Going Global – Export Expansion By Shantanu Krishna.

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Copyright © 2002 by The McGraw-Hill Companies, Inc. A ll rights reserved.

Going Global – Export Expansion

By Shantanu Krishna

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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

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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

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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

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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

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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

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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!!

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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

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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

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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

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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

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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

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Export documents• Air Waybills :The air waybill---air consignment note or airway bill of

lading---serves as a receipt for goods and an evidence of the contract of carriage, but it is not a document of title to the goods. Hence, the AWB is non-negotiable.

• Bills of Exchange (Drafts) :The bill of exchange, commonly referred to as the draft or the bill, is an unconditional order in writing, signed and addressed by the drawer (the exporter usually) to the drawee (the confirming bank or the issuing bank usually), requiring the drawee to pay the drawer a certain sum of money at sight or at a fixed or determinable future time.

• Export Shipping Instructions When an exporter engages a custom broker or forwarder to handle the customs declaration, he/she must give instructions on what to do with the shipment in the shipping instructions. The format of the shipping instructions varies, but all the forms essentially contain the same information. One form is often used in different modes of transportation.

• Commercial Invoice The commercial invoice is a record or evidence of transaction between the exporter and the importer. It is similar to an ordinary sales invoice, except some entries specific to the export-import trade are added.

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Export Documents:

• Dock Receipt The dock receipt---shipping note---when signed by the receiving clerk (cargo checker) at the container terminal or dock is a proof of the delivery of goods.

• Documentary collection is necessary when the draft is drawn on the importer. The exporter must give instructions to the collecting bank on what to do with the draft and shipping documents in documentary collection instructions, also known as a collection letter or letter of instructions. Such letter provides the conditions under which the collecting bank can release documents to the importer and the actions to be undertaken.

• Letter of Credit: The LC can also be the source of payment for a transaction, meaning that redeeming the letter of credit will pay an exporter. Letters of credit are used primarily in international trade transactions of significant value, for deals between a supplier in one country and a customer in another. They are also used in the land development process to ensure that approved public facilities (streets, sidewalks, stormwater ponds, etc.) will be built.

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Export Documents-cont.

• A pro-forma Invoice is a quote in an invoice format that may be required by the buyer to apply for an import license, contract for pre-shipment inspection, open a letter of credit or arrange for transfer of hard currency. A proforma may not be a required shipping document, but it can provide detailed information that buyers need in order to legally import the product.

• A purchase order (PO) is a commercial document issued by a buyer to a seller, indicating types, quantities, and agreed prices for products or services the seller will provide to the buyer. Sending a PO to a supplier constitutes a legal offer to buy products or services. Acceptance of a PO by a seller usually forms a one-off contract between the buyer and seller, so no contract exists until the PO is accepted.

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Export Terms • EXW {+ the named place}

Ex Works -Ex means from. Works means factory, mill or warehouse, which is the seller's premises. EXW applies to goods available only at the seller's premises. Buyer is responsible for loading the goods on truck or container at the seller's premises, and for the subsequent costs and risks.

• FCA {+ the named point of departure}Free Carrier :The delivery of goods on truck, rail car or container at the specified point (depot) of departure, which is usually the seller's premises, or a named railroad station or a named cargo terminal or into the custody of the carrier, at seller's expense.

• FAS {+ the named port of origin}Free Alongside Ship : Goods are placed in the dock shed or at the side of the ship, on the dock or lighter, within reach of its loading equipment so that they can be loaded aboard the ship, at seller's expense. Buyer is responsible for the

loading fee, main carriage/freight, cargo insurance, and other costs and risks.

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Export Terms• FOB {+ the named port of origin}

Free On Board : The delivery of goods on board the vessel at the named port of origin (loading), at seller's expense. Buyer is responsible for the main carriage/freight, cargo insurance and other costs and risks.

• FOB Origin means the buyer is responsible for the freight and other costs and risks. FOB Destination means the seller is responsible for the freight and other costs and risks until the goods are delivered to the buyer's premises, which may include the import customs clearance and payment of import customs duties and taxes at the buyer's country, depending on the agreement between the buyer and seller.

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Export Terms• CFR {+ the named port of destination}

Cost and Freight -The delivery of goods to the named port of destination (discharge) at the seller's expense. Buyer is responsible for the cargo insurance and other costs and risks. The term CFR was formerly written as C&F. Many importers and exporters worldwide still use the term C&F.

• CIF {+ the named port of destination}Cost, Insurance and Freight : The cargo insurance and delivery of goods to the named port of destination (discharge) at the seller's expense. Buyer is responsible for the import customs clearance and other costs and risks.

• CPT Carriage Paid To : The delivery of goods to the named place of destination (discharge) at seller's expense. Buyer assumes the cargo insurance, import customs clearance, payment of customs duties and taxes, and other costs and risks. SAME GOES WITH CIP (CARRIER & INSURANCE PAID)

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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

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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

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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

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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

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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

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Letter of Credit

Advance payment is done by Letter of Credit arranged by Buyer

Exporter Exporter’sBank

Importer’s BankImporter

Overseas

Home Country

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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

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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

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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

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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

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Export Expansion Strategy

• Internationalizing needs an orderly export expansion strategy.

• Typically companies tend to follow one of the two strategies– Waterfall Strategy– Sprinkler Strategy

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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

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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

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