1. Going Global – Export Expansion

2. 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

3. 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

4. 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

5. 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

6. 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

7. 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!!

8. 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

9. 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

10. 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

11. 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

12. 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

13. 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

14. 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

15. 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:

16. 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

17. 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

18. 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
Tariff (20 percent c.i.f. value) n.a
Importer pays n.a. n.a
Importer margin when
sold to wholesaler *
(25 percent) on cost n.a. n.a
Wholesaler pays landed cost *
Wholesaler margin (331/3 percent on cost) =4.28
Retailer pays
7.08
+1.42 *
Retail margin (50 percent on cost) =8.50
Retail price
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

19. Price Escalation The Lower Prices are at Home
New York London Paris Tokyo Mexico City
Aspirin $ $ $ 7.07 $ $
Movie
Levi 501 jeans
Ray-Ban sunglasses
Sony Walkman
Nike Air Jordans
Nikon camera ,054.42
Los Angeles Madrid Stockholm Berlin Rome
Mariah Carey CD
Windows
Diapers
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.

20. 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

21. 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

22. 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

23. 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

24. 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

25. 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

26. 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.

27. 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

28. 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

29. 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

30. 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

31. 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

32. 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

33. 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

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

35. 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

36. 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

37. 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

38. 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

39. 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

40. “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”