978-0134129945 Chapter 8 Lecture Note Part 2

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KEY EXPORT PARTICIPANTS

(Learning Objective #5)

Export participants include: purchasing agents, export brokers, and export merchants, who have

no assignment of responsibility. Others, including export management companies,

manufacturers’ export representatives, export distributors, and freight forwarders, are assigned

responsibilities by the exporter.

Foreign purchasing agents are variously referred to as buyer for export, export commission

house, or export confirming house. They operate on behalf of, and are compensated by, an

overseas customer known as a “principal”.

The export broker receives a fee for bringing together the seller and the overseas buyer. Their

fee is usually paid by the seller, but sometimes, the buyer pays it. The broker takes no title to the

goods and assumes no financial responsibility.

Export merchants are sometimes referred to as jobbers. These are marketing intermediaries that

identify market opportunities in one country or region and make purchases in other countries to

fill these needs.

Export management company (EMC) is an independent marketing intermediary that acts as the

export department for two or more manufacturers (“principals”) whose product lines do not

compete with each other.

Manufacturer’s export agents (MEA) can act as an export distributor or as export commission

representative. However, the MEA does not perform the functions of an export department and

the scope of market activities is usually limited to a few countries.

An export distributor assumes financial risk. The export distributor usually represents several

manufacturers and is therefore sometimes known as a combination export manager.

The export commission representative assumes no financial risk. The commission

representative is assigned all or some foreign markets by the manufacturer.

The cooperative exporter, sometimes called a mother hen, piggyback exporter, or export

vendor, is an export organization of a manufacturing company retained by other independent

manufacturers to sell their products in some or all foreign markets.

Freight forwarders are licensed specialists in traffic operations, customs clearance, and

shipping tariffs and schedules; simply put, they can be thought of as travel agents for freight.

ORGANIZING FOR EXPORTING IN THE MANUFACTURER’S COUNTRY

(Learning Objective #6)

Home-country issues include deciding whether to assign export responsibility inside the

company or to work with an external organizations specializing in a product or geographic area.

Most companies handle export operations within their own in-house export organization.

The possible arrangements for handling exports include the following:

A part-time activity performed by domestic employees

Through an export partner that takes possession of the goods before they leave the

country

Through an export department that is independent of the domestic marketing structure

Through an export department within an international division

For multidivisional companies, each of the preceding options is available.

A company that assigns a sufficiently high priority to its export business will establish an in-

house organization.

The company that chooses not to perform its own marketing and promotion in-house has

numerous external export service providers from which to choose. These include export trading

companies (ETCs), export management companies (EMCs), export merchants, export brokers,

combination export managers, manufacturers’ export representatives or commission agents, and

export distributors. (All discussed earlier.)

ORGANIZING FOR EXPORTING IN THE MARKET COUNTRY

(Learning Objective #7)

In addition to deciding whether to rely on in-house or external export specialists in the home

country, a company must also make arrangements to distribute the product in the target market

country.

Every exporting organization faces one basic decision: To what extent do we rely on direct

market representation as opposed to representation by independent intermediaries?

Two major advantages to direct representation in a market: 1) control and 2) communications.

Direct market representation enables decisions concerning program development, resource

allocation, or price changes to be implemented unilaterally.

Direct representation means that the possibilities for feedback and information from the market

are much greater.

Direct representation does not mean that the exporter is selling directly to the consumer or

customer; in most cases, direct representation involves selling to wholesalers or retailers.

In smaller markets, it is usually not feasible to establish direct representation because the low

sales volume does not justify the cost. Finding “good” distributors can be the key to export

success.

TRADE FINANCING and METHODS OF PAYMENT

(Learning Objective #8)

The appropriate method of payment for an international sale is a basic credit decision.

A number of factors must be considered, including currency availability in the buyer’s country,

creditworthiness of the buyer, and the buyer and seller’s relationship.

There are often fewer collections problems on international sales, provided the proper financial

instruments are used. The reason is simple: A letter of credit can be used to guarantee payment

for a product.

The basics of trade financing: The export sale begins when the exporter-seller and the importer-

buyer agree to do business. The agreement is formalized when the terms of the deal are set down

in a pro forma invoice, contract, or fax, or some other document.

Documentary Credit

Documentary credits (also known as letters of credit) are widely used as a payment method in

international trade. A letter of credit (L/C) is essentially a document stating that a bank as

substituted its creditworthiness for that of the import-buyer.

The importer-buyer’s bank is the “issuing” bank; the importer-buyer is, in essence, asking the

issuing bank to extend credit.

The actual payment process is set in motion when the exporter-seller physically ships the

product.

Once the documents are negotiated, the confirming bank, requests payment from the issuing

bank. Comparing shipping documents, comparing it to the L/C, and if there are no discrepancies,

the money is transferred to the exporter-seller’s account.

Documentary Collections (Sight or Time Drafts)

After an exporter and importer have established a good working relationship, it may be possible

to move to a documentary collection or open-account method of payment. A documentary

collection is a method of payment that uses a bill of exchange, also known as a draft. A bill of

exchange is a negotiable instrument that is easily transferable from one party to another.

Drafts are different from L/Cs; a draft is a payment instrument that transfers all the risk of

nonpayment onto the exporter/seller. Banks are involved as intermediaries but they do not bear

financial risk. Because a draft is negotiable, a bank may be willing to buy the draft from the

seller at a discount and thus assume the risk.

Also, because bank fees for drafts are lower than those for L/Cs, drafts are frequently used when

the monetary value of an export transaction is relatively low.

The draft is presented to the importer; payment takes place in accordance with the terms

specified in the draft. In the case of a sight draft (also known as a D/P or documents against

payment), the importer-buyer is required to make payment when presented with both the draft

and the shipping documents.

Time drafts can take two forms. An arrival draft specifies that payment is due when the

importer/buyer receives the goods; a date draft requires payment on a particular date.

Cash in Advance

A number of conditions may prompt the exporter to request cash in advance. Examples include

times when credit risks abroad are high, when exchange restrictions delay the return of funds, or

when the exporter is unwilling to sell on credit terms.

Because of competition and restrictions, the volume of business handled on a cash-in-advance

basis is small (e.g., Compressor Control Corporation makes oil field equipment and can require

cash in advance because no competitors offer a competing product).

Sales on Open Account

Goods sold on open account are paid for after delivery (e.g., intracorporate sales to branches of

an exporter use open-account terms).

Open-accounts prevail when exchange controls are minimal and exporters have long-standing

relations with buyers.

For example, Tile Connection in Florida imports tile; owner Jimmy Fand sends payables

electronically on their due day.

The main objection to open-account sales is the absence of tangible obligation. If an open-

account transaction is dishonored, the legal procedure may be more complicated.

In 1995, the Export-Import Bank expanded insurance coverage on open-account transactions to

limit export risk.

ADDITIONAL EXPORT/IMPORT ISSUES

In the post-September 11 business environment in the United States, national security concerns

have resulted in increased security for imports. A number of initiatives have been launched to

ensure that international cargo cannot be used for terrorism.

The Customs Trade Partnership Against Terrorism (C-TPAT) has as its goal to secure

voluntary cooperation of supply chain participants in an effort to reduce inspection delays.

Organizations that have achieved certified C-TPAT status are entitled to priority status for CBP

inspections.

Another issue is duty drawback. This refers to refunds of duties paid on imports that are

incorporated into other goods and then re-exported.

SOURCING

(Learning Objective #9)

In global marketing, the issue of customer value is inextricably tied to the sourcing decision:

whether a company makes or buys its products as well as where it makes or buys its products.

Outsourcing is shifting production jobs or work assignments to another company to cut costs.

When the outsourced work moves to another country, the terms global outsourcing or offshoring

are sometimes used.

In today’s competitive marketplace, companies are under intense pressure to lower costs; one

way to do this is to locate manufacturing and other activities in low-wage countries.

In theory, this situation bestows great flexibility on companies.

The first wave of non-manufacturing outsourcing primarily affected call centers. These are

sophisticated telephone operations that provide customer support and other services to in-bound

callers from around the world.

The decision of where to locate key business activities depends on other factors besides cost.

There are no simple rules to guide sourcing decisions.

Several factors may figure into the sourcing decision: management vision, factor costs and

conditions, customer needs, public opinion, logistics, country infrastructure, the political

environment, and exchange rates.

Management Vision

Some chief executives are determined to retain some or all manufacturing in their home country.

(E.g., Swatch manufactures mass-market products in high-wage countries).

Top managers at Canon chose to maintain a strategic focus on high value-added products rather

than the manufacturing location, keeping 60 percent in Japan.

Factor Costs and Conditions

Factor costs are land, labor, and capital costs.

German hourly compensation costs for production workers in manufacturing are 160 percent of

those in the United States. Those in Mexico are only a fraction of those in the United States.

Labor costs in non-manufacturing jobs are also dramatically lower in some parts of the world.

For example, a software engineer in India may receive an annual salary of $12,000 as compared

to $80,000 in the U.S.

The other factors of production are land, materials, and capital. The cost of these factors depends

upon their availability and relative abundance. Often, the differences in factor costs will offset

each other so that, on balance, companies have a level field in the competitive arena.

The application of advanced computer controls and other new manufacturing technologies has

reduced the proportion of labor relative to capital for many businesses.

Company managers and executives should also recognize the declining importance of direct

manufacturing labor as a percentage of total product cost.

Customer Needs

Although, outsourcing can help reduce costs, sometimes customers are seeking something

besides the lowest possible price.

Dell Computer recently rerouted some of its call center jobs back to the United States from India

after complaints from key business customers.

Logistics

In general, the greater the distance between the product source and the target market, the greater

the time delay for delivery and the higher the transportation cost.

Manufacturers can take advantage of intermodal services that allow containers to be transferred

between rail, boat, air, and truck carriers.

Country Infrastructure

In order to present an attractive setting for a manufacturing operation, it is important that a

country’s infrastructure be sufficiently developed to support a manufacturing and distribution.

Infrastructure requirements will vary by company and by industry, but minimally, they will

include power, transportation and roads, communications, service and component suppliers, a

labor pool, civil order, and effective governance.

A country needs support services or infrastructure to support a high volume of business activities

(e.g., Hong Kong, Taiwan, and Singapore do).

A challenge in the new Russian market is an inadequate infrastructure.

Political Factors

Political risk is a deterrent to investment in local sourcing. The difficulty of assessing political

risk is inversely proportional to a country’s stage of economic development.

All other things being equal, the less developed a country the more difficult it is to predict

political risk.

The political risk of the Triad countries, for example, is quite limited as compared to that of a

less-developed country in Africa, Latin America, or Asia.

Market access is another type of political factor. If a country or a region limits market access

because of local content laws, balance-of-payments problems, or any other reason, it may be

necessary to establish a production facility within the country itself.

Foreign Exchange Rates

In deciding where to source a product or locate a manufacturing activity, a manager must take

into account foreign exchange rate trends in various parts of the world. Exchange rates are so

volatile today that many companies pursue global sourcing strategies as a way of limiting

exchange-related risk.

The dramatic shifts in price levels of commodities and currencies are a major characteristic of

the world economy today. Such volatility argues for a sourcing strategy that provides alternative

country options for supplying markets.

TEACHING TOOLS AND EXERCISES

Additional Cases:

“ECCO A/S – Global Value Chain Management”. Bo Nielsen; Torban Pedersen; Jacob Pyndt.

HBS 908M14.

“Sony Ericsson: Marketing the Next Music Phone”. Qui Cheng; Zane Moi. HBS HKU801.

Activity: Students should be preparing or presenting their Cultural-Economic Analysis and

Marketing Plan for their country and product as outlined in Chapter 1.

Out-Of-Class Reading: Wolff, James A., and Timothy L. Pett. “Internationalization of Small

Firms: An Examination of Export Competitive Patterns, Firm Size, and Export Performance.”

Journal of Small Business Management 38, no. 2 (April 2000) pp. 34-47.

Internet Exercise: Find out about the activities of Global Exchange, a human rights group, that

offers information on efforts to combat sweatshops: www.globalexchange.org

Prepare a short 1-2 page paper outlining the activities of this group.