Exporting, Importing, and Countertrade Discussion Section March 23, 2007 Brian Chen

Chapter 15 Review  Outline some of the tremendous advantages and common pitfalls of exporting  Identify the primary sources of information available to firms interested in exporting  Describe the "nuts and bolts" of exporting L/C, Draft (Bill of Exchange), Bill of Lading  Suggest how firms can use the EXIM bank and insurance to facilitate exports  *Explain in more detail the various types of counter trade and the pro and cons of engaging in counter trade

Megahertz: The Facts  UK-based firm became one of Britain’s leading independent broadcasting system  Sought to expand in Africa, Middle East, and Eastern Europe for their market potential  Strategy: Provided turnkey solution.  Successful, but: cash flow woes. Difficulty chasing money to finance orders  Banks found it too risky to lend bridging funds even with L/C and export insurance documentation  Finally, Megahertz was sold to Canada

Megahertz: Question 1  What was the motivation for Megahertz’s shift toward a strategy of export-led growth? Why do you think the opportunities for growth might be greater in foreign markets? Do you think that developing countries are likely to be a major market opportunity for Megahertz? Why?

Answer  Before exploring international opportunities, Megahertz was in mature markets where there was plenty of competition. Export-led growth allowed for company growth without much competition in the export markets. Those opportunities were in developing markets that had been underserved, in part because the need for broadcast systems was itself developing in these countries. As countries develop, they will want major broadcast capabilities. Such capabilities are important to the government and to the growth of the private sector.

Megahertz: Question 2  Does Megahertz’s strategy for building exports make sense given the nature of the broadcast industry? Why?

Answer  Megahertz pursued a turnkey export strategy. They would build the broadcast operation and then turn it over to the customer. This made sense because there was a shortage of local expertise in broadcast engineering in developing markets.

Megahertz: Question 3  Why do you think Megahertz found it difficult to raise the working capital required to finance its international trade activities? What does the experience of Megahertz tell you about the problems facing small firms that wish to export?

Answer  Megahertz was selling into markets in developing countries whose currency may be unstable and whose access to foreign reserves was severely limited. The banks that would finance Megahertz were concerned that Megahertz might not be paid on time or at all by these customers in the developing markets. Banks did not want to assume this risk. Megahertz had a product for which there was demand and the ability to deliver it, but their financing picture was considered to be too risky by their bankers. This is an issue other small exporting firms may need to address as well.

Megahertz: Question 4  Megahertz solved its financing problem by selling the company to AZCAR of Canada. What other solutions might the company have adopted?

Answer  Megahertz could have considered export financing schemes supported by the UK and EU, credit insurance, taking on additional investors in the company, barter and other forms of countertrade, among other approaches.

Exporting Australian Lamb to Saudi Arabia  You are the director of international sales of an Australian lamb company. What are the steps would you take to protect yourself against a non-paying importer?  Discuss the cultural imperatives of the Saudi Arabian market.  To what extent are the costs of conforming with Halal requirements likely to render the Australian product uncompetitive in Saudi Arabia?  Given the rise of Islamic fundamentalism in an increasing number of countries, including some in Asia, does expertise in Halal killing provide Australia with a long term competitive advantage?  What are the advantages and disadvantages of halal slaughter in comparison with live sheep exports?  If you were promoting Australian chilled lamb in Saudi Arabia, what aspects would you focus upon in your advertising?