Going Global – Export Expansion

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

Exports – The First Step Globalization is forcing firms to compete in foreign markets Exports is usually the first step in entering a new market Firms are usually resource constrained. Firms may have financial resources but often lack managerial resources Even if resources are available, Prudence suggests a more deliberate approach by Exports Exports is one of the 4 options in Entering new markets

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 e-commerce

Indirect Exports Exporting through Export Management Company(EMC) or Trading Company EMC’s are independent agents who develop foreign distribution network, work with agents, take care of customs etc EMC’s lower overhead costs of exporting Firms also fail to learn from foreign markets Firms may become dependent on EMC’s Firms can change EMC’s or have limited commitment to EMC’s 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 Direct Export gives a higher level of control

Exporting – Work Involved Product Shipment Export Pricing Local distribution Getting Paid Legal Issues After-sales support Exporting job requires legal, financial & people skills. Exports also requires extensive documentation!!

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

Clearing Through Customs Once the goods arrive at the national border, the goods have to be cleared through customs Customs officials process the goods for entry once a claimant appears with the Bill of Lading, Customs officials also determine the tariff rate Goods are released once duty is paid

Product Shipment - Warehousing Once the goods enter the foreign country, they need to stored and/or distributed to selling locations Warehousing costs near the port of entry are usually high, Exporters can lower costs by quickly clearing customs and shipping the products to a less expensive location Exporters have to establish a distribution network abroad

Documents used in Exporting Foreign Customer Pro forma Invoice Acceptance of purchase order Ocean(airway) bill of lading Certificate of insurance Packing list Exporter Purchase Order Letter of Credit or draft (trade) acceptance Government Export Declaration Export License

Documents used in Exporting Export’s Bank Exporter’s Draft Commercial Invoice Consular Invoice Insurance certificate Ocean(Airway) Bill of Lading Home Government Export Declaration Export License 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

Terms of Shipment – Cont’d Cost, Insurance & Freight(CIF): The price includes insurance and all transportation and miscellaneous charges to the port of disembarkation from ship/aircraft Delivery Duty Paid (DDP) : Exporter delivers the goods with import duty paid, including transportation to the importer’s premises Source: http://www.iccwbo.org

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

Sample Causes and Effects of Price Escalation Foreign Foreign Foreign Example 1: Example 2: Example 3: Assuming the Importer and Same as 2 but same channels with same margins with 10 percent Domestic wholesaler import- and channels cumulative Example ing directly turnover tax Manufacturing net $ 5.00 $ 5.00 $ 5.00 $ 5.00 Transport, c.i.f. n.a. 6.10 6.10 6.10 Tariff (20 percent c.i.f. value) n.a. 1.22 1.22 1.22 Importer pays n.a. n.a. 7.32 7.32 Importer margin when 1.83 sold to wholesaler +0.73 * (25 percent) on cost n.a. n.a. 1.83 2.56 Wholesaler pays landed cost 5.00 7.32 9.15 +9.88 3.29 +0.99 * Wholesaler margin (331/3 percent on cost) 1.67 2.44 3.05 =4.28 Retailer pays 6.67 9.76 12.20 14.16 7.08 +1.42 * Retail margin (50 percent on cost) 3.34 4.88 6.10 =8.50 Retail price 10.01 14.64 18.30 22.66 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

Price Escalation The Lower Prices are at Home New York London Paris Tokyo Mexico City Aspirin $ 0.99 $ 1.23 $ 7.07 $ 6.53 $ 1.78 Movie 7.50 10.50 7.89 17.29 4.55 Levi 501 jeans 39.99 74.92 75.40 79.73 54.54 Ray-Ban sunglasses 45.00 88.50 81.23 134.49 89.39 Sony Walkman 59.95 74.98 86.00 211.34 110.00 Nike Air Jordans 125.00 134.99 157.71 172.91 154.24 Nikon camera 629.95 840.00 691.00 768.49 1,054.42 Los Angeles Madrid Stockholm Berlin Rome Mariah Carey CD 16.22 16.09 17.82 15.31 20.67 Windows 98 117.99 123.94 179.79 211.20 264.46 Diapers 13.52 5.03 5.42 6.86 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

Dumping & Trade Disputes Trade disputes are often on dumping USA leads the world in dumping complaints brought to WTO WTO trade laws regarding dumping determine the final decision Countries can impose countervailing duty while contesting the case at WTO Stricter definition of dumping rules will bring down the number of trade disputes

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

Export Strategies Under Varying Currency Conditions When Domestic Currency is WEAK... When Domestic Currency is STRONG... Stress, price benefits Expand product line and add more costly features Shift sourcing and manufacturing to domestic market Exploit export opportunities in all markets Conduct conventional cash-for- goods trade Use full-costing approach, but use marginal-cost pricing to penetrate new/competitive markets Engage in nonprice competition by improving quality, delivery, and after-sale service Improve productivity and engage in vigorous cost reduction Shift sourcing and manufacturing overseas Give priority to exports to relatively strong-currency countries Deal in countertrade with weak-currency countries Trim profit margins and use marginal-cost pricing 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 Exporter Exporter’s Bank Home Country Overseas Importer’s Bank Importer

Legal Issues Exporter’s 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

Legal Issues with Local Agent Legal issues have to be worked out with the local agent or distributor. Product Liability, warranty issues, and after sales service issues have to be worked out in advance at the time of contract negotiation Contracts with local agent or distributor must stand up to legal scrutiny in that country It pays to hire a lawyer during the contract negotiation phase to be compliant with the local laws, rules & regulations

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

Culture Distance and Learning Going Global means going beyond a few culturally similar countries. Firms often expand first into culturally similar countries Firms export to new countries, learn how to do business in that country and then commit more resources via FDI or Joint Ventures. Cultural Distance, differences in culture must be overcome to succeed overseas International learning Curve will be there when entering a new country and learning period must be incorporated into the business plan

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

Export Expansion Strategy Internationalizing needs an orderly export expansion strategy. Typically companies tend to follow one of the two strategies Waterfall Strategy Sprinkler Strategy

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

Importers as Trade Initiators Importers also initiate trade. International Product life cycle theory implies that some times it is cheaper to import. Pure marketing companies like Nike prefer to import and sell products Giant Retailers like Wal-Mart, Costco etc initiate imports Need to diversify supplier base, outsourcing non-critical functions etc are the other motivators

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”