Chapter 17

Export and Import Strategies

 

 

Objectives

 

!          Identify the key elements of export and import strategies.

!          Compare the direct and indirect selling of exports.

!          Identify the key elements of import strategies and importing.

!          Discuss the roles of several types of third-party intermediaries and trading companies in exporting.

!          Show how freight forwarders help exporters with the movement of goods.

!          Identify the methods of receiving payment for exports and the financing of receivables.

!          Discuss the role of countertrade in international business.

 

 

Chapter Overview

 

In many ways, Chapter 17 is a natural extension of Chapter 16 because much of it deals with elements of the marketing mix, especially channels of distribution. The first part of the chapter is devoted to an examination of export and import strategies. Table 17.1 identifies the steps to consider when developing an export (or import) business plan. Next, the roles of a wide variety of third-party intermediaries are discussed. The chapter concludes with a discussion of the major issues related to export financing, including the use of countertrade as a form of payment mechanism.

 

 

Chapter Outline

 

OPENING CASE: Grieve Corporation—A Small Business Export Strategy

A small firm located near Chicago, Grieve Corporation manufactures laboratory and industrial ovens, furnaces and heat processing systems for the U.S. market. Grieve began losing business as (i) foreign competitors began to penetrate the U.S. market and (ii) its customers began to move overseas and started sourcing locally. With the help of the International Trade Administration of the U.S. Department of Commerce, Grieve was able to identify potential Asian distributors. During a business trip to Asia, the president of Grieve met with potential candidates and successfully recruited exclusive agents for each country visited. Once Grieve had gained sufficient experience in the Asian market, export activities were expanded to other regions. Moving into international markets has proved to be a major factor in the firm’s continued growth and success.

 

Teaching Tip: Review the PowerPoint slides for Chapter 17 and select those you find most useful for enhancing your lecture and class discussion. For additional visual summaries of key chapter points, also review the figures and tables in the text.

I.                   INTRODUCTION

Whereas exports represent goods and services flowing out of a country, imports represent goods and services flowing into a country. Exports result in receipts and imports result in payments. Although export and import activities are a natural extension of distribution strategy, they also include elements of product, promotion and pricing factors and decisions. Both exporting and importing entail a lower level of risk than foreign direct investment, but while exporting offers less control over the marketing function, importing offers less control over the production function.

 

II.        EXPORT STRATEGY

A firm’s choice of entry mode depends on various factors, such as the ownership advantages of the firm, the location advantages of the market and the internalization advantages of specific assets, international experience and/or the ability to develop differentiated products (see Chapter 8). In general, firms that possess few ownership advantages either do not enter foreign markets, or they use the lower-risk entry modes of exporting and licensing. Still in all, the decision to export must fit a company’s overall strategy and take into account global concentration (the presence of relatively few major players), global synergies (the gains from sharing corporate expertise on a global basis) and global strategic motivations (the firm’s competitive reasons to enter a given market).

A.                Characteristics of Exporters

Research conducted on the characteristics of exporters has resulted in two basic conclusions: (i) the probability of exporting increases with size of company revenues and (ii) export intensity (the percentage of total revenues generated by exports) is not positively correlated with company size. Factors such as the risk profile of management and the nature of industry competition are just as important as firm size.

B.                 Why Companies Export

Companies export in order to increase sales revenues, achieve economies of scale in production, diversify markets and minimize risk.             

C.                Stages of Export Development

Firms tend to move through three phases of export development: pre-engagement, initial exporting and advanced exporting. As they do so, they tend to (i) export to more countries and (ii) expect exports to grow as a percentage of total sales. In addition, they also tend to (i) diversify their markets to more distant countries and (ii) move into environments that are increasingly different from those of their home countries.

D.                Potential Pitfalls of Exporting

The operational mistakes associated with exporting can be very costly. In addition, events such as 9/11 can bring international trade activities to a complete halt in the affected region.         

E.        Designing an Export Strategy [See Figure 17.3, Table 17.1]

To design an effective export strategy, managers must:

·         assess the company’s export potential


·         obtain expert counseling on exporting

·         select target markets

·         formulate and implement an effective export strategy.

III.       IMPORT STRATEGY

The import process involves strategic and procedural issues that basically mirror those of the export process. (See question #1 of this chapter’s closing case for an outline of a sample import business plan.) There are two basic types of imports: extracompany imports from independent (unrelated) upstream sources and intracompany imports from a firm’s upstream global supply chain that represent intermediate goods and services. The three basic types of importers are those that:

·         look for any product around the world that will generate a positive cash flow

·         look to foreign sourcing as a means to minimize product costs

·         use foreign sourcing as part of their global supply chain strategy.

An import broker is a certified specialist who obtains required government permissions and other clearances before forwarding the necessary documents to the carrier(s) of the goods.

A.                The Role of Customs Agencies

Customs reflect a country’s import and export procedures and restrictions. The primary duties of a customs agency are the assessment and collection of all duties, taxes and fees on imported products, the enforcement of customs and related laws and the administration of certain navigation laws and treaties. National customs agencies are increasingly involved in dealing with smuggling operations and preventing foreign terrorist attacks. A customs broker can help an importer minimize duties by (i) valuing products in such a way that they qualify for more favorable treatment, (ii) qualifying for duty refunds through drawback provisions, (iii) deferring duties by using bonded warehouses and foreign trade zones and (iv) limiting liability by properly marking an import’s country of origin.

B.                 Import Documentation

The import documentation process can be both complicated and cumbersome. Without proper documentation, customs agencies will not release shipments. Documents are of two types: (i) those that determine whether customs will release the shipment and (ii) those that contain the information necessary for duty assessment and data gathering purposes. At a minimum, the required documents would include an entry manifest, a commercial invoice and a packing list.

 

IV.       THIRD-PARTY INTERMEDIARIES

Third-party intermediaries are independent (unrelated) firms that facilitate international trade transactions by assisting both importers and exporters. They may perform any or all of the following functions:

·         stimulate sales, obtain orders and conduct market research


·         perform credit investigations and payment-collection activities

·         handle foreign traffic arrangements and shipping details

·         provide support for a client’s sales, distribution and promotion staff.

Direct exports represent products sold to an independent party outside of the exporter’s home country; indirect exports are first sold to an intermediary in the domestic market, who then sells the products in the export market. While services are more likely to be exported on a direct basis, goods are exported via both avenues.

A.                Direct Selling

Direct selling, i.e., exporting through sales representatives to distributors, foreign retailers, or final end users, gives exporters greater control over the marketing function and offers the potential to earn higher profits as well. Whereas a sales representative usually operates on a commission basis, a distributor is a merchant who purchases goods from a manufacturer and resells them at a profit.

B.        Direct Exporting through the Internet and Electronic Commerce

Electronic commerce allows companies both large and small to engage in direct marketing quickly, easily and inexpensively. It is especially important for small and medium-size firms that wish to reach distant markets.

C.                Indirect Selling

Indirect selling, i.e., selling products to or through an independent domestic intermediary, is carried out via export management companies and export trading companies.

D.                Export Management Companies

An export management company [EMC] is a firm that either acts as a manufacturer’s agent or buys merchandise from manufacturers for international distribution. EMCs generally operate on a contractual basis, provide exclusive representation in a well-defined foreign territory and act as the export arm of a manufacturer. Often, export management companies specialize according to product, function and/or market area.

E.                 Export Trading Companies

An export trading company [ETC] is somewhat like an export management company, but its primary purpose in becoming involved in international trade as an independent broker is to match domestic exporters to foreign customers. Export trading companies that are based in the U.S. may be exempt from antitrust provisions in order to allow them to penetrate foreign markets by collaborating with other U.S. firms.

F.                 Non-U.S. Trading Companies


While the original functions of a trading company were to handle the paperwork, financing, transportation and storage services related to import and export transactions, many have expanded the scope of their operations to include production and processing facilities and operations, as well as fully integrated marketing systems. (There are no U.S. trading companies that rank among the Fortune Global 500 companies; only Japan, South Korea, Germany and China have firms on that list.) The Japanese sogo shosha (trading company) traces its roots to the zaibatsu (large, family-owned businesses composed of financial and manufacturing companies linked together by a large holding company), which subsequently evolved into the keiretsu (large, interlocking financial, manufacturing and trading company networks). South Korean trading companies are part of a larger corporate group known as the chaebol. Companies within a chaebol are very dependent on family patriarchs and are tightly linked to one another via a high degree of intercompany transactions.


G.                Foreign Freight Forwarders

A freight forwarder is a foreign trade specialist who deals in the movement of goods from producer to customer. Even export management companies may use the specialized services of foreign freight forwarders. The typical freight forwarder is the largest export intermediary in terms of the weight and value of cargo handled. Some may specialize in the type of mode used, others in the geographical area served. The movement of goods across a variety of modes from origin to destination is known as intermodal transportation. Three recent trends leading to a preference for air freight over ocean freight are: (i) the need for more frequent shipments, (ii) lighter-weight shipments and (iii) high-value shipments.

H.                Export Documentation

An export license allows the exporter to ship goods to particular countries. Other key export documents are the:

·         pro forma invoice

·         commercial invoice

·         consular invoice

·         bill of lading

·         certificate of origin

·         shipper’s export declaration

·         export packing list.

 

V.                EXPORT FINANCING

From the exporter’s point of view, four major issues relate to export financing: (i) the price of the product, (ii) the method of payment, (iii) the financing of receivables and (iv) insurance.

A.                Product Price

Export prices must factor in exchange rate fluctuations, transportation costs, relevant duties, the costs of multiple wholesale channels, insurance fees, bank charges, antidumping laws, etc.

B.                 Method of Payment

The flow of money across national borders requires the use of special documents and may be very complicated. In descending order of security for the exporter, the basic methods of payment for exports are:

·         cash in advance

·         a letter of credit (obligates the buyer’s bank to pay the exporter)

§         a revocable letter of credit may be changed by any of the parties to the agreement

§         an irrevocable letter of credit requires all parties to the agreement to consent to the change in the document


§         a confirmed letter of credit adds a guarantee of payment to an additional bank (usually an interbank agreement).

·         a draft or bill of exchange

§         a documentary draft instructs the importer to pay the exporter if specified documents are presented

§         a sight draft requires payment to be made immediately

§         a time draft requires payment to be made at some specific date in the future.

·         an open account (the exporter bills the importer but does not require formal payment documents—generally limited to members of the same corporate group).

C.                Financing Receivables

The increased distances and time involved in exporting often create cash flow problems for an exporter. Further, because exporting is risky, banks may be unwilling to provide financing for export transactions. However, exporters can get access to funds through factoring, i.e., the discounting of a foreign account receivable, and forfaiting, i.e., a longer-term instrument that includes a guarantee from a bank in the importer’s country. In addition, exporters can apply for guarantees from government agencies (such as the Ex-Im Bank) in order to get banks to lend them money until payment is received.

D.                Insurance

The two types of insurance most often used for export transactions are: (i) transportation risks (e.g., devastating weather conditions or rough handling by carriers) and (ii) political, commercial and foreign-exchange (environmental) risks. While private insurers will covers these types of risks for established exporters with a proven record, government agencies tend to be the most important insurers of export shipments.

 

VI.       COUNTERTRADE

Countertrade involves a reciprocal flow of goods and services. It provides a means to complete a transaction when a firm (or government) does not have sufficient convertible currency to pay for imports, or it simply does not have sufficient funds. Countertrade transactions can be divided into two basic types: (i) barter (based on clearing arrangements used to avoid money-based exchange) and (ii) buybacks, offsets and counterpurchase (all of which are used to impose reciprocal commitments).

A.                Barter

Barter occurs when goods or services are traded for other goods and services, i.e., it represents a non-monetary transaction. (Barter is not only the oldest form of countertrade, it is the oldest form of any type of trade transaction.) Buybacks represent counter-deliveries the exporter receives as payment that in fact are related to or originate from the original export.

B.                 Offset Trade


Offset trade occurs when the exporter sells goods or services for cash but then helps the importer find opportunities to earn hard currency. Direct offsets include generated business that directly relates to the export; indirect offsets include generated business unrelated to the export.

 


ETHICAL DILEMMA:

Is Demand Always Just Cause to Export?

Of all of the issues associated with exporting, two of the most vexing have to do with hazardous materials and sensitive technology. First, regulations concerning pesticides and other dangerous chemicals are often more lax in many of the developing countries than in the industrialized world. The concept of prior informed consent would require each exporter of a banned or restricted substance to obtain through its home-country government the express consent of the importing country government. Those who oppose this principle do so on grounds of ethical relativism and national sovereignty. Second, although governments usually control the export of sensitive technology to friends and foes alike, many firms try to bypass such controls. Documents may be falsified to hide the true nature of a transaction. In neither instance does the mere existence of demand seem to be sufficient reason to justify export transactions.

 

LOOKING TO THE FUTURE:

How Will Technology Affect Exporting?

Exporting continues to differ across countries in terms of its importance in generating GDP and employment. Nonetheless, advances in transportation and communications will continue to facilitate export growth and make it easier for firms to reach distant international markets. A primary advance in communication technology is the electronic data interchange (EDI), which facilitates the electronic transfer of information across the whole of the value chain. One of the major developments to affect exporting is the use of the Internet, which brings producers and customers from all over the world together in ways not possible before and allows firms to engage in direct exporting.

 

WEB CONNECTION

 

Teaching Tip: Visit www.prenhall.com/daniels for additional information and links relating to the topics presented in Chapter 17. Be sure to refer your students to the on-line study guide, as well as the Internet exercises for Chapter 17.

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CLOSING CASE: Sunset Flowers of New Zealand, Ltd. [See Map 17.1]

 

1.         Using Table 17.1, develop an import-marketing plan Robertson could use.

Key issues that should be explored before developing a marketing plan would include the following:

·         the nature of the market for cut flowers in different regions of the U.S.

·         the barriers to importing cut flowers into the U.S.

·         the import requirements and procedures for cut flowers in the U.S.

·         the channel of distribution required to get flowers from New Zealand to the U.S.

·         the ways to effectively deal with problems, given the distance between New Zealand and the U.S.


·         the determination of production levels, production costs and shipping costs

·         the determination of strategic prices for the cut flowers

·         the determination of effective payment procedures

·         the availability of wholesalers to handle the cut flowers

·         the type of exclusivity that should be granted to wholesalers

·         the nature of an effective organizational structure for the venture.

 

An effective marketing plan must consider company resources, identify specific markets, establish specific plans for dealing with marketing, legal, manufacturing, personnel and financial elements, and include an implementation schedule. The outline of an import-marketing plan for Sunset Flowers of NZ, Ltd., might look like the following:

 

I.                    Executive summary

·         Objective: import Leucadendrons from specific New Zealand growers

·         Initial target: florists in the U.S. Pacific Northwest

·         John Robertson to serve as import coordinator, using specified intermediaries

·         Estimated costs, revenues and profits for the first year.

II.         Business history

·         History of Leucadendron growers

·         Details of business operations to date

·         Description of fresh-cut flower industry.

III.       Market research

·         Target country market: United States

§         Market conditions

§         Assessment of demand

§         Assessment of competition

·         Additional and alternative markets.

IV.       Marketing decisions

·         Product strategy

·         Distribution strategy

·         Pricing strategy

·         Promotion strategy.

V.                 Legal decisions

·         Agreements with intermediaries

·         Relevant export/import regulations.

VI.       Production and operations decisions

·         Supplier capacity in New Zealand

·         Modifications necessary for the U.S. market.

VII.      Personnel decisions

·         Hiring needs

·         Required expertise.

VIII.     Financial decisions

·         Pro forma financial statements

·         Need for investment funds

·         Tax issues.

IX.               Implementation schedule.

 



2.                  Who were the key intermediaries Robertson used? Should he try to develop the expertise of those intermediaries so he doesn’t have to pay them for their services? Why or why not?

Robertson used two key intermediaries and contacted a third. An export management company handled the sample shipment from New Zealand to the U.S.; a U.S. customs broker got the sample through customs; he also consulted a Seattle wholesaler who was willing to place a large order for the flowers, given certain conditions. If the business were to take hold, it is unlikely Robertson would take on the activities of these intermediaries, although he should develop as much expertise as possible about all of the associated activities. Since Robertson is located in Seattle, he needs an export management company to handle shipments from New Zealand. If the value of a shipment is greater than $250, U.S. law requires he engage the services of a customs broker. Finally, though Internet sales are certainly tempting, he needs wholesalers who are well established in the U.S. market. Further, by using wholesalers, Robertson not only gains critical access to the market, but his risk and capital requirements will be significantly lower.

 

3.                  What are the pros and cons of using a Web page to sell the Leucadendron flowers? What should Robertson put on his Web page?

A web page is relatively inexpensive and easy to create. Other pros include wide-ranging publicity and easy access to information about the Leucadendron. However, a web page might not generate a great deal of new interest in Leucadendrons, because a visitor would already have to be interested in flowers to find it. Because the Leucadendron flower is not well known in the U.S. market, a web page should familiarize the visitor with the appearance and characteristics of the flower. It should also specify ways for the visitor to get more information and whom to contact should he or she be interested in handling the flower.

 

 


Additional Exercises: Export and Import Strategies

 

Exercise 17.1. Research has shown although the largest firms in the world also tend to be the world’s largest exporters, export intensity is not positively correlated with the size of a firm. Begin a discussion by asking students to explore the reasons for this. Then, ask students to discuss the levels of export intensity they would expect to find with respect to a variety of industries. Be sure they explain their reasoning and compare differences across industries.

 


Exercise 17.2. A major barrier to international trade activities is the issue of trust. Even when importers and exporters are known to each other, there is a high degree of risk associated with international trade transactions, i.e., exporters want to be sure they’ll be paid and importers want to be sure they receive the full value of an order. Ask students to discuss the reasons letters of credit and the various forms of a draft help both importers and exporters overcome this challenge. Under what conditions might each instrument be preferred?

 

Exercise 17.3. Assign each student (or team of students) a given product and foreign country market. Then have the students (or teams) consult the National Trade Data Bank to collect information useful in developing a strategy for exporting the specific product to the designated country market. Discuss the information the students find and its relevance to exporting in class. Be sure to compare information across products and countries.