CHAPTER 5: EXPORT ENTRY MODES

 Choice between direct and indirect exporting organizational forms involves: 1. cost of performing functions, 2. transaction costs of organizing activities or contracting with others.  Figure 7.1 shows how a foreign manufacturer may use both direct and indirect forms of export.

Figure 7.1 Indirect and direct export of consumer goods

Figure 7.2 Direct and indirect exporting

5.0 EXPORT ENTRY MODES 5.1 INDIRECT EXPORT 5.2 DIRECT EXPORT

 Exporter/manufacturer uses independent organization (IO) located in the manufacturer’s country.  In some cases, exporters may works together with IO & coordinates the export activities.  In other words, exporter uses “middleman” in their home-country.  They do not export on their own but instead relies on the middleman/IO.

 Two (2) alternatives: 1. International Marketing Organizations a. Merchants (3) b. Agents (6) 2. Cooperative Organization a. Piggyback Marketing b. Export Combinations.

5.1 INDIRECT EXPORT INTERNATIONAL MARKETING ORGANIZATIONS HOME-COUNTRY BASED MERCHANTS HOME-COUNTRY BASED AGENTS COOPERATIVE ORGANIZATION

 Merchant ◦ Take ownership  Agent ◦ Doesn’t take title.

HOME-COUNTRY BASED MERCHANTS (i) EXPORT MERCHANT (ii) TRADING COMPANY (iii) EXPORT DESK JOBBER

(i) Export Merchants  Domestic-based (home-country).  Are domestic wholesalers who do business in foreign markets.  Buys and sells on its own account.  Handled international marketing task (except: modification of products, packaging, etc.).  Export merchants often carry competing lines, which means they have little loyalty to suppliers.  Most export merchants specialize in particular industries and well known of certain localities or even nations.  Thus, not available in all markets.

(ii) Trading Companies  Usually large and do more functions.  Few types of TC (refer Table 7.1)  Large TC = heavily involved in domestic distribution.  Small TC = limited foreign trade activities.  Play central role in diverse areas as shipping, warehousing, finance, technology transfer, etc.  Things that differentiate GTC with others TC is GTC offers financial services.

(iii) Export Desk Jobber (EDJ)  Also known as export drop shipper/cable merchant.  Usually involved in international sales of raw materials.  EDJ never see/physically acquire the goods they sell & buy.  Goods are typically owned in very short time.  Exporter handle the physical movement of the goods to the EDJ customer.  Responsibility: negotiation of sales.

HOME-COUNTRY BASED AGENTS (i) EXPORT COMMISSION HOUSE (ii) CONFIRMING HOUSE (iii) RESIDENT BUYER (iv) EXPORT MANAGEMENT COMPANIES (EMC) (v) BROKER (vi) MANUFACTURER EXPORT AGENT

(i) Export Commission House (ECH)  A representative of foreign buyers who resides in the exporter’s home country.  In other words, ECH is an overseas customer’s hired purchase agents.  Responsible on order made by importer & “indents” (purchase offer including price to be paid).  Received commissions from buyer (importer).  Scans the market for the merchandise that it has been requested to buy.  Sends out specifications to manufacturers.

(ii) Confirming House (CH)  Assists overseas buyers by confirming, as a principle.  Exporter will get payment from CH once good are shipped.  Alike commission house because performing some of the ECH functions.  Responsibility: - making arrangements for the shipper - all contract between buyer & exporter would go under CH.

(iii) Resident Buyer  Operation same like ECH.  Represent all types of foreign buyers and are domiciled in the exporter’s home market.  Represent foreign concerns that want to have close and continues contact with their overseas sources of supply.  Can be expatriate or local people.  E. g.: usually used by large retailers.  Foreign buyer responsible for the rest exporting process.  Advantages: Reduce language barriers, cultural & business customs.

(iv) Broker  Primarily finds buyers for sellers and vice versa.  Function: to “bring” buyer & seller together (contract/agreement).  “Specialist” in performing the contractual function.  Does not involve/handle the products sold/bought.  Received commission from principal.  Usually specializes in particular products.  Responsibility: - act as an agent for either exporter/ buyer. - negotiate price and handle quotation.

(v) Export Management Company (EMC)  Defined as international sales specialist who acts as exclusive export department for several allied but not competing exporters.  Act as domestic export sales agent for exporter.  EMC conduct business in the name of each exporter that it represents.  Business negotiated under exporter’s name and all quotation and order are subject to confirmation by the exporter.  EMC takes all risks and problems of export while the manufacturer/exporter only filling the orders.

 Situation required the uses of EMCs - an important channel of foreign distribution for small companies just getting started in international trade or for those lacking the resources to assign their own people to foreign markets.  Most EMCs are merchant intermediaries, working on a buy-and-sell arrangement with non- competing domestic small companies.  Advantages: low-cost & efficient.  The greatest benefits EMCs offer small companies are ready access to global markets and an extensive knowledge base on foreign trade.

(vi) Manufacturer's Export Agent (MEA) o Act as international sales representatives in a limited number of markets for various non- competing domestic companies. o In contrast with EMC, MEA operates used its own name. o MEA typically operates on a commission basis. o Does not engaged in buy-and-sell arrangements with the manufacturers represents. o With these basic differences, MEA does not offer all services than EMC does. o Especially advertising and financing assistance. o Conditions required the use of MEA: - Small order from foreign buyer. - Wants to enter new market. - Sell product that relatively new to foreign costumer.

5.1.2 COOPERATIVE ORGANIZATION PIGGYBACK MARKETING EXPORT COMBINATION

(i) Piggyback Marketing  Occurs when one manufacturer (called “carrier”) uses its foreign distribution facilities to sell another company’s (called “supplier”) products alongside its own.  Used for products from different companies, that are noncompetitive (but related), complementarily (allied) or unrelated.  Products use private labels – never their own.  Used by manufacturers to broadening the product lines that can offer to foreign market.  Also to bolster the decreasing export sales.  Government encouragement.

 Advantages:  Easy, low-risks for beginner.  Well suited to small manufacturers which do not want to invest heavily in foreign market.  Transaction are domestic in nature.  For larger firm, they can provide export department to smaller firm.  But for smaller firm, piggybacking means that control over the marketing products is passed to the carrier.

(ii) Exporting Combinations  Associations to promote exports of member's products or to serve as export cartels.  Export cartels: A combination of independent business organizations formed to regulate production, pricing, and marketing of goods by the members.  Cartels may be for market domination, international commodity agreements to stabilize prices, or to promote exports (sometimes under special laws allowing cooperation).