58.
Letter of Credit
Advance payment is done by Letter of Credit arranged by Buyer
Exporters Bank
Home Country Overseas
Exporter
Importer
Importers Bank
Legal Issues
Exporters need Export License. Similarly importer may need an Import License Transferring title: Thee title of ownership generally follows the bill of Lading. Whoever holds the Bill of Lading has access to the goods & the risks. Insurance: Damage during transit can be covered by insurance. If seller buys insurance, they will quote a CIF. If buyer buys insurance, the price quoted will be FOB Good marketing plan will suggest use of CIF to avoid additional hassles for the buyer
After-Sales Support
Exporting company needs to address service, parts supply and training of local staff Often these are worked out with the local agent or the distributor and terms are specified in the contract Some times exporter will appoint another agent to provide after sales support if the distributor or the importing agent is unable to provide after sales support
Sales Subsidiary
At times it may be necessary to have a wholly owned sales subsidiary in a foreign country which will handle all the import issues, manage local marketing & provide after sales service Sales subsidiary gives tighter control and provides learning experience from foreign markets
Internationalization Stages
Firms typically go through stages in their International expansion efforts
Stage 1 : Indirect Exports, Licensing Stage 2 : Direct Exports via agent Stage 3 : Establish foreign sales subsidiary Stage 4 : FDI by Joint Venture or wholly owned subsidiary
A new trend of Born Global companies are emerging. These firms operate globally from an early stage and bypass the stages of Internationalization
Waterfall Strategy
A more traditional approach towards export expansion. First expand into countries with similar cultures Then venture into high growth mature markets Finally expand into developing countries or new potential markets Slow, steady and stable expansion plan.
Pro: Stable, low risk Con: Lose out on first mover advantage
Sprinkler Strategy
Hypercompetition often forces a firm to expand into several countries simultaneously. Rapidly falling tariffs, Formation of free trade areas creates new opportunities simultaneously Firms can also take benefit from spill-over effects by expanding in all countries in that region Requires lots of managerial, financial and other resources Sony, Intel, Microsoft, Gillette etc have successfully implemented sprinkler strategy
Exports as a Diversification
Exports provide as a diversification to the home markets. Acts as a safety net in case of recession at home markets Expanding into several countries provides as a means to risk mitigation For global giants such as Intel, Sony etc, Foreign sales is much larger than sales in their home country Such firms tend to focus more on sales and marketing abroad
Closing Thoughts
Exporting has been a traditional way for firms to expand abroad. With Globalization firms are often forced to expand simultaneously in several countries Exports is the easiest way of going global, but it is not simple. One must be aware of the legal pitfalls and foreign currency exchange problems For global firms such as Intel, Nokia, Sony, Honda foreign sales are much bigger than sales in their home country. Similar trend is seen in Indian companies Exports provide a natural hedge against recession in home markets
Direct Exporting involves learning about overseas transportation, international trade credit, tariff barriers, Legal rules & regulations in foreign country etc. This requires quite an investment for a beginner