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Pricing
Based on Philip cateora and RM Joshi- any books is okThink- Suppose your company is putting a new factoryhave to import- computers, heavy machinery, stainless
steel, generators.Which countries you will prefer?
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Pricing fundamentals
Basics of pricing - Cost and existing contributions decide the bottom Demand supply positions and uniqueness of product
and services decide the top
Competition or market prices give orientations Company policy to international marketing decide
actual price- entry at any cost, continuity of business,big volumes or only if better profit
Others- Country and customer specific pricing Future prospects associated with this contract Payment conditions, foreign exchange fluctuations
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Factors influencing pricingdecisions in international markets
cost full cost, marginal cost, Full cost plus mark up, Marginal cost- these prices could attract anti dumping
Competition- high in India, OECD, China, low in Angola,Mali Algeria
irregular or unaccounted payments- bribes inBangladesh, India, Russia, Nigeria, Phil, Ukraine
purchasing power of customers- discussed elsewhere buyers behaviour- performance (in developed countries)
or price (in poorer countries) based depending on cultureand advancement foreign exchange fluctuations- Singapore $ very stable,
Indian rupee, GBP moderately stable against dollar
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Terms of payment in internationaltransactions
Different terms of payments have different levels of security, speedcost and risk. Major modes-
advance payment- TTs, Wire, safest, fastest, popular for smallerpayments,
after signing contracts but before shipment, risky for buyer
open account or running account- (do not follow Joshi) its purecredit sale. very very risky, normally not in use. Used in case of exports to subsidiary/branch of exporter or to old
customers
consignment- not popular, shipments on consignment basis, titlewith exporter,
consignment is sold by agents or company rep. under consultation withshipper rates decided at the time of sale, tentative value declared in GR require warehousing at destination, Used for exports to own subsidiary
or branch or to old and reliable agents
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Payments- LC- refer Philip cateorachapter 15
Letter of credit- most popular specially for biggertransactions
safest, for shipper and buyer both LC shifts the credit risk from buyer to opening bank
Could be revocable or irrevocable. Irrevocable is safe asit means that once LC is accepted by exporter it wont berevoked by opener
Exporter could add further security by asking buyer forconfirmed LC. Confirmation is done by an Indian bank
and Indian bank take responsibility of paying even ifforeign bank and buyers fail. Confirmation costs extra and restrict the LC. So
avoided while dealing with old customers
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LCs
Revolving immediate after buyer accept docs andpays the LC is reinstated without opening a new LC
Back to back and freely transferable-
Availability of credit- issuing bank authorises their
corresponding bank in India to honour the docs onopeners behalf, Unless credit stipulate availability with issuing bank,
nominated bank is authorised to pay In freely negotiable credits any bank is nominated bank.
These are better for seller as their own bank handle thenegotiation and discount/purchase of drafts If not freely negotiable, credit must be available for
negotiation with shippers bank
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Payments
Signing Contract is starting point to open LC LCs have universally standard formats with provisions
for special conditions to be fulfilled by exporter Buyer applies to their bank with copy of contract,
specifying special instructions. Normally buyers fax/mail a copy of application to shipperfor approval before applying as amendments areexpensive- usd 80 to 180 per amendment
LCs are not flat payment guarantees, rather based on
certain contractual fulfillments by shipper. Shippershould examine terms of LC carefully and comply Discrepancies require acceptance by buyer, if not
accepted, LC become in operational
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Payments
Bills of exchange- like hundis- drawn by sellers onforeign buyers
Seller take all risks till payments are received Seller draws the draft on buyer with all negotiable and
original documents for collection through their bankers tobuyers bankers Buyers bank present it to buyer for acceptance and
payments on sight or on deferred due dates sight mean payment on presentation and acceptance DAP,
safer than DA. Documents are handed over on payments only or on deferred due dates, Usance or time draft, DA, like 30, 45, 90
or 120 days or as agreed, BLs are handed over on acceptanceand buyer take delivery. Docs are presented again on due date.Risky, buyer may not pay on due or not at all on some pretext
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payments
Others- part cash (10-15%) beforeproduction and balance before shipmentor part cash (25%) before production and
balance bills of exchange/CAD- withregular customers
Forfaiting and factoring- first is one time
and second is running arrangement ofdiscounting with bank or others
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INCOTERMS- www.iccwbo.org
Known as International commercial term- INCOTERMSdeveloped by International Chambers of commerce-ICC, Paris in 1936. INCOTERMS 2000 is current version
Define cost risk and obligations of two parties.
Incoterms apply if mentioned in contract or LC Pre carriage mean transportation up to vessel/port Main carriage mean sea freight UnderF terms- pre carriage paid by seller and main
carriage by buyer
UnderC terms pre carriage and main carriage paid byseller but seller risk limited till delivery to main carrier
UnderD terms all risk and expenditure up to destinationare in seller a/c
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Terms of delivery
CPT (carriage Paid To) named place of destination likeCFR any mode
DAF (Delivered at Frontier) named place, land border,cleared for export but not import
DES (Delivered Ex Ship) named port of destination likeCFR but CFR delivers at loading port DEQ (Delivered Quay) named port of destination- DEQ
plus discharging, delivery in dock, not cleared for import DDU (Delivered Duty Unpaid) named place of
destination, import duty unpaid DDP (Delivered Duty Paid) named place of destination-
cleared for import, all duties and taxes paid but notunloaded
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dumping
selling a product or commodity below the cost ofproduction or at a lower price in overseas markets ascompared to its price in domestic markets.
WTO consider it unfair trade practice and attract penal
duty if harm domestic industry of importer types of dumping
sporadic dumping- occasional not regular
predatory dumping- it forces competitors out and after gettingcontrol the predator increases price. Developed countries in farm
products, Japan in electronics, persistent dumping- continuous, China in consumer items and
textiles
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Transfer pricing
Transfer Pricing relate to pricing amongst different unitsof corporate like- consignment transfers or
exports to branches, subsidiaries, joint ventures, SIAs or
otherwise related parties MNCs, with offices and branches in many countries,
have scope to manipulate prices to exploit- Normally pricing should evenly distribute profits amongst
producing, procuring and distributing units
Companies use different units to manipulate taxes income tax by generating major income in planned country
tariffs in importing country
Reduced foreign exchange exposures
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Transfer pricing- Legal frameworks
Re-invoicing or third country invoicing- such countries have, liberal tax laws and or corporate / head
office Value additions only assembling/repacking but shown major on
paper.
governments are getting concerned, increasinglyrestrictive and paying special attention to transfer pricingin tax audits.
Govt. departments compare market based (ArmsLength) transfer pricing to that of related firms transfer
pricing India introduced laws related to transfer pricing in 2001,
US in 1994, UK in 1999, Germany 1983, Japan 1986,South Korea 1996, Malaysia 2003, Australia 1994----
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Grey marketing
import or export of goods and marketing them throughunauthorized channels
conditions that create profitable opportunity for a parallelmarket-
Variations in the value of currencies between countries- Whenthe dollar was high relative to the West German mark, CabbagePatch dolls were purchased from German distributors at whatamounted to a discount and resold in US
Purposefully restricting the supply of a product in a market.Mercedes-Benz automobile supply was limited in the U.S.
Americans returning from Germany with cars used to sell, in US,for double the price they paid in Germany. This situationpersisted until the relative value of the dollar to the Markweakened and controlled distribution ended.
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Grey markets- competition fromwithin
Parallel importing- when prices are cheaper in home market or inone of overseas markets. importers buy from distributors in homecountry or such cheaper third country and sell them to distributorsnot part of the manufacturers regular channel. Mercedes cars from Germany to US earlier Coke from US and Canada in HK, Taiwan Pampers from Saudi to India
Re- importing when prices in overseas markets are cheaper thanhome country- Electronics in Japan- Panasonic cordless phones @ $59.95 in NY versus $152 in Tokyo and Sony Walkman @ $89.00 in NY versus $165.23 in Tokyo OTC Medicines in US normally start with USD 15.00, ( own labels @ $
10.00) for a pack of 30 pills, cost half in Canada and about $ 0.75 inIndia. Prescriptions in US are more expensive
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Grey markets- competition fromwithin
Parallel Sale of copyrighted material like,movie and programs on CDs/DVDscommon.
Taiwan, HK, New Zealand, Australia banparallel trade but Canada and Europe donot if product is official
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Price escalation in USD for cotton yarn,fabric brand garments using same raw
material
Price in Indian market- Rs. 150.00
CFR price- 174.00 or usd 3.90 or say 4.00
Import duty for yarn 10% Import duty for for fabric- 25%
Import duty for garment 50%
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Price escalation in USD for cotton yarn, fabricbrand garments using same raw material
Items Yarn/ kg Fabric/kg Ts/Pcloose
Ts /Pc box
Pack
Stuffing 20
frt 1500$7000 7000 7000 2800
Price- India 2.50 2.75 1.50 1.70CIF Price 2.90 3.15 2.00 3.00
Import duty 0.30 0.80 1.00 1.50
Importer + 0.80 1.00 1.00 1.50
repacking xxxx xxxx 0.50 xxxx
Wholesaler 1.00 1.25 1.15 1.50
Retailer xx xx 2.85 3.75
Final price 5.00 6.20 8.50 11.25
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Escalation- books by S.C.Jain andPhilip Cateora
When products moveacross borders, additionalcosts are incurred like- cost of the physical
movement of goods fromexporters godown tobuyers godown
tariffs and non-tariffbarriers.
Charges and margins ofintermediaries like buyer,converter, wholesaler,retailer
This addition of cost overexport price is priceescalation.
Companies able tocontrol or minimise, someelements of escalation,could expect better profit,price competitiveness
and above all smootherbusiness
How to minimise???
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Escalations
Options- host country or third
country
productions,
assembly, repacking
FTZs- reduction in cost offinancing (escalations)
shortening channels,
reclassifications,
net rate invoicing,
consignment sales,
Unethical options- under invoicing,
wrong classifications
bribing custom pass.
Not possible in allcountries.
Could attract anti dumping