Chapter 13 - Exporting, Importing, and Countertrade Exporting, Importing, and Countertrade Chapter Outline OPENING CASE: Exporting and Growth for Small Businesses INTRODUCTION THE PROMISE AND PITFALLS OF EXPORTING Management Focus: FCX Systems IMPROVING EXPORT PERFORMANCE An International Comparison Information Sources Management Focus: Exporting with a Little Government Help Utilizing Export Management Companies Export Strategy Management Focus: Export Strategy at 3M Management Focus: Red Spot Paint and Varnish EXPORT AND IMPORT FINANCING Lack of Trust Letter of Credit Draft Bill of Lading A Typical International Trade Transaction EXPORT ASSISTANCE Export-Import Bank 13-1
Transcript
Chapter 13 - Exporting, Importing, and Countertrade
Exporting, Importing, and Countertrade
Chapter Outline
OPENING CASE: Exporting and Growth for Small Businesses
INTRODUCTION
THE PROMISE AND PITFALLS OF EXPORTING
Management Focus: FCX Systems
IMPROVING EXPORT PERFORMANCE
An International Comparison Information Sources Management Focus: Exporting with a Little Government Help Utilizing Export Management Companies Export Strategy Management Focus: Export Strategy at 3M Management Focus: Red Spot Paint and Varnish
EXPORT AND IMPORT FINANCING
Lack of Trust Letter of Credit Draft Bill of Lading A Typical International Trade Transaction
EXPORT ASSISTANCE
Export-Import Bank Export Credit Insurance COUNTERTRADE
The Incidence of Countertrade Types of Countertrade The Pros and Cons of Countertrade
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SUMMARY
CRITICAL THINKING AND DISCUSSION QUESTIONS
CLOSING CASE: Megahertz Communication
Learning Objectives
1. Explain the promises and risks associated with exporting.
2. Outline the steps managers can take to improve their firm’s export performance.
3. Identify information sources and government programs that exist to support exporters.
4. Grasp the basic steps involved in financing exporting.
5. Articulate how countertrade can be used to facilitate exporting.
Chapter Summary
This chapter focuses on the “nuts and bolts” of exporting and importing. The promise and pitfalls of exporting are discussed, along with a discussion of the role of export management companies in the internationalization process. The chapter also provides a nice discussion of export financing. In this section, the author discusses the financial devices that have evolved to facilitate exporting including: the letter of credit, the draft (or bill of exchange), and the bill of lading. The section ends by providing an example of a typical international trade transaction. This example illustrates the complex nature of international trade transactions. Finally, the chapter explores countertrade, its growth and the pros and cons of this type of transaction.
Opening Case: Exporting and Growth for Small Business
Summary
The opening case focuses on the importance of exporting to small firms. Many smaller companies could not survive without the revenues brought in through exports. Some small companies manage their export process themselves, but others like Malden Mills get assistance from government export agencies and export financing institutions. Discussion of the case can revolve around the following questions:
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QUESTION 1: Reflect on the importance of export markets for small companies like Morgan Motors and Wadia. Why do these companies rely on export sales for their livelihood?
ANSWER 1: Export sales are of critical importance to some small companies like Morgan Motors and Wadia. Because of their small domestic markets, both companies need export revenues in order to survive. Morgan Motors, for example, ships some 70 percent of its production overseas because its home market of the United Kingdom is too small to generate adequate sales. A similar situation exists for Wadia, a maker of high end premium priced compact disc players. The market niche for the players in Wadia’s home market of the United States is too small to support the company forcing Wadia to expand internationally. Wadia relies on exports for 70 to 80 percent of its sales.
QUESTION 2: Discuss the challenges faced by small exporters like Morgan Motors and Wadia. How can these firms get assistance with the export process?
ANSWER 2: Small firms may find the process of exporting to be quite daunting. Not only do these firms take on the risks associated with dealing with foreign markets and possibly foreign currencies, they must also become familiar with the overwhelming amount of paperwork involved with the process. Many small companies like Malden Mills turn to government agencies for assistance. Malden Mills for example, worked with the South Carolina Export Consortium, a state agency, to determine the potential for foreign sales of its high tech fabrics. The company, with assistance from the agency, was also able to secure a loan from the U.S. Export-Import Bank.
Teaching Tip: Exporters in South Carolina can get assistance from the U.S. Export Assistance Center {http://www.buyusa.gov/southcarolina/}The agency currently maintains three offices in South Carolina. Students can click on Our Services, and then on an array of options like Export Financing or Trade Leads to see the types of assistance the agency provides. To see how to put an export plan together, students can click on Trade Leads, then on Access Trade Lead Database, then on International Sales-Marketing, and finally on Strategy and Planning.
Chapter Outline with Lecture Notes, Video Notes, and Teaching Tips
INTRODUCTION
A) This chapter is concerned with the nuts and bolts of exporting (and importing). Exporting is not just for large enterprises, many small firms have benefited significantly from the moneymaking opportunities of exporting too.
B) The volume of export activity in the world economy is increasing as exporting has become easier. The gradual decline in trade barriers under GATT and now the WTO along with regional economic agreements such as the European Union and the North American Free Trade Agreement have significantly increased export opportunities.
Chapter 13 - Exporting, Importing, and Countertrade
C) Despite the opportunities for exporting, it remains a challenge for many firms. The firm wishing to export must identify export opportunities, avoid a host of unanticipated problems that are often associated with doing business in a foreign market, familiarize itself with the mechanics of export and import financing , learn where it can get financing and export credit insurance, and learn how it should deal with foreign exchange risk.
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Teaching Tip: The UK Trade and Investment office {https://www.uktradeinvest.gov.uk/ukti/appmanager/ukti/home?_nfls=false&_nfpb=true}is devoted to helping companies develop their export business. Click on “Country Report” to see the types of information available in a typical report on a specific country.
Teaching Tip: Export.gov {http://www.export.gov/exportbasics/exp_001602.asp} covers the basics of exporting. You can click on various topics related to getting ready to export, developing an export plan, finding leads and so on. The site is well worth a visit, and could be used as the basis for an in-class export project.
Teaching Tip: Your students may wonder how firms U.S. firms find buyers in foreign countries. To find foreign customers, exporters often use '"trade leads" that are provided by organizations dedicated towards the activity of matching "buyers" and "sellers" in an international context. An example of a site that provides trade leads is the Export.gov at {http://www.export.gov/index.asp}.
THE PROMISE AND PITFALLS OF EXPORTING
A) The potential benefits from exporting can be great. Regardless what country a firm is based in, the rest of the world is a much larger market than the domestic market. While larger firms may be proactive in seeking out new export opportunities, many smaller firms are reactive and only pursue international opportunities when the customer calls or knocks on the door.
B) Many novice exporters have run into significant problems when first trying to do business abroad, souring them on following up on subsequent opportunities.
Teaching Tip: A great web site to visit to determine whether a company is ready to export is the International Trade Centre, run by UNCTAD/WTO {http://www.intracen.org/ec/welcome.htm}. You can use the interactive quiz to gauge export readiness. Click on “Export Fitness Checker”, then on “Use the Export Fitness Checker online” to see the quiz.
C) Common pitfalls include poor market analysis, poor understanding of competitive conditions, lack of customization for local markets, poor distribution arrangements, bad promotional campaigns, and a general underestimation of the differences and expertise required for foreign market penetration.
D) Exporters also must deal with a tremendous amount of paperwork and other formalities associated with exporting.
Chapter 13 - Exporting, Importing, and Countertrade
Management Focus: FCX Systems
Summary
This feature explores FCX Systems’ move into the export market. FCX Systems, which manufactures power converters for the aerospace industry, realized that to continue to grow, the company would have to seek opportunities in foreign markets. The company initially used an international distribution company to help with the process, but began handling its exports on its own in 1994. Today, the company is the recipient of numerous accolades for its exporting success, and has recently, after numerous years of trying, begun to find success in China, a market it believes will be important in the future. The following questions can be helpful in directing the discussion.
Suggested Discussion Questions
1. FCX Systems’ entry into foreign markets was not an easy one. Reflect on the challenges facing small companies like FCX Systems as they pursue foreign opportunities. Why did FCX believe that foreign markets could be more profitable than its domestic market?
Discussion Points: Small companies beginning the export process can find it overwhelming. Not only do the companies have to deal with additional paperwork, but they also have to learn the local ways of doing business, how to finance exports, how to make contacts, and so on. Some firms, like FSX, hire local distributors to help with this process. However, if the distributor is not looking out for the best interests of the firm, the company, like FSX, may find it better to take on the process itself. FSX cites persistence and assistance as being particularly important elements to its success as an exporter. FSX president Don Gallion notes that especially in markets like China, personal relationships are important and may take time to establish. FSX’ efforts in China, which involved more than 100 trips by Gallion to the country since 1990, were recently rewarded with $2 million in contracts. Gallion believes that the network of trust that he has developed in that market will continue to pay off in the future. Gallion also notes that government agencies such as the U.S. Department of Commerce provided critical information on the rules and regulations of exporting that helped FSX with its international sales.
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2. Why did FCX initially sign on with an in international distribution company? What made FCX decide to go it alone? How important was government assistance to FCX’s success?
Discussion Points: This question provides students with the opportunity to examine the services provided by various institutions such as the Small Business Association and the Department of Commerce in greater depth. Students may also wish to examine some of the services offered by profit-oriented organizations offering export assistance. FSX credits a number of federal and state agencies for providing assistance that helped the company become successful in foreign markets. Not only did the agencies provide help with the exporting process itself, they also gave FSX contact information. While the company started its exporting using an international distribution company, FSX became disillusioned with the distributor and took over the process itself in 1994. At the time, export sales accounted for just 12 percent of the company’s total sales, but now that figure is over 50 percent.
Teaching Tip: To learn more about FSX Systems, go to {http://www.fcxinc.com/}.
Lecture Note: Companies that are new to exporting are often overwhelmed by the process. To provide assistance to new exporters, the U.S. Commerce Department has created an office devoted to the export process. To see what a typical trade facilitator does, consider {http://www.businessweek.com/bschools/content/mar2007/bs20070314_078577.htm?chan=search}.
IMPROVING EXPORT PERFORMANCE
A) There are a number of ways in which inexperienced exporters can gain information about foreign market opportunities and avoid some of the common pitfalls that tend to discourage and frustrate novice exporters.
An International Comparison
B) One big impediment to exporting is the simple lack of knowledge of the opportunities available. The way to overcome ignorance is to collect information. Both Germany and Japan have developed extensive institutional structures for promoting exports. In addition, Japanese exporters can take advantage of the knowledge and contacts of sogo shosha, the country’s great trading houses.
Video Note: The iGlobe Brazil Seeks to Break New Ground in Global Marketplace illustrates the role that exports play in Brazil’s recent economic success. Embraer, the Brazilian aircraft maker, was on the brink of collapse when it recognized the opportunity to sell smaller, regional jets in the global market. Thanks to exports, the country has also become a leader in the production of a range of agricultural products.
Chapter 13 - Exporting, Importing, and Countertrade
Information Sources
C) Despite institutional disadvantages, U.S. firms can increase their awareness of export opportunities. The most comprehensive source of information is the U.S. Department of Commerce.
Teaching Tip: Students may want to explore the U.S. Department of Commerce’s web site {http://www.commerce.gov/}and click on “Free Trade.” The Small Business Administration (SBA) also has an extensive web site {http://www.sba.gov/} with information about exporting to different countries, contacts and leads, and so on.
Management Focus: Exporting with a Little Government Help
Summary
This feature describes the challenges faced by small firms as they seek to expand their sales through exports. The feature notes that there are a number of agencies, institutions, and export management companies that provide assistance to small exporters. The following questions can be helpful in directing the discussion.
Suggested Discussion Questions
1. Foreign market expansion can be a daunting prospect, especially for a small company with no international experience. Discuss how Novi, Inc became such a success story in such a short time. What lessons can other companies learn from Novi’s experiences?
Discussion Points: When Novi began its international expansion, the company had no experience in foreign markets. The company relied on the Small Business Administration’s services and the Department of Commerce to help guide its international efforts. Students will probably agree that one of the key lessons other firms can learn from Novi’s experiences is the importance of market research and using resources such as the Small Business Administration that are available, often free of charge.
2. As a small business owner facing saturated domestic markets, how would you approach foreign markets? Develop a strategic plan outlining how you would research markets, get your product to potential customers, handle the financing side of the business, and grow your sales. Include information on what resources are available to help with this process.
Discussion Points: Using an imaginary company (or a real one if one is available), ask students to develop a basic outline of how to expand into foreign markets. The outline should contain information on targeted markets, the information they would need on the market, how they would acquire it, and how it would help them enter a foreign market. The report could be formatted as an attempt to get funding for international expansion.
Chapter 13 - Exporting, Importing, and Countertrade
Utilizing Export Management Companies
D) Export management companies are export specialists that act as the export marketing department or international department for client firms.
E) EMCs normally accept two types of export assignments. They start exporting operations for a firm with the understanding that the firm will take over operations after they are well established; and EMCs start services with the understanding that the EMC will have continuing responsibility for selling the firm’s products.
F) In theory, the advantage of EMCs is that they are experienced specialists who can help the neophyte exporter identify opportunities and avoid common pitfalls. However, studies have revealed a large variation in the quality of EMCs. Therefore, an exporter should carefully review a number of EMCs, and check references from an EMC's past client, before deciding on a particular EMC.
Teaching Tip: The FITA Directory of Export Management Companies {http://fita.org/index.html} provides information on export management companies, and also trade leads and international market research.
Export Strategy
G) In addition to utilizing EMCs, a firm can reduce the risks associated with exporting if it is careful about its choice of exporting strategy.
H) Firms can take several steps to help improve their export success. First, particularly for the novice exporter, it does to help to hire an EMC, or at least an
experienced export consultant, to help with the identification of opportunities and navigate through the tangled web of paperwork and regulations so often involved in exporting.
Second, it often makes sense to initially focus on one, or a handful, of markets. Third, it may make sense to enter a foreign market on a fairly small scale in order to reduce
the costs of any subsequent failure. Fourth, the exporter needs to recognize the time and managerial commitment involved in
building export sales, and should hire additional personnel to oversee this activity. Fifth, in many countries it is important to devote a lot of attention to building strong and
enduring relationships with local distributors and / or customers. Sixth, it is important to hire local personnel to help the firm establish itself in a foreign
market. Finally, it is important for the exporter to keep the option of local production in mind.
Chapter 13 - Exporting, Importing, and Countertrade
Management Focus: Exporting Strategy at 3M
Summary
This feature explores the Minnesota Mining and Manufacturing Company’s (3M) export strategy. In 2007, 3M generated more than 60 percent of its revenues from outside the United States. The company often uses exports to establish an initial presence in a foreign market, only building foreign production facilities once sales volume rises to a level where local production is justified. Discussion of the feature can begin with the following questions:
Suggested Discussion Questions
1. Discuss why 3M initially enters markets on a small scale. How does the firm’s strategy fit with the philosophy that exporting is not an end in itself, but merely a step on the road toward establishment of foreign production?
Discussion Points: The basic idea behind 3M’s strategy of entering markets on a small scale is that it allows the company to learn about the market before it risks making a big push into the country. Students will probably recognize that this approach allows the company to break its international expansion into a series of stages beginning with a test of the market going all the way to a complete foreign presence.
2. Explain the three principles that make 3M so successful. Why was it important for 3M to hire local personnel?
Discussion Points: 3M’s principles are central to its success in foreign markets. The company believes that it is important to be first to a market, learn about it and sell there before competitors do. Second, 3M likes to learn about a market by selling a single product. Only after it has proven to be successful, will the company enter the market on a larger scale. Third, 3M believes strongly because locals are more familiar with the market, local employees are essential to its success. 3M believes that local employees have a better idea of how to sell in their own country than Americans.
Teaching Tip: To learn more about 3M and its international strategy, go to{http://www.3m.com/}.
Management Focus: Red Spot Paint & Varnish
Summary
This feature focuses on Red Spot Paint & Varnish, a company that produces paints for plastic components used in automobiles. The company does business in about 15 countries and relies on foreign markets for some 15-25% of its annual revenue. Generating its foreign sales has not been an easy task according to one employee. The company has found it difficult to hire managers with appropriate international experience and has also struggled with pressures to achieve quick results. Discussion of the feature can begin with the following questions:
Chapter 13 - Exporting, Importing, and Countertrade
Suggested Discussion Questions
1. How has the Internet made it easier for companies to not only get export assistance but also to find the experienced talent necessary to build an international staff? How has Red Spot Paint & Varnish been able to capitalize on foreign market opportunities while similar competitors have not?
Discussion Points: Students will probably point out that in many ways the Internet has made the world a smaller place. When Red Spot Paint & Varnish was beginning its international expansion in the 1960s, finding information on the process, or people with international experience, was significantly more difficult than it is today when companies can access resources such as the Department of Commerce and Small Business Association from their own offices, and advertise for personnel using Internet-based searches like Monster.com. Some students will attribute Red Spot Paint & Varnish’s success to its perseverance and forward-looking thinking. The company hired an expert to focus on international market development years ago, and despite the slow nature of the process, has allowed its international business to continue to grow.
2. In an era of “time is money,” how can the trusting relationships that are so often critical to the success of a foreign venture be achieved? How important was the establishment of trust between Red Spot Paint & Varnish and its local distributors and customers to the success of the company?
Discussion Points: Students should recognize that one of the key challenges to operating internationally is the development of relationships between buyers and sellers. Companies that focus on quick results may do so at the expense of relationships that may take longer to develop, but could prove to be more profitable in the long term. A longer term outlook has helped Red Spot Paint & Varnish develop a thriving international component to its business in a market where competitors have has little success in foreign markets.
Teaching Tip: Go to Red Spot Paint & Varnish {http://www.redspot.com/} to explore the company’s operations in more depth. Click on “Global Alliance” to see what the company believes are the advantages of working with other firms.
Lecture Note: In May 2008, Red Spot Paint & Varnish was in the process of being acquired by Fujikura Kesai Company {http://www.fkkasei.co.jp/english/index_e.html}. It is anticipated that the company will operate as an independent subsidiary of Fujikura Kesai Company.
EXPORT AND IMPORT FINANCING
A) Mechanisms for financing exports and imports have evolved over the centuries in response to a problem that can be particularly acute in international trade: the lack of trust that exists when one must put faith in a stranger.
Chapter 13 - Exporting, Importing, and Countertrade
Lack of Trust
B) Firms engaged in international trade face a problem - they have to trust someone who may be very difficult to track down if they default on an obligation.
C) Due to the lack of trust, each party to an international transaction has a different set of preferences regarding the configuration of the transaction. Figures 13.1 and 13.2 show the preferences for two firms - a U.S. exporter and a French importer.
D) The problems arising from a lack of trust between exporters and importers can be solved by using a third party who is trusted by both - normally a reputable bank. Figure 13.3 illustrates this process. Teaching Tip: Trade Port provides a Global trade Tutorial on export financing. The tutorial is available at {http://www.tradeport.org/tutorial/financing}. The site provides excellent details on the process, and is well worth a visit.
Letter of Credit
E) A letter of credit stands at the center of international commercial transactions. Issued by a bank at the request of an importer, the letter of credit states the bank will pay a specified sum of money to a beneficiary, normally the exporter, on presentation of particular, specified documents.
Draft
F) A draft, sometimes referred to as a bill of exchange, is the instrument normally used in international commerce for payment. A draft is simply an order written by an exporter instructing an importer, or an importer's agent, to pay a specified amount of money at a specified time. A sight draft is payable on presentation to the drawee while a time draft allows for a delay in payment - normally 30, 60, 90, or 120 days.
Bill of Lading
G) The bill of lading is issued to the exporter by the common carrier transporting the merchandise. It serves three purposes: it is a receipt, a contract, and a document of title.
A Typical International Transaction
H) The entire process for conducting an export transaction is summarized in Figure 13.4.
EXPORT ASSISTANCE
A) Prospective U.S. exporters can draw on two forms of government-backed assistance to help their export programs. They can get financing aid from the Export-Import Bank and export credit insurance from the Foreign Credit Insurance Association.
Chapter 13 - Exporting, Importing, and Countertrade
Export-Import Bank
B) The Export-Import Bank (Eximbank) is an independent agency of the U.S. government. Its mission is to provide financing aid that will facilitate exports, imports, and the exchange of commodities between the U.S. and other countries.
Teaching Tip: Students can explore the Export-Import Bank in more depth at {http://www.exim.gov/}.Export Credit Insurance
C) In the U.S., export credit insurance is provided by the Foreign Credit Insurance Association (FICA). FICA provides coverage against commercial risks and political risks.
COUNTERTRADE
A) Countertrade is an alternative means of structuring an international sale when conventional means of payment are difficult, costly, or nonexistent. Countertrade denotes a whole range of barter like agreements; its principle is to trade goods and service for other goods and services when they cannot be traded for money. The text provides several examples of countertrade.
The Incidence of Countertrade
B) In the modern era, countertrade arose in the 1960s as a way for the Soviet Union and the Communist states of Eastern Europe, whose currencies were generally nonconvertible, to purchase imports. During the 1980s, the technique grew in popularity among many developing nations that lacked the foreign exchange reserves required to purchase necessary imports. There was a notable increase in the volume of countertrade after the Asian financial crisis of 1997.
Types of Countertrade
C) Countertrade can be categorized into five distinct types of trading arrangements: barter, counterpurchase, offset, switch trading, and compensation or buyback.
Barter
D) Barter is a direct exchange of goods and/or services between two parties without a cash transaction. Barter is viewed as the most restrictive countertrade arrangement. It is used primarily for one-time-only deals in transactions with trading partners who are not creditworthy or trustworthy.
Counterpurchase
E) Counterpurchase is a reciprocal buying agreement. It occurs when a firm agrees to purchase a certain amount of materials back from a country to which a sale is made.
Chapter 13 - Exporting, Importing, and Countertrade
Offset
F) Offset is similar to counterpurchase insofar as one party agrees to purchase goods and services with a specified percentage of the proceeds from the original sale. The difference is that this party can fulfill the obligation with any firm in the country to which the sale is being made.
Switch Trading
G) Switch trading refers to the use of a specialized third-party trading house in a countertrade arrangement. When a firm enters a counterpurchase or offset agreement with a country, it often ends up with what are called counterpurchase credits, which can be used to purchase goods from that country. Switch trading occurs when a third-party trading house buys the firm’s counterpurchase credits and sells them to another firm that can better use them.
Compensation or Buybacks
H) A buyback occurs when a firm builds a plant in a country—or supplies technology, equipment, training, or other services to the country—and agrees to take a certain percentage of the plant’s output as a partial payment for the contract.
The Pros and Cons of Countertrade
I) Countertrade’s main attraction is that it can give a firm a way to finance an export deal when other means are not available. If a firm is unwilling to enter a countertrade agreement, it may lose an export opportunity to a competitor that is willing to make a countertrade agreement.
J) In some cases, a countertrade arrangement may be required by the government of a country to which a firm is exporting goods or services.
K) The drawbacks of countertrade are substantial. Countertrade contracts may involve the exchange of unusable or poor-quality goods that the firm cannot dispose of profitably.
L) Countertrade is most attractive to large, diverse multinational enterprises that can use their worldwide network of contacts to dispose of goods acquired in countertrading.
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Critical Thinking and Discussion Questions
1. A firm based in Washington State wants to export a shipload of finished lumber to the Philippines. The would-be importer cannot get sufficient credit from domestic sources to pay for the shipment but insists that the finished lumber can be quickly resold in the Philippines for a profit. Outline the steps the exporter should take to effect this export to the Philippines.
Answer: The exporter should recommend to the importer that the importer apply to Eximbank for a loan. Eximbank has a direct lending operation under which it lends dollars to foreign borrowers for use in purchasing U.S. exports. The foreign borrowers use the loans to pay U.S. suppliers and repay the loan to Eximbank with interest.
2. You are the assistant to the CEO of a small textile firm that manufactures high-quality, premium-priced, stylish clothing. The CEO has decided to see what the opportunities are for exporting and has asked you for advice as to the steps the company should take. What advice would you give the CEO?
Answer: This question is designed to stimulate classroom discussion and/or to encourage your students to “think” about the export process in completing a written answer for this question. There are a number of approaches that can be pursued in answering this question. The first step might be to tap into some of the government information sources that are available, free of charge, to see if international markets are available for the company’s product. There are also a number of resources on the Internet, mentioned throughout the text that can assist companies in learning about the foreign market potential of their products. Another approach would be to contact an export management company for assistance. While this approach may involve some cost, it may be the fastest way to get “up and running” in regard to initiating an export program. 3. An alternative to using a letter of credit is export credit insurance. What are the advantages and disadvantages of using export credit insurance rather than a letter of credit for exporting (a) a luxury yacht from California to Canada, and (b) machine tools from New York to Ukraine?
Answer: Exporters prefer to get letters of credit from importers. However, when the importer is in a strong bargaining position and able to play competing suppliers off against each other, an exporter may have to forgo a letter of credit. The lack of a letter of credit exposes the exporter to the risk that the foreign importer will default on payment. The exporter can insure against this possibility by buying export credit insurance. Students may suggest that in the case of the luxury yacht, should the importer fail to make payment, the clearly defined laws of Canada would make it easier to go after the importer than would be the case with the machine tools in the Ukraine, and that therefore a letter of credit is less important for the yacht exporter. On the other hand, students may note that there is probably more competition in machine tools as compared to luxury yachts and that the exporter of machine tools may lose the sale if the exporter insists on a letter of credit.
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4. How do you explain the popularity of countertrade? Under what scenarios might its popularity increase still further by the year 2010? Under what scenarios might its popularity decline?
Answer: This question requires students to speculate on the future state of global trade. As trade between developing and developed countries, and trade among developing countries continues to grow, many students will predict that the popularity of countertrade will increase by the year 2010. Some students may predict a decline in the popularity of countertrade by 2010 as countries from the former Soviet Union and Eastern European Communist bloc either become members of the EU an adopt the fully convertible euro as their currency, or develop their own fully convertible currency.
5. How might a company make strategic use of countertrade schemes as a marketing weapon to generate export sales revenues? What are the risks associated with pursuing such a strategy?
Answer: Countertrade is an alternative means of structuring an international sale when conventional means of payment are difficult, costly, or nonexistent. The governments of developing countries sometimes insist on a certain amount of countertrade. Thus, if a firm is unwilling to enter a countertrade agreement, it may lose an export opportunity to a competitor that is willing to make a countertrade agreement. Companies that are willing to entertain countertrade as a means of financing, will have an advantage over those firms that prefer traditional forms of financing. Firms engaging in countertrade must be willing to invest in an in-house trading department dedicated to arranging and managing countertrade deals, and must be aware of the quality of the products received in countertrade deals.
Closing Case: Megahertz Communications
Summary
The closing case describes Megahertz Communications’ export strategy. Megahertz Communications is one of Great Britain’s leading independent broadcasting system builders. The export strategy of Megahertz International, a subsidiary of Megahertz Communications, involved providing turnkey solutions to emerging broadcast and media entities in Africa, the Middle East, and Eastern Europe, as well as offering to custom-design, manufacture, install, and test broadcasting systems. While the company found it easy to make sales, export financing has proven to be a challenge. Discussion of the case can revolve around the following questions:
QUESTION 1: What is the motivation for Megahertz’s shift toward a strategy of export-led growth? Why do you think 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 1: The EU market for media and broadcasting is both mature and well served by large established companies. In contrast, the Middle East, Africa, and Eastern Europe are growth markets with significant long term potential for media and broadcasting.
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QUESTION 2: Does Megahertz’s strategy for building exports make sense given the nature of the broadcast industry? Why?
ANSWER 2: Megahertz’s strategy for exports was simple. The company aimed to provide a turnkey solution to emerging broadcast and media entities in Africa, the Middle East, and Eastern Europe. Megahertz was so successful with this strategy that the British government awarded the company a Small Business Export Award in 2000. Perhaps a key to Megahertz’s success was the fact that the company offered to custom design, manufacture, install, and test broadcasting systems. In a region where there was a lack of broadcast engineers, these services were important.
QUESTION 3: Why do you think Megahertz found it difficult to raise the working capital required to finance its international activities? What does the experience of Megahertz tell you about the problems facing small firms that wish to export?
ANSWER 3: Despite its export sales success, Megahertz found that preshipment financing was a major problem. The company found that banks were very cautious about making working capital loans to the company when they found out that the company’s customers were in Africa or Eastern Europe. Even with letters of credit, the banks perceived the transactions as being too risky. Megahertz’s working capital difficulties illustrate the challenges faced by smaller companies as they seek to expand their growth through exports.
QUESTION 4: Megahertz solved its financing problem by selling the company to AZCAR of Canada. What other solutions might the company have adopted?
ANSWER 4: Megahertz was sold to Canada’s AZCAR in 2002. Megahertz’s managing director saw the sale as a means of acquiring the necessary working capital to take full advantage of export opportunities. The company had explored the use of lending companies that specialize in financing international trade, but found that many of the companies charged interest rates significantly greater than those charged by banks. Megahertz could have also explored financing assistance offered through the Export-Import Bank.
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Chapter 13 - Exporting, Importing, and Countertrade
Continuous Case Concept
One of the issues that the world’s automakers must contend with as they search the world for the most efficient suppliers and locate production in the most optimal location, is importing and exporting, and the costs involved in the process. China has attracted significant attention recently as both a production location and a growth market. For suppliers, the globalization of the industry implies that supplier operations become international too, and consequently introduces new risks and concerns.
Ask students to consider production in China. Costs have been rising for imports, and shipping finished cars out is also becoming more expensive. Is there still any benefit to locating production in China given these rising costs?
As a supplier, how can you protect yourself when dealing with companies from foreign countries? Does the fact that you are dealing with Toyota or BMW mitigate the need for letters of credit? Why or why not?
What types of assistance are available to suppliers seeking to sell their products to automakers located in foreign markets? Michelin and Cie, the world’s second largest tire maker, indicated that its 2008 sales were affected by the weak dollar and the high cost of raw materials. What steps might Michelin take to protect itself?
This exercise works well as a summary for the material discussed in the chapter. The first question can also be used as an introductory discussion. To extend the material, and incorporate the discussion of previous chapters, ask students to develop a plan using the various web sites given within this chapter, or ones they have found on their own, to market their products internationally. The plan should include a description of their product, the identification of prospective customers and their locations, a discussion of issues that could affect exporting to those destinations, and the ways the supplier can protect itself financially.
globalEDGE Exercises
Use the globalEDGE Resource Desk {http://globalEDGE.msu.edu/ResourceDesk/} to complete the following exercises.
Chapter 13 - Exporting, Importing, and Countertrade
Exercise 1
The Internet is rich with resources that provide guidance for companies that wish to expand their markets through exporting. globalEDGE provides links to these under a category called “Trade Tutorials”. Identify three sources recommended by globalEDGE and provide a description of the services available for new exporters through each of these sources.
Answer: exporting. A rich list of those resources can be found by searching the term “exporting” at http://globalEDGE.msu.edu/ResourceDesk/ , or by directly entering the “Trade Tutorials” category under the Global Resources section of the Resource Desk. One of the recommended websites that provide useful information for U.S. exporters is:
The U.S. Department of Commerce’s “Basic Guide To Exporting”Website: http://www.unzco.com/basicguide/
You work for a banking company that hopes to provide financial services in India. After searching a resource that enumerates the import and export regulations for a variety of countries, outline the most important foreign trade barriers your firm’s managers must keep in mind while developing a strategy for entry into the Indian banking market.
Answer: By providing a variety of publications concerning foreign trade barriers, the Office of the United States Trade Representative offers considerable information about the import and export regulations of many countries. Using the search term “import and export regulations” at http://globalEDGE.msu.edu/ResourceDesk/, the report for India is readily available. Scroll down to the section of the report devoted to the banking industry and an overview as required for the question can be located.
Search Phrase: Import and Export RegulationsResource Name: 2008 National Trade Estimate Report on Foreign Trade BarriersWebsite: http://www.ustr.gov/Document_Library/Reports_Publications/2008/2008_NTE_Report/ Section_Index.html globalEDGE Category: “Trade: Trade Tutorials”
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