Going Global Export Expansion 3046

8/2/2019 Going Global Export Expansion 3046

1/40

Going GlobalExport

Expansion


2/40

Introduction

Exporting is the standard exchange of products orservices for money.

Exporting is a straight forward, less riskyexpansion into new markets with an existing lineof products

It is easier to sell MTR products in US by exports thanmake them in USA

Exports require local marketing either through anindependent middlemen or by a wholly ownedsales subsidiary


3/40

ExportsThe First Step

Globalization is forcing firms to compete inforeign markets

Exports is usually the first step in entering a newmarket

Firms are usually resource constrained. Firms may havefinancial resources but often lack managerial resources

Even if resources are available, Prudence suggests amore deliberate approach by Exports

Exports is one of the 4 options in Entering newmarkets


4/40

Exporting

Methods of Exporting

Indirect Exports via Export management

companies or trading companiesDirect exporting using a foreign agent or a

distributor

Direct Exporting by using wholly owned sales

subsidiaryDirect sales, including mail order and e-

commerce


5/40

Indirect Exports

Exporting through Export ManagementCompany(EMC) or Trading Company

EMCs are independent agents who develop foreigndistribution network, work with agents, take care ofcustoms etc

EMCs lower overhead costs of exporting

Firms also fail to learn from foreign markets Firms may become dependent on EMCs

Firms can change EMCs or have limitedcommitment to EMCs if exports are too successful


6/40

Marketing Control

Selection among the methods of exports dependson the level of marketing control desired

Brand Reputation, Brand Equity & Future brand valueis at stake

Higher level of control implies use of an exclusiveagent or Wholly owned sales subsidiary

E.g: Absolut Vodka in US with Seagrams as an agent

Intel, Samsung in India with a wholly owned salessubsidiary

Direct Export gives a higher level of control


7/40

ExportingWork Involved

Product Shipment

Export Pricing

Local distribution Getting Paid

Legal Issues

After-sales support

Exporting job requires legal, financial & peopleskills.

Exports also requires extensive documentation!!


8/40

Product Shipment-Transportation

Usually handled by a freight forwarder in

combination with a shipping agency

Freight forwarder might specialize in certain typesof 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


9/40

Clearing Through Customs

Once the goods arrive at the nationalborder, the goods have to be cleared

through customs Customs officials process the goods for

entry once a claimant appears with the Billof Lading, Customs officials also determinethe tariff rate

Goods are released once duty is paid


10/40

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


11/40

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


12/40

Documents used in Exporting

Exports Bank

Exporters 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


13/40

Export Pricing

Export pricing is lot more complex than domestic

pricing

Pricing depends on the terms of shipment, modeof 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


14/40

Terms of Shipment

Ex-Works(EXW): Seller agrees to deliver the

goods at the point of origin or some specified Place.

Buyer bears all other charges

Free Alongside Ship(FAS): The price of the goodsinclude changes for delivery of goods alongside a

vessel at a port

Free on Board (FOB): In addition to FAS, seller

loads the goods on the vessel to be used for shipping

Cost & Freight(CFR): The price of goods includes

the cost of transportation to a named overseas port


15/40

Terms of ShipmentContd

Cost, Insurance & Freight(CIF): The priceincludes insurance and all transportation andmiscellaneous charges to the port ofdisembarkation from ship/aircraft

Delivery Duty Paid (DDP) : Exporter delivers thegoods with import duty paid, includingtransportation to the importers premises

Source: http://www.iccwbo.org


16/40

Trade Credit

The price quoted depends very much on whatcredit arrangement can be made.

A high price can often be counterbalanced byadvantageous trade credit terms, especially whenthe seller takes the responsibility for arranging thetrade credit

Credit is particularly important in export ofexpensive itemsAirplanes, Machinery

Airbus, Japanese Keiretsu etc often persuade theirgovernment to provide credit to the buyer


17/40

Price Escalation

Final selling price abroad is usually much higher thanat home market due to Price escalation.

Home Price + transportation costs + Tariffs +

exchange rates fluctuations + foreign distributioncosts + foreign retail markup + other costs = Foreignselling 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 intoa lower tariff category I.e. Knock down kits Vsfinished products, Lowering the quoted price etc


18/40

Sample Causes and Effects of Price Escalation

Manufacturing net $ 5.00 $ 5.00 $ 5.00 $ 5.00Transport, c.i.f. n.a. 6.10 6.10 6.10Tariff (20 percent c.i.f. value) n.a. 1.22 1.22 1.22

Importer pays n.a. n.a. 7.32 7.32Importer margin when 1.83sold to wholesaler +0.73 *(25 percent) on cost n.a. n.a. 1.83 2.56Wholesaler pays landed cost 5.00 7.32 9.15 +9.88

3.29+0.99 *

Wholesaler margin(331/3 percent on cost) 1.67 2.44 3.05 =4.28

Retailer pays 6.67 9.76 12.20 14.167.08

+1.42 *Retail margin (50 percent on cost) 3.34 4.88 6.10 =8.50Retail price 10.01 14.64 18.30 22.66

Foreign Foreign ForeignExample 1: Example 2: Example 3:Assuming the Importer and Same as 2 but

same channels with same margins with 10 percentDomestic wholesaler import- and channels cumulativeExample ing directly turnover tax

Notes: a. All figures in U.S. dollars; c.i.f = cost, insurance, and freight; n.a. = not applicable.b. The exhibit assumes that all domestic transportation costs are absorbed by the middleman.c. Transportation, tariffs, and middleman margins vary from country to country, but for purposes of

comparison, only a few of the possible variations are shown.* Turnover Tax


19/40

Price Escalation

The Lower Prices are at Home

Aspirin $ 0.99 $ 1.23 $ 7.07 $ 6.53 $ 1.78

Movie 7.50 10.50 7.89 17.29 4.55

Levi 501 jeans 39.99 74.92 75.40 79.73 54.54

Ray-Ban sunglasses 45.00 88.50 81.23 134.49 89.39Sony Walkman 59.95 74.98 86.00 211.34 110.00

Nike Air Jordans 125.00 134.99 157.71 172.91 154.24

Nikon camera 629.95 840.00 691.00 768.49 1,054.42

New York London Paris Tokyo Mexico City

SOURCE: Norihiki Shirouzu, Luxury Prices for U.S. Goods No Longer Pass

Muster in Japan, Wall Street Journal, February 8, 1996, p. B1; and Elizabeth

Fleick, The Cost of Europe: Buyer Beware, Europeans Are Getting Mad as Hell

about Prices, Time International, December 13, 1999, p. 38.

Los Angeles Madrid Stockholm Berlin Rome

Mariah Carey CD 16.22 16.09 17.82 15.31 20.67

Windows 98 117.99 123.94 179.79 211.20 264.46

Diapers 13.52 5.03 5.42 6.86 10.55


20/40

Dumping

Dumping is defined as selling goods in a foreigncountry below cost

Typically done when there is excessive production & theseller 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 cowabroad & home market faces tough competition


21/40

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 thefinal 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


22/40

Local Distribution

Find a local distributor and avoid creating a newdistribution network

Sometimes new distribution channels have to becreated

Local distributors may or may not take ownershipof the goods. Many distributors handle customs

clearance, provide storage and transport goods toretailers

Finding the best distributor is a challenge

Trade Fairs, Government Agencies will help find

distributors


23/40

Screening Distributors

First movers often have a task of screening for gooddistributors. Late movers may lose on getting the bestdistributors (First mover would have signed anexclusive contract)

Screening Criteria

Prior Experience

Services Offered

Marketing Support & Strength

Financial Strength

Working Relationship

Exclusive or Non-Exclusive


24/40

Personal Visits

Its is best to visit the foreign country to select thebest distributor. Here are some tips:

Talk to users & retailers to get their opinion andpreferences on distributors

Visit these distributors and see their facilities

Look for a distributor who has a key person for your lineof products, who will champion for your product

Once decided on the distributor, negotiate a contractin accordance to the local laws & regulations

In Some countries, trust is more important than the legalrules. Cultural differences affect the nature of contract


25/40

International Finance

Finally there is the issue of payment for exports

Payments in local currency exposes the exporter to

foreign exchange risks Local Currencies may not be easily convertible tohome currency, in such cases Financial Swapshave to be considered

Creditworthiness of the importer/buyer must bechecked. Alternatively goods can be exported viaLetter of Credit (LOC), which guarantees paymentto exporter


26/40

Export Strategies Under Varying

Currency Conditions

Stress, price benefits

Expand product line and add morecostly features

Shift sourcing and manufacturing todomestic market

Exploit export opportunities in allmarkets

Conduct conventional cash-for-goods trade

Use full-costing approach, but usemarginal-cost pricing to penetratenew/competitive markets

When Domestic Currency isWEAK...

Engage in nonprice competition byimproving quality, delivery, and after-sale service

Improve productivity and engage invigorous cost reduction

Shift sourcing and manufacturingoverseas

Give priority to exports to relativelystrong-currency countries

Deal in countertrade with weak-currency countries

Trim profit margins and use marginal-cost pricing

When Domestic Currency isSTRONG...

SOURCE: S. Tamur Cavusgil, "Unraveling the Mystique of Export Pricing,"

Business Horizons, May-June 1988, figure 2, p. 58.


27/40

Letter of Credit

Advance payment is done by Letter of Credit arranged by Buyer

Exporter ExportersBank

Importers

BankImporter

Overseas

Home Country


28/40

Legal Issues

Exporters need Export License. Similarly importermay need an Import License

Transferring title: Thee title of ownership generallyfollows the bill of Lading. Whoever holds the Bill ofLading has access to the goods & the risks.

Insurance: Damage during transit can be covered by

insurance. If seller buys insurance, they will quote aCIF. If buyer buys insurance, the price quoted will beFOB

Good marketing plan will suggest use of CIF to

avoid additional hassles for the buyer


29/40

Legal Issues with Local Agent

Legal issues have to be worked out with the localagent or distributor.

Product Liability, warranty issues, and after salesservice issues have to be worked out in advance atthe 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 contractnegotiation phase to be compliant with the locallaws, rules & regulations


30/40

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 orthe 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


31/40

Sales Subsidiary

At times it may be necessary to have a

wholly owned sales subsidiary in a foreign

country which will handle all the importissues, manage local marketing & provide

after sales service

Sales subsidiary gives tighter control andprovides learning experience from foreign

markets


32/40

Culture Distance and Learning

Going Global means going beyond a few culturallysimilar countries. Firms often expand first intoculturally similar countries

Firms export to new countries, learn how to dobusiness in that country and then commit moreresources via FDI or Joint Ventures.

Cultural Distance, differences in culture must beovercome to succeed overseas

International learning Curve will be there whenentering a new country and learning period must be

incorporated into the business plan


33/40

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


34/40

Export Expansion Strategy

Internationalizing needs an orderly export

expansion strategy.

Typically companies tend to follow one ofthe two strategies

Waterfall Strategy

Sprinkler Strategy


35/40

Waterfall Strategy

A more traditional approach towards exportexpansion.

First expand into countries with similar cultures

Then venture into high growth mature markets

Finally expand into developing countries or newpotential markets

Slow, steady and stable expansion plan. Pro: Stable, low risk

Con: Lose out on first mover advantage


36/40

Sprinkler Strategy

Hypercompetition often forces a firm to expandinto several countries simultaneously.

Rapidly falling tariffs, Formation of free tradeareas creates new opportunities simultaneously

Firms can also take benefit from spill-over effectsby expanding in all countries in that region

Requires lots of managerial, financial and otherresources

Sony, Intel, Microsoft, Gillette etc havesuccessfully implemented sprinkler strategy


37/40

Exports as a Diversification

Exports provide as a diversification to the homemarkets.

Acts as a safety net in case of recession at homemarkets

Expanding into several countries provides as ameans to risk mitigation

For global giants such as Intel, Sony etc, Foreignsales is much larger than sales in their home country

Such firms tend to focus more on sales andmarketing abroad


38/40

Importers as Trade Initiators

Importers also initiate trade. International Productlife cycle theory implies that some times it ischeaper to import.

Pure marketing companies like Nike prefer toimport and sell products

Giant Retailers like Wal-Mart, Costco etc initiateimports

Need to diversify supplier base, outsourcing non-critical functions etc are the other motivators


39/40

Closing Thoughts

Exporting has been a traditional way for firms toexpand abroad. With Globalization firms are oftenforced to expand simultaneously in several countries

Exports is the easiest way of going global, but it is notsimple. One must be aware of the legal pitfalls andforeign currency exchange problems

For global firms such as Intel, Nokia, Sony, Hondaforeign sales are much bigger than sales in their homecountry. Similar trend is seen in Indian companies

Exports provide a natural hedge against recession in

home markets


40/40

Direct Exporting involves learning about

overseas transportation, international trade

credit, tariff barriers, Legal rules &regulations in foreign country etc. This

requires quite an investment for a

beginner