Exports, Imports, Countertrade

 Opportunities and risks of exporting  Steps to improve export performance  Information sources/programs on exporting  Financing exporting  Countertrade as an export facilitator

Exporting Opportunities and Risks  Perception: Exports – Offer huge revenue / profit opportunities overseas – Are “there for the pickings”  Large firms are more successful – Proactive about exporting to realize promise – Systematic effort backed by knowledge of overseas markets  Smaller firms are reactive – Overseas markets are an afterthought – Ad-hoc effort on an opportunistic and often naïve basis  Exports require volumes of specialized paperwork

US Export Support

Export Performance Improvement Factors  Government information sources – US: various parts of the Dept. of Commerce – Other countries: similar entity – Embassies and consulates: commercial sections  Export management companies – Act as the export department of firms – Experienced specialists – Not exclusive  Focused export strategy

Some Successful Export Strategies  Enter on a small scale to reduce risks  Add product lines after export operations begin to be successful  Hire locals to promote the firm’s products

Exporting Strategy Exporting Strategy  It helps to hire an EMC or, at least, someone with experience.  Focus on one or a few markets.  Enter markets on a fairly small scale until you ‘learn the ropes’. Add new lines after initial success.  Need to recognize the time and managerial commitment.  Build strong and lasting relationships.  Hire locals to help firm establish itself.  Keep the option of local production in mind. © McGraw Hill Companies, Inc., 2000

Export Process Evaluate export potential  financial resources  management capability/experience  competitive advantages abroad

Steps in the Export Process Evaluate export potential Do country analysis (more later)  country receptiveness to imports and investment  trade barriers/requirements  infrastructure

Steps in the Export Process Evaluate export potential Do market analysis  market size/product potential  distribution channels  needs for re-engineering etc. = localization

Steps in the Export Process Determine entry method  goal of entry  select distribution “partner”  determine channel length  assess risks  determine costs

Steps in the Export Process Determine entry method  determine trade terms (INCOTERMS: ex works, FOB, CIF, etc.)  determine tasks to be performed in the foreign market

Export/Import Financing  Assures: – Exporter of payment – Importer of product  Banks offer financing intermediary service – Letters of credit: bank guarantee of payment to exporter “bought” by the corresponding importer – Draft or bill of exchange: instructions to bank to pay at a certain time based on certain documentation  Carriers provide to the exporter – Bill of lading: receipt, contract and document of title

Sources of Exporter Financing Financing exporter credit to the importer: - Bankers’ acceptance (of the draft) - Factoring - Forfaiting - EXIM loans

Export/Import Financing  Letters of Credit (LOC) – Bank guarantee on behalf of importer to exporter assuring payment when exporter presents specified documents  Drafts (Bill of Exchange) – Written order by exporter, telling an importer to pay a specified amount of money at a specified time.  Bill of Lading – Issued to exporter, by carrier. Serves as receipt, contract and document of title. © McGraw Hill Companies, Inc., 2000

Exporters’ Problems with Letters of Credit (L/C)  Shipment date or method required in L/C cannot be met.  Documents required by L/C cannot be obtained.  Importer deliberately fills out L/C application incorrectly (to stall or force a discount).  Product description too detailed (exporter compliance difficult).

Preference of the US Exporter French ImporterAmerican Exporter 1. Importer Pays for Goods 2. Exporter Ships Goods After Being Paid

Preference of the French Importer French ImporterAmerican Exporter 1. Exporter Ships the Goods 2. Importer pays after the Goods are Received

The Use of a Third Party French ImporterAmerican Exporter 1. Importer Obtains Bank’s Promise to Pay on Importers Behalf 5. Bank Gives Merchandise to Importer Bank 6. Importer Pays Bank 3. Exporter Ships “to the Bank.” Trusting Bank’s Promise to Pay 2. Bank Promises Exporter to Pay on Behalf of Importer 4. Bank Pays Exporter

A Typical International Transaction French ImporterAmerican Exporter Bank of New YorkBank of Paris 6. Goods Shipped to France 7. Exporter Presents Draft to Bank 10 and 11 Exporter Sells Draft to Bank 14. B of NY Presents Matured Draft and Gets Payment 12. Bank Tells Importer Documents Arrive 13. Importer Pays Bank 2. Exporter Agrees to Fill Order 1. Importer Orders Goods 3. Importer Arranges for LOC 8. B of NY Presents Draft to Bank of Paris 9. Bank of Paris Returns Accepted Draft 4. Bank of Paris Sends LOC to B of NY 5. B of NY Informs Exporter of LOC

Countertrade  Structures an international sale when means of payment are difficult, costly, or non- existent – No currency convertibility – Weak reserves prohibit access to hard currency  Barter-like agreements – Trade goods and services for other goods and services – 8-10% or world trade by value is in the form of countertrade (up from 2% in 1975)

Countertrade  Main attraction: – way to finance an export deal – meet requirement of local government to support exports  Main drawback: – risk of disposal / sale of goods at less than full value – disposal of imports may require resources other than those that the firm possesses

Types of Countertrade  Barter  Counterpurchase  Offset  Switch Trading  Compensation or Buyback

Barter  International Reciprocal Trade Association (IRTA) – the industry trade organization - almost a half a million small businesses use commercial barter exchanges every year.  Almost $10 billion in sales is transacted each year by the commercial barter industry.  Trades where no intermediary is used and the global barter market may be 10 times that amount.

Barter  International Reciprocal Trade Association estimates that in 1998 over 470,000 companies actively participated in barter in the US for a total of over $16 billion in annual sales.  Over 65% of the corporations listed in the New York Stock Exchange are presently using barter to reduce surplus inventory, bolster sales, and ensure that production facilities run at capacity.  U.S. Department of Commerce estimates that 20 to 25% of world trade is now barter, and corporate barter is now a $20 billion industry.

Barter  Conserve cash -- preserve cash-flow  Strengthen cash reserves -- use barter for the goods & services most needed  Increase buying power -- access to goods & services for growth  Increase customer base – may add new clients  Move surplus inventory  Finance -- new businesses can build credit through barter Employee Incentives -- travel, entertainment, gifts, perks & bonuses

Compensation  Barter with a combination of goods and convertible currency  Less risk than in straight barter

Counterpurchase – Parallel Barter  Parties pay cash of goods  Seller agrees to buy products/services unrelated to its business  Seller then sells products to third parties

Offset Purchase  Usually large projects, often involving expenditure of buying government’s money  A % of the selling price is required to be purchased or sourced from the buying country

Buyback  The seller agrees to buy a negotiated quantity of the output from the buyer’s output

Clearing Agreement  A third party brokers transactions between parties, maintaining accounts for all participants  Typically are legal documents which specify the details of the arrangements:  Electrical power companies  Stock brokers, on-line traders

Switch Trading  Buyer pays hard currency for unwanted goods/services from seller  Broker buys unwanted goods  Broker sells goods to third parties