Chap015

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Chap015

  1. 1. Chapter 13 - Exporting, Importing, and CountertradeExporting, Importing, and CountertradeChapter OutlineOPENING CASE: Exporting and Growth for Small BusinessesINTRODUCTIONTHE PROMISE AND PITFALLS OF EXPORTINGManagement Focus: FCX SystemsIMPROVING EXPORT PERFORMANCEAn International ComparisonInformation SourcesManagement Focus: Exporting with a Little Government HelpUtilizing Export Management CompaniesExport StrategyManagement Focus: Export Strategy at 3MManagement Focus: Red Spot Paint and VarnishEXPORT AND IMPORT FINANCINGLack of TrustLetter of CreditDraftBill of LadingA Typical International Trade TransactionEXPORT ASSISTANCEExport-Import BankExport Credit InsuranceCOUNTERTRADEThe Incidence of CountertradeTypes of CountertradeThe Pros and Cons of Countertrade13-1
  2. 2. Chapter 13 - Exporting, Importing, and CountertradeSUMMARYCRITICAL THINKING AND DISCUSSION QUESTIONSCLOSING CASE: Megahertz CommunicationLearning Objectives1. 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 SummaryThis chapter focuses on the “nuts and bolts” of exporting and importing. The promise and pitfallsof exporting are discussed, along with a discussion of the role of export management companies inthe 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 exportingincluding: the letter of credit, the draft (or bill of exchange), and the bill of lading. The sectionends by providing an example of a typical international trade transaction. This example illustratesthe 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 BusinessSummaryThe opening case focuses on the importance of exporting to small firms. Many smaller companiescould not survive without the revenues brought in through exports. Some small companies managetheir export process themselves, but others like Malden Mills get assistance from governmentexport agencies and export financing institutions. Discussion of the case can revolve around thefollowing questions:13-2
  3. 3. Chapter 13 - Exporting, Importing, and CountertradeQUESTION 1: Reflect on the importance of export markets for small companies like MorganMotors 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 Motorsand Wadia. Because of their small domestic markets, both companies need export revenues inorder to survive. Morgan Motors, for example, ships some 70 percent of its production overseasbecause its home market of the United Kingdom is too small to generate adequate sales. A similarsituation exists for Wadia, a maker of high end premium priced compact disc players. The marketniche for the players in Wadia’s home market of the United States is too small to support thecompany forcing Wadia to expand internationally. Wadia relies on exports for 70 to 80 percent ofits 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 dothese firms take on the risks associated with dealing with foreign markets and possibly foreigncurrencies, they must also become familiar with the overwhelming amount of paperwork involvedwith the process. Many small companies like Malden Mills turn to government agencies forassistance. Malden Mills for example, worked with the South Carolina Export Consortium, a stateagency, to determine the potential for foreign sales of its high tech fabrics. The company, withassistance 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 AssistanceCenter {http://www.buyusa.gov/southcarolina/}The agency currently maintains three offices inSouth Carolina. Students can click on Our Services, and then on an array of options like ExportFinancing or Trade Leads to see the types of assistance the agency provides. To see how to put anexport plan together, students can click on Trade Leads, then on Access Trade Lead Database, thenon International Sales-Marketing, and finally on Strategy and Planning.Chapter Outline with Lecture Notes, Video Notes, and Teaching TipsINTRODUCTIONA) This chapter is concerned with the nuts and bolts of exporting (and importing). Exporting isnot just for large enterprises, many small firms have benefited significantly from the moneymakingopportunities of exporting too.B) The volume of export activity in the world economy is increasing as exporting has becomeeasier. The gradual decline in trade barriers under GATT and now the WTO along with regionaleconomic agreements such as the European Union and the North American Free Trade Agreementhave significantly increased export opportunities.13-3
  4. 4. Chapter 13 - Exporting, Importing, and CountertradeC) Despite the opportunities for exporting, it remains a challenge for many firms. The firmwishing to export must identify export opportunities, avoid a host of unanticipated problems thatare often associated with doing business in a foreign market, familiarize itself with the mechanicsof export and import financing , learn where it can get financing and export credit insurance, andlearn how it should deal with foreign exchange risk.13-4
  5. 5. Chapter 13 - Exporting, Importing, and CountertradeTeaching Tip: The UK Trade and Investment office{https://www.uktradeinvest.gov.uk/ukti/appmanager/ukti/home?_nfls=false&_nfpb=true}isdevoted to helping companies develop their export business. Click on “Country Report” to see thetypes of information available in a typical report on a specific country.Teaching Tip: Export.gov {http://www.export.gov/exportbasics/exp_001602.asp} covers thebasics of exporting. You can click on various topics related to getting ready to export, developingan export plan, finding leads and so on. The site is well worth a visit, and could be used as thebasis 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 organizationsdedicated towards the activity of matching "buyers" and "sellers" in an international context. Anexample of a site that provides trade leads is the Export.gov at {http://www.export.gov/index.asp}.THE PROMISE AND PITFALLS OF EXPORTINGA) 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 beproactive in seeking out new export opportunities, many smaller firms are reactive and only pursueinternational opportunities when the customer calls or knocks on the door.B) Many novice exporters have run into significant problems when first trying to do businessabroad, 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 theInternational 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 promotionalcampaigns, and a general underestimation of the differences and expertise required for foreignmarket penetration.D) Exporters also must deal with a tremendous amount of paperwork and other formalitiesassociated with exporting.13-5
  6. 6. Chapter 13 - Exporting, Importing, and CountertradeManagement Focus: FCX SystemsSummaryThis feature explores FCX Systems’ move into the export market. FCX Systems, whichmanufactures power converters for the aerospace industry, realized that to continue to grow, thecompany would have to seek opportunities in foreign markets. The company initially used aninternational distribution company to help with the process, but began handling its exports on itsown 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 itbelieves will be important in the future. The following questions can be helpful in directing thediscussion.Suggested Discussion Questions1. FCX Systems’ entry into foreign markets was not an easy one. Reflect on the challenges facingsmall companies like FCX Systems as they pursue foreign opportunities. Why did FCX believethat foreign markets could be more profitable than its domestic market?Discussion Points: Small companies beginning the export process can find it overwhelming. Notonly do the companies have to deal with additional paperwork, but they also have to learn the localways 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 notlooking out for the best interests of the firm, the company, like FSX, may find it better to take onthe process itself. FSX cites persistence and assistance as being particularly important elements toits 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, whichinvolved more than 100 trips by Gallion to the country since 1990, were recently rewarded with $2million in contracts. Gallion believes that the network of trust that he has developed in that marketwill 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 exportingthat helped FSX with its international sales.13-6
  7. 7. Chapter 13 - Exporting, Importing, and Countertrade2. Why did FCX initially sign on with an in international distribution company? What made FCXdecide 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 servicesprovided by various institutions such as the Small Business Association and the Department ofCommerce in greater depth. Students may also wish to examine some of the services offered byprofit-oriented organizations offering export assistance. FSX credits a number of federal and stateagencies 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 FSXcontact information. While the company started its exporting using an international distributioncompany, 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 thatfigure 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. Toprovide assistance to new exporters, the U.S. Commerce Department has created an office devotedto 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 PERFORMANCEA) There are a number of ways in which inexperienced exporters can gain information aboutforeign market opportunities and avoid some of the common pitfalls that tend to discourage andfrustrate novice exporters.An International ComparisonB) 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 havedeveloped extensive institutional structures for promoting exports. In addition, Japanese exporterscan take advantage of the knowledge and contacts of sogo shosha, the country’s great tradinghouses.Video Note: The iGlobe Brazil Seeks to Break New Ground in Global Marketplace illustrates therole 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 theglobal market. Thanks to exports, the country has also become a leader in the production of arange of agricultural products.13-7
  8. 8. Chapter 13 - Exporting, Importing, and CountertradeInformation SourcesC) Despite institutional disadvantages, U.S. firms can increase their awareness of exportopportunities. The most comprehensive source of information is the U.S. Department ofCommerce.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 todifferent countries, contacts and leads, and so on.Management Focus: Exporting with a Little Government HelpSummaryThis feature describes the challenges faced by small firms as they seek to expand their salesthrough exports. The feature notes that there are a number of agencies, institutions, and exportmanagement companies that provide assistance to small exporters. The following questions can behelpful in directing the discussion.Suggested Discussion Questions1. Foreign market expansion can be a daunting prospect, especially for a small company with nointernational 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 experiencein foreign markets. The company relied on the Small Business Administration’s services and theDepartment of Commerce to help guide its international efforts. Students will probably agree thatone of the key lessons other firms can learn from Novi’s experiences is the importance of marketresearch and using resources such as the Small Business Administration that are available, oftenfree of charge.2. As a small business owner facing saturated domestic markets, how would you approach foreignmarkets? Develop a strategic plan outlining how you would research markets, get your product topotential customers, handle the financing side of the business, and grow your sales. Includeinformation 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 todevelop a basic outline of how to expand into foreign markets. The outline should containinformation on targeted markets, the information they would need on the market, how they wouldacquire it, and how it would help them enter a foreign market. The report could be formatted as anattempt to get funding for international expansion.13-8
  9. 9. Chapter 13 - Exporting, Importing, and CountertradeUtilizing Export Management CompaniesD) Export management companies are export specialists that act as the export marketingdepartment or international department for client firms.E) EMCs normally accept two types of export assignments. They start exporting operations for afirm 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 responsibilityfor selling the firm’s products.F) In theory, the advantage of EMCs is that they are experienced specialists who can help theneophyte exporter identify opportunities and avoid common pitfalls. However, studies haverevealed a large variation in the quality of EMCs. Therefore, an exporter should carefully review anumber of EMCs, and check references from an EMCs past client, before deciding on a particularEMC.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 internationalmarket research.Export StrategyG) In addition to utilizing EMCs, a firm can reduce the risks associated with exporting if it iscareful 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 anexperienced export consultant, to help with the identification of opportunities and navigatethrough 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 reducethe costs of any subsequent failure.• Fourth, the exporter needs to recognize the time and managerial commitment involved inbuilding 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 andenduring relationships with local distributors and / or customers.• Sixth, it is important to hire local personnel to help the firm establish itself in a foreignmarket.• Finally, it is important for the exporter to keep the option of local production in mind.13-9
  10. 10. Chapter 13 - Exporting, Importing, and CountertradeManagement Focus: Exporting Strategy at 3MSummaryThis 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. Thecompany often uses exports to establish an initial presence in a foreign market, only buildingforeign 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 Questions1. Discuss why 3M initially enters markets on a small scale. How does the firm’s strategy fit withthe philosophy that exporting is not an end in itself, but merely a step on the road towardestablishment of foreign production?Discussion Points: The basic idea behind 3M’s strategy of entering markets on a small scale is thatit 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 internationalexpansion into a series of stages beginning with a test of the market going all the way to acomplete foreign presence.2. Explain the three principles that make 3M so successful. Why was it important for 3M to hirelocal personnel?Discussion Points: 3M’s principles are central to its success in foreign markets. The companybelieves that it is important to be first to a market, learn about it and sell there before competitorsdo. Second, 3M likes to learn about a market by selling a single product. Only after it has provento be successful, will the company enter the market on a larger scale. Third, 3M believes stronglybecause locals are more familiar with the market, local employees are essential to its success. 3Mbelieves that local employees have a better idea of how to sell in their own country thanAmericans.Teaching Tip: To learn more about 3M and its international strategy, go to{http://www.3m.com/}.Management Focus: Red Spot Paint & VarnishSummaryThis feature focuses on Red Spot Paint & Varnish, a company that produces paints for plasticcomponents used in automobiles. The company does business in about 15 countries and relies onforeign markets for some 15-25% of its annual revenue. Generating its foreign sales has not beenan easy task according to one employee. The company has found it difficult to hire managers withappropriate international experience and has also struggled with pressures to achieve quick results.Discussion of the feature can begin with the following questions:13-10
  11. 11. Chapter 13 - Exporting, Importing, and CountertradeSuggested Discussion Questions1. How has the Internet made it easier for companies to not only get export assistance but also tofind 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 havenot?Discussion Points: Students will probably point out that in many ways the Internet has made theworld a smaller place. When Red Spot Paint & Varnish was beginning its international expansionin the 1960s, finding information on the process, or people with international experience, wassignificantly more difficult than it is today when companies can access resources such as theDepartment of Commerce and Small Business Association from their own offices, and advertisefor personnel using Internet-based searches like Monster.com. Some students will attribute RedSpot Paint & Varnish’s success to its perseverance and forward-looking thinking. The companyhired an expert to focus on international market development years ago, and despite the slownature 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 thesuccess of a foreign venture be achieved? How important was the establishment of trust betweenRed 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 operatinginternationally is the development of relationships between buyers and sellers. Companies thatfocus 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 SpotPaint & Varnish develop a thriving international component to its business in a market wherecompetitors have has little success in foreign markets.Teaching Tip: Go to Red Spot Paint & Varnish {http://www.redspot.com/} to explore thecompany’s operations in more depth. Click on “Global Alliance” to see what the companybelieves are the advantages of working with other firms.Lecture Note: In May 2008, Red Spot Paint & Varnish was in the process of being acquired byFujikura Kesai Company {http://www.fkkasei.co.jp/english/index_e.html}. It is anticipated thatthe company will operate as an independent subsidiary of Fujikura Kesai Company.EXPORT AND IMPORT FINANCINGA) Mechanisms for financing exports and imports have evolved over the centuries in response to aproblem that can be particularly acute in international trade: the lack of trust that exists when onemust put faith in a stranger.13-11
  12. 12. Chapter 13 - Exporting, Importing, and CountertradeLack of TrustB) Firms engaged in international trade face a problem - they have to trust someone who may bevery 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 ofpreferences regarding the configuration of the transaction. Figures 13.1 and 13.2 show thepreferences 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 byusing a third party who is trusted by both - normally a reputable bank. Figure 13.3 illustrates thisprocess.Teaching Tip: Trade Port provides a Global trade Tutorial on export financing. The tutorial isavailable at {http://www.tradeport.org/tutorial/financing}. The site provides excellent details onthe process, and is well worth a visit.Letter of CreditE) A letter of credit stands at the center of international commercial transactions. Issued by abank at the request of an importer, the letter of credit states the bank will pay a specified sum ofmoney to a beneficiary, normally the exporter, on presentation of particular, specified documents.DraftF) A draft, sometimes referred to as a bill of exchange, is the instrument normally used ininternational commerce for payment. A draft is simply an order written by an exporter instructingan importer, or an importers agent, to pay a specified amount of money at a specified time. Asight draft is payable on presentation to the drawee while a time draft allows for a delay inpayment - normally 30, 60, 90, or 120 days.Bill of LadingG) 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 TransactionH) The entire process for conducting an export transaction is summarized in Figure 13.4.EXPORT ASSISTANCEA) Prospective U.S. exporters can draw on two forms of government-backed assistance to helptheir export programs. They can get financing aid from the Export-Import Bank and export creditinsurance from the Foreign Credit Insurance Association.13-12
  13. 13. Chapter 13 - Exporting, Importing, and CountertradeExport-Import BankB) The Export-Import Bank (Eximbank) is an independent agency of the U.S. government. Itsmission is to provide financing aid that will facilitate exports, imports, and the exchange ofcommodities 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 InsuranceC) 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.COUNTERTRADEA) Countertrade is an alternative means of structuring an international sale when conventionalmeans of payment are difficult, costly, or nonexistent. Countertrade denotes a whole range ofbarter like agreements; its principle is to trade goods and service for other goods and services whenthey cannot be traded for money. The text provides several examples of countertrade.The Incidence of CountertradeB) In the modern era, countertrade arose in the 1960s as a way for the Soviet Union and theCommunist states of Eastern Europe, whose currencies were generally nonconvertible, to purchaseimports. During the 1980s, the technique grew in popularity among many developing nations thatlacked the foreign exchange reserves required to purchase necessary imports. There was a notableincrease in the volume of countertrade after the Asian financial crisis of 1997.Types of CountertradeC) Countertrade can be categorized into five distinct types of trading arrangements: barter,counterpurchase, offset, switch trading, and compensation or buyback.BarterD) Barter is a direct exchange of goods and/or services between two parties without a cashtransaction. Barter is viewed as the most restrictive countertrade arrangement. It is used primarilyfor one-time-only deals in transactions with trading partners who are not creditworthy ortrustworthy.CounterpurchaseE) Counterpurchase is a reciprocal buying agreement. It occurs when a firm agrees to purchase acertain amount of materials back from a country to which a sale is made.13-13
  14. 14. Chapter 13 - Exporting, Importing, and CountertradeOffsetF) Offset is similar to counterpurchase insofar as one party agrees to purchase goods and serviceswith a specified percentage of the proceeds from the original sale. The difference is that this partycan fulfill the obligation with any firm in the country to which the sale is being made.Switch TradingG) Switch trading refers to the use of a specialized third-party trading house in a countertradearrangement. When a firm enters a counterpurchase or offset agreement with a country, it oftenends up with what are called counterpurchase credits, which can be used to purchase goods fromthat country. Switch trading occurs when a third-party trading house buys the firm’scounterpurchase credits and sells them to another firm that can better use them.Compensation or BuybacksH) 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’soutput as a partial payment for the contract.The Pros and Cons of CountertradeI) Countertrade’s main attraction is that it can give a firm a way to finance an export deal whenother means are not available. If a firm is unwilling to enter a countertrade agreement, it may losean 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 towhich a firm is exporting goods or services.K) The drawbacks of countertrade are substantial. Countertrade contracts may involve theexchange 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 theirworldwide network of contacts to dispose of goods acquired in countertrading.13-14
  15. 15. Chapter 13 - Exporting, Importing, and CountertradeCritical Thinking and Discussion Questions1. A firm based in Washington State wants to export a shipload of finished lumber to thePhilippines. The would-be importer cannot get sufficient credit from domestic sources to pay forthe shipment but insists that the finished lumber can be quickly resold in the Philippines for aprofit. 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 fora loan. Eximbank has a direct lending operation under which it lends dollars to foreign borrowersfor use in purchasing U.S. exports. The foreign borrowers use the loans to pay U.S. suppliers andrepay 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 forexporting and has asked you for advice as to the steps the company should take. What advicewould you give the CEO?Answer: This question is designed to stimulate classroom discussion and/or to encourage yourstudents to “think” about the export process in completing a written answer for this question. Thereare a number of approaches that can be pursued in answering this question. The first step might beto tap into some of the government information sources that are available, free of charge, to see ifinternational markets are available for the company’s product. There are also a number ofresources on the Internet, mentioned throughout the text that can assist companies in learningabout the foreign market potential of their products. Another approach would be to contact anexport management company for assistance. While this approach may involve some cost, it maybe 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 anddisadvantages of using export credit insurance rather than a letter of credit for exporting (a) aluxury 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 ina strong bargaining position and able to play competing suppliers off against each other, anexporter may have to forgo a letter of credit. The lack of a letter of credit exposes the exporter tothe risk that the foreign importer will default on payment. The exporter can insure against thispossibility by buying export credit insurance. Students may suggest that in the case of the luxuryyacht, should the importer fail to make payment, the clearly defined laws of Canada would make iteasier to go after the importer than would be the case with the machine tools in the Ukraine, andthat therefore a letter of credit is less important for the yacht exporter. On the other hand, studentsmay note that there is probably more competition in machine tools as compared to luxury yachtsand that the exporter of machine tools may lose the sale if the exporter insists on a letter of credit.13-15
  16. 16. Chapter 13 - Exporting, Importing, and Countertrade4. How do you explain the popularity of countertrade? Under what scenarios might its popularityincrease 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 tradebetween developing and developed countries, and trade among developing countries continues togrow, 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 fromthe former Soviet Union and Eastern European Communist bloc either become members of the EUan adopt the fully convertible euro as their currency, or develop their own fully convertiblecurrency.5. How might a company make strategic use of countertrade schemes as a marketing weapon togenerate export sales revenues? What are the risks associated with pursuing such a strategy?Answer: Countertrade is an alternative means of structuring an international sale whenconventional means of payment are difficult, costly, or nonexistent. The governments ofdeveloping countries sometimes insist on a certain amount of countertrade. Thus, if a firm isunwilling to enter a countertrade agreement, it may lose an export opportunity to a competitor thatis willing to make a countertrade agreement. Companies that are willing to entertain countertradeas a means of financing, will have an advantage over those firms that prefer traditional forms offinancing. Firms engaging in countertrade must be willing to invest in an in-house tradingdepartment dedicated to arranging and managing countertrade deals, and must be aware of thequality of the products received in countertrade deals.Closing Case: Megahertz CommunicationsSummaryThe closing case describes Megahertz Communications’ export strategy. MegahertzCommunications is one of Great Britain’s leading independent broadcasting system builders. Theexport strategy of Megahertz International, a subsidiary of Megahertz Communications, involvedproviding 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 testbroadcasting systems. While the company found it easy to make sales, export financing has provento 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-ledgrowth? Why do you think opportunities for growth might be greater in foreign markets? Do youthink 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 largeestablished companies. In contrast, the Middle East, Africa, and Eastern Europe are growthmarkets with significant long term potential for media and broadcasting.13-16
  17. 17. Chapter 13 - Exporting, Importing, and CountertradeQUESTION 2: Does Megahertz’s strategy for building exports make sense given the nature of thebroadcast industry? Why?ANSWER 2: Megahertz’s strategy for exports was simple. The company aimed to provide aturnkey solution to emerging broadcast and media entities in Africa, the Middle East, and EasternEurope. Megahertz was so successful with this strategy that the British government awarded thecompany a Small Business Export Award in 2000. Perhaps a key to Megahertz’s success was thefact that the company offered to custom design, manufacture, install, and test broadcastingsystems. 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 capitalrequired to finance its international activities? What does the experience of Megahertz tell youabout the problems facing small firms that wish to export?ANSWER 3: Despite its export sales success, Megahertz found that preshipment financing was amajor problem. The company found that banks were very cautious about making working capitalloans to the company when they found out that the company’s customers were in Africa or EasternEurope. 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 asthey seek to expand their growth through exports.QUESTION 4: Megahertz solved its financing problem by selling the company to AZCAR ofCanada. What other solutions might the company have adopted?ANSWER 4: Megahertz was sold to Canada’s AZCAR in 2002. Megahertz’s managing directorsaw the sale as a means of acquiring the necessary working capital to take full advantage of exportopportunities. The company had explored the use of lending companies that specialize infinancing international trade, but found that many of the companies charged interest ratessignificantly greater than those charged by banks. Megahertz could have also explored financingassistance offered through the Export-Import Bank.13-17
  18. 18. Chapter 13 - Exporting, Importing, and CountertradeContinuous Case ConceptOne of the issues that the world’s automakers must contend with as they search the world for themost efficient suppliers and locate production in the most optimal location, is importing andexporting, and the costs involved in the process. China has attracted significant attention recentlyas both a production location and a growth market. For suppliers, the globalization of the industryimplies that supplier operations become international too, and consequently introduces new risksand concerns.• Ask students to consider production in China. Costs have been rising for imports, andshipping finished cars out is also becoming more expensive. Is there still any benefit tolocating production in China given these rising costs?• As a supplier, how can you protect yourself when dealing with companies from foreigncountries? Does the fact that you are dealing with Toyota or BMW mitigate the need forletters of credit? Why or why not?• What types of assistance are available to suppliers seeking to sell their products toautomakers located in foreign markets? Michelin and Cie, the world’s second largest tiremaker, indicated that its 2008 sales were affected by the weak dollar and the high cost ofraw 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 questioncan also be used as an introductory discussion. To extend the material, and incorporate thediscussion of previous chapters, ask students to develop a plan using the various web sites givenwithin 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 customersand their locations, a discussion of issues that could affect exporting to those destinations, and theways the supplier can protect itself financially.globalEDGE ExercisesUse the globalEDGE Resource Desk {http://globalEDGE.msu.edu/ResourceDesk/} to completethe following exercises.13-18
  19. 19. Chapter 13 - Exporting, Importing, and CountertradeExercise 1The Internet is rich with resources that provide guidance for companies that wish to expand theirmarkets through exporting. globalEDGE provides links to these under a category called “TradeTutorials”. Identify three sources recommended by globalEDGE and provide a description of theservices 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” athttp://globalEDGE.msu.edu/ResourceDesk/ , or by directly entering the “Trade Tutorials” category underthe Global Resources section of the Resource Desk. One of the recommended websites that provide usefulinformation for U.S. exporters is:The U.S. Department of Commerce’s “Basic Guide To Exporting”Website: http://www.unzco.com/basicguide/globalEDGE Category: “Trade: Trade Tutorials”Resource Name: Multiple NamesWebsite: Multiple WebsitesExercise 2You work for a banking company that hopes to provide financial services in India. After searchinga resource that enumerates the import and export regulations for a variety of countries, outline themost important foreign trade barriers your firm’s managers must keep in mind while developing astrategy for entry into the Indian banking market.Answer: By providing a variety of publications concerning foreign trade barriers, the Office of the UnitedStates Trade Representative offers considerable information about the import and export regulations ofmany countries. Using the search term “import and export regulations” athttp://globalEDGE.msu.edu/ResourceDesk/, the report for India is readily available. Scroll down to thesection of the report devoted to the banking industry and an overview as required for the question can belocated.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.htmlglobalEDGE Category: “Trade: Trade Tutorials”13-19
  20. 20. Chapter 13 - Exporting, Importing, and CountertradeAdditional Readings and Sources of InformationA World of Woe for Big U.S. Exportershttp://www.businessweek.com/investor/content/jul2008/pi2008073_436111.htm?chan=searchHow to Break into the Export Businesshttp://www.businessweek.com/smallbiz/content/dec2007/sb20071210_360435.htm?chan=searchUsing Barter to Growhttp://www.businessweek.com/magazine/content/08_64/s0804021853506.htm?chan=search13-20

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