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Opportunities For Development In The Current Global Economic Crisis
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Opportunities For Development In The Current Global Economic Crisis


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The opportunities created for businesses to grow their exports in rapidly developing emerging markets

The opportunities created for businesses to grow their exports in rapidly developing emerging markets

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  • Caprio and Klingelbiel, “Bank Insolvencies: Cross Country Experience,” Policy Research Working Papers no.1620 (Washington, DC: World Bank, Policy and Research Department, 1996).
  • Transcript

    • 1. Opportunities For Development In The Current Global Economic Crisis The Potential of Rapidly Developing Emerging Economies Author: Daniel Evans, Co-Founder & Principal, Ormita Commerce Network
    • 2. Current Situation
      • Liquidity for many businesses (and governments) worldwide is still an issue
        • Interbank market has still not recovered yet
        • Refinancing is harder to assure
      • There is a danger of postponement, reduction or cancellation of existing sales
      • Pressure on profitability of every transaction in a declining market
      • Highly developed countries are coming under pressure from those with lower cost labour
      • Traditionally profitable markets may be “drying up” as credit becomes harder to acquire
    • 3. A Changing Sales Environment
      • This was the biggest, but not the first , crisis
        • The World Bank has identified 96 banking crises and 176 monetary crises in recent 20 year period
        • Such crisis are a remarkably perennial
        • Financial crisis in developing countries continue to happen despite very different regulatory systems, different governments, different development levels; and at very different times…
      • Developed countries are finding it increasingly difficult to compete against lower-cost models from rapidly emerging markets
      • There continues to be shortage of money in highly-developed countries
    • 4. Import Growth = Export Decline ?
      • US is the world’s leader in gross domestic product (GDP), which is the monetary value of all goods and services produced in a country during one year .
      • US % share of world exports has shifted downward over the past 25 years, while its % share of world imports has increased .
      • Since 1975 imports to the US have significantly exceeded exports each year.
      • Rapidly Emerging Markets (China, India etc) account for about half of the total US trade deficit.
    • 5. The Challenge For Business
      • The major challenge for businesses in a world characterised by growing financial imbalances and increasingly economic crisis is to find a balance between…
      • a prudent and responsible approach with existing capital
      • continuing with existing relationships during difficult times
      • finding new business opportunities in a changing market
      • accepting risks despite global economic turbulence
      Businesses who do not change run the risk of market erosion and eventual financial collapse!
    • 6. Other Macroeconomic Issues
      • The severe debt problems of a number of countries, along with the increasing fragility of the international financial system.
      • The increasing use of barter and countertrade to support international transactions.
      • The move toward market economies in formerly socialist countries along with rapid privatization of publicly owned companies.
      • The rapid dissemination of global lifestyles.
      • The gradual opening of major new markets, namely China, India, eastern Europe, the Arab countries, and Latin America.
    • 7. Porters “Diamond” of National Competitive Advantage Company strategy structure and rivalry
      • Number of companies in an industry
      • Intensity of competition
      • Public or private owner
      Related and supporting industries
      • Existence of supplier clusters
      Factor conditions
      • Natural resources
      • Education and skill levels
      • Wage rates
      Demand conditions
      • Size of market
      • Sophistication of consumers
      • Media exposure of products
    • 8. We Are Living In A Changing World Changing Consumer Spending Patterns Economic Development Changes in Income Labour Costs Inflation and Recession Regulatory
    • 9. Finding (New) Foreign Customers
      • Firms that do not export and/or seek foreign customers loose out on huge opportunities for growth and cost reduction
      • Large firms are often more pro-active in seeking foreign opportunities
      • Medium and small-sized firms are often slow to respond
        • Too busy with local side of business
        • Ignorance of potential opportunities
        • Lack of understanding of foreign trade mechanisms
        • Intimidated by mechanics of exporting to a foreign country
    • 10. Market Types Consumer Markets International Markets Government Markets Business Markets Reseller Markets
    • 11. The Trade Feedback Effect
      • As a country’s exports increase, its national output and income increase, which leads to a increase in the demand for imports. Hence, imports affect exports and vice versa
      • This Trade Feedback Effect is one argument for free trade among nations
      • Emerging Markets are rapidly gaining more of the worlds wealth and can not be ignored
      Images: Shenzhen (China) 20 years ago and today
    • 12. Strategic Market Entry
      • Critical Markets:
      • Markets that are profit sanctuaries for competitors
      • Markets with volume
      • Markets that are growing in size
      • Markets with good margins
      Increasing global levels of Foreign Direct Investment (FDI) & Increasingly competitive world markets
    • 13. What Is An Emerging Market?
      • High-growth, high-potential markets
      • … in East Asia, Eastern Europe, Latin America; … China, India, South Africa, Turkey … etc
      • Engaged in rapid industrialization, market liberalization, privatization, modernization
      • An artefact of past three decades of global economic realignment
    • 14. The Economic Effects of Being an Early Mover High Possible Returns (Advantage) High Uncertainty/Cost (Disadvantage)
      • Market Power:
      • Barriers to followers
      • Technical leadership
      • Product positioning
      • Pre-emptive opportunities:
      • Marketing
      • Early access to resources
      • Brand Recognition
      • Strategic Opportunities:
      • Location selection
      • Low competition
      • Uncertainty:
      • Regulatory environment
      • Low government experience
      • New industry
      • Operational Risks:
      • Lack of supply inputs
      • Lack of support infrastructure
      • Unknown market structure
      • Extra Cost:
      • Learning Curve
      • Training cost
      • Localisation
    • 15. The Promise of Emerging Markets
      • Dynamic, rapidly transforming…
      • Young demographics
      • Middle class coming into its own
      • Engaged in technological leapfrogging
      • Low competitive intensity
      • Less regulated
      • Serve as export markets, investment destinations, and sourcing locations
    • 16. Continuum of Entry Modes
      • Trade Related
      • Export, Subcontracting, Countertrade
      • Transfer Related
      • Leasing, Licensing, Franchising, BOT
      • FDI Related
      • Joint Ventures, Subsidiaries
      Risk & Return Organisational control and resource commitment Continuum of Cooperation
    • 17. Developing an Export Strategy
      • Risks can be decreased by taking few steps:
      • Work with an experienced export consultant to identify opportunities and deal with red tape
      • Focus on a few markets to learn what is needed to succeed
      • Enter on a small scale to reduce costs of any failure
      • Invest time and managerial commitment in building export sales
      • Build strong and enduring relationships with local distributors and customers
      • Hire local personnel
      • Keep option of local production open
        • Cost-efficient economies of scale
        • Greater market acceptance
    • 18. Collaboration With Competitors
      • Horizontal co-operation a window on each others capabilities:
        • Opportunity to acquire other’s skills and technologies
      • Strategic Alliances:
        • Competition in another form
        • Limited life span
        • Learning from partners of paramount importance
      • Mutual Gain is Possible
        • Where strategic goals converge but competitive goals diverge
        • Size & market power of both is modest compared with industry leaders
        • each partner believes it can learn from the others whilst protecting its own skills
    • 19. The Ormita Commerce Network
      • Free Export Management Advice
      • Provides assistance to a clients export marketing department
      • Helps identify opportunities and avoid common pitfalls
      • Helps develop reasonable start-up budget and matching new sales as offset methodologies to meet these costs
      • Cashless Procurement of Essential Services
      • Allows a business to swap / exchange their own product or service for things they need
      • Reduces the cash outlay of the business
      • Every purchase is matched with a new sale
      • More sales result in more customer feedback and less cost for “give-away” samples
      • Improves the balance-sheet of the company
    • 20. Helping Get Through The Layers Customer Demographic Economic Natural Technological Political Cultural Company Customers Intermediaries Suppliers Competitors Publics
    • 21. Available Products and Services
      • Accommodations (Hotels etc)
      • Advertising (Expos, Internet, Print, Out-of-Home, Radio, Television, Mobile)
      • Equipment Purchase & Rental
      • Fixed Asset Purchase
      • Graphic Design
      • Incorporation, Accounting & Audit Services
      • IT Support
      • Legal Advice, Contract Negotiation
      • Localisation of Materials
      • Marketing Advice
      • Public Relations, Media Liaison, Strategic Negotiations
      • Taxation Advice
      • Telecommunication (Video Conference, VPN etc)
      • Translation
      Ormita can offer the following services on a no-cash ( barter/swap ) basis:
    • 22. Types of Media Availabilities
      • Internet
      • Blogs • Email Blasts • Localisation • Newsletters • Online Advertising • Search Engine Placement • Social Media • Translation • Video • Website Design
      • Print
      • Campus • In-flight • Journals • Magazines • Newspapers • Trade Publications
      • Out-Of-Home
      • Airport • Billboards • Bus • Cinema • Digital • Elevator • Expos • Kiosks • Mall Branding • Mass Transit • Metro Rail • Point of Sale Advertising • Signboards • Street Signs • Taxi
      • Radio
      • Network • Satellite • Spot Radio • Shadow/Metro Traffic • Talk Show
      • Television
      • Cable • DTV • Network • Satellite • Spot TV • Spot Cable
      • Mobile
      • Direct Response Campaigns • SMS Advertising
    • 23.  
    • 24. Emerging Market – Ormita India
    • 25. Emerging Market – Ormita China
    • 26. Other Countries Where Ormita Is Present India Australia New Zealand South Africa Mexico United States of America United Kingdom Canada China Hong Kong Sweden Turkey Poland Germany Iran Greece Egypt
    • 27. Some Media Acknowledgement
    • 28. Country Experience USA Poland Japan Dubai Uzbekistan Peru Italy Denmark UK Panama:  Israel Cyprus Turkey Pakistan Ireland Croatia Thailand Norway Iraq Chile Switzerland Norway Indonesia Cape Verde Sweden New Zealand India Canada Sri Lanka Netherlands Hungary Bulgaria Spain Nepal Hong Kong Brunei South Africa Mexico Guatemala Brazil Slovenia Malta Greece Bosnia-Herzegovina Slovakia Maldives Ghana Belgium Singapore Malaysia Germany Belarus Seychelles Macau Georgia Bangladesh Samoa Luxembourg France Bahrain Russia Lithuania Finland Austria Romania Latvia Fiji Australia Puerto Rico Kosovo Estonia Armenia Portugal Kenya El Salvador Argentina
    • 29. Entry To Restrictive Markets
      • One of the major obstacles facing western companies is that customers in the new markets may not have any valuable currency to exchange for goods and services.
      • Various countries place restrictions on currency exchange for:
        • the protection of the currency
        • balance requirements between imports and exports
        • statistical purposes
        • combating financing of crime and money laundering
    • 30. Countertrade
      • Countertrade is an alternative means of structuring an international sale when conventional means of payment are difficult, costly, or nonexistent
      • Payment for goods (or services) with other goods (or services)
      • The exporter usually receives the goods first and sells them for cash or exchanges them for something else of use
      • May also involve switch trading, offset, tolling, counter-purchase, buyback or compensation
      • The counter-trade agreement is a framework contract setting out matters such as
        • which goods are suitable for counter-trade
        • valuation of the goods (determination of price)
        • modalities of payment of the balance (time, currency) (often through a clearing account)
        • restriction on further sale
        • credit security, etc.
    • 31. Why Countertrade?
      • Advantages
        • Avoidance of debt and exchange rate volatility
        • Covert reduction of prices
        • Circumvention of price and exchange controls
        • Increasing popularity of bilateralism concept
        • A method of market entry
        • Stability for long-term sales
        • Improves quality of transaction
      • Disadvantages
        • May not totally eliminate all commercial risk
        • May mask dumping activities
        • Does not allow for multilateral settlements
        • Trade is restricted to two parties, each with specific goods to trade
        • May be seen as non-competitive
    • 32. Managing Payment Risk
      • Countertrade offers a unique (and immediate) form of collateralization for payments to the supplier
      • It is well-known that that one means of managing payment risk in purchase and sale transactions is through taking security on property.
      • Barter or countertrade, depending on how the transaction is structured legally and financially, can serve the function of collateralization.
      • The buyer acquires not a security interest or mortgage on the seller’s inventory but an actual property right in the inventory as the payment in the transaction.
      • This may be cheaper than third-party financing as a bank has costs to verify the existence of the goods, establish risks of damage and deterioration, ascertain its market value etc.
    • 33. Preservation of Buyer & Seller Cash
      • Countertrade preserves scarce hard currency and improves the balance of trade in the importing country.
      • Lesser developed countries can take advantage of the distribution and marketing networks of the companies they countertrade with to distribute their products.
      • Countertrade often results in a significant transfer of technology and know how from seller to buyer which upgrades the buyer's manufacturing capabilities. For example, in a countertrade involving cola syrup for vodka, PepsiCo taught a German vodka maker how to make their vodka bottles more marketable through the use of screw caps and different labels.
      • Global currency volatility and more rigorous counterparty risk assessment contribute to higher cost of trade finance for importers, exporters and financial intermediaries
    • 34. Building Relationships
      • Countertrade gives unique benefits and advantages to the seller of goods. A company willing to engage in countertrade can penetrate new markets and expand sales potential in existing markets.
      • Business relationships can be created and strengthened by the willingness to accept the purchaser's domestically produced goods as payment.
      • Countertrade can be used to obtain a steady, long-term supply of raw materials. For example Occidental Petroleum obtained a reliable, low cost, twenty year supply of ammonia by entering into a countertrade agreement with the Soviet Union
    • 35. Lowering Opportunity Cost
      • During difficult economic times a seller may face high finance costs and slow movement of product - leading to surpluses and/or the need to reduce staff numbers and/or inventory holdings.
      • There may be a lack of immediate opportunities to sell for cash.
      • Where liquidity is a challenge, goods can be sold "in kind" and this credit applied to fixed operational costs of the business (offsetting real cash expenses)
      • Finding a new cash-paying customer for goods involves a new investment in marketing, versus a low cost for countertrade (especially where marketing and entry costs are offset against new sales via bartering)
      • Countertrade represents an extremely low opportunity cost to generate new sales
    • 36. Helping Manage Price Volatility
      • The government of an importing country contemplating using its foreign exchange to buy additional imports may worry that it will not be able to generate sufficient exports to earn the needed foreign exchange.
      • One way to shift the risk to others is to make imports contingent on offsetting exports.
      • Hedging currency risks through countertrade rather than financial instruments may be desirable because purchasing financial instruments requires an upfront financial payment and thus drains liquidity.
      • Financial instruments cannot hedge real exposures effectively because financial value changes with nominal exchange rates, not real exchange rates, and is based on interest earnings not inflation. A countertrade deal can help solve the real price problem.
      • Because counter-trade involves the exchange of real goods, not financial instruments for real goods, it can solve the inflation risk involved in foreign currency procurements. Thus, it can sometimes provide a superior hedge to financial instruments.
    • 37. Improves The Balance Sheet
      • Goods acquired through countertrade are still counted as an increase in the assets of the business.
      • Bank capital guarantees reduce available lines of credit - barter capital does not.
      • Allows the organisation to meet assets and/or equity ratios for other (cash) subsidies and loans.
      • Lets a business obtain future international lines of credit guaranteed by countertrading operations.
    • 38. Countertrade May Be Mandatory
      • EXAMPLES
      • Philippines
      • Executive Order 120 directs all government agencies to adopt countertrade (C/T) as a supplemental tool to the importation of foreign capital equipment, machinery products, and goods and services over a certain dollar value.
      • Kuwait
      • Decision No. 694 which stipulates that all Foreign Contractors who meet certain criteria, should participate in the Counter-Trade Offset Program.
      The GATT, World Bank and DOC claim that countertrade represents between 25% - 30% of all world financial activity and is growing.
    • 39. Classification of Countertrade Does the transaction involve reciprocal commitments (other than cash payments)? Does the transaction involve the use of money? Does the transaction extend over long periods and involve a basket of goods? Are the goods taken back by the exporter the resultant output of the equipment sold? Is the reciprocal commitment limited to the purchase of goods? No Yes Straight Sales (cash or credit) Yes Counterpurchase, buyback or offset Counterpurchase and buyback Buyback Counterpurchase Yes Yes No No No No Yes Barter type Simple barter Clearing Arrangement Are third parties involved? Yes No Switch Trading Clearing Arrangements Does the transaction involve debt? Yes No Swaps Offsets
    • 40. Compensation
      • The seller accepts goods as part payment, the rest is paid in cash.
      • Example:
      • A British computer firm sells computers to a Russian mining firm. The Russsian firm can only pay part of the price in money, but wants to pay the rest with titanium.
      • The British firm does not need titanium so it contacts a metal trader in London who promises to buy the from the Russian mining firm titanium and pay the British computer firm .
    • 41. Counterpurchase
      • Two linked contracts
        • simple exchange of goods
        • reverse reciprocity grants access to resources
      • Trading parties maintain restricted-purpose drawing accounts for the deposits of their countertrade activities.
      • Example:
      • The Finnish airforce buys F18 fighter jets from McDonald Douglas Corp. For 2,5 b. The air force pays in dollars. In another but linked contact McDonald promises in return to buy Finnish goods for 2,5 b. dollars.
    • 42. Product Buyback
      • A long term contract made between a firm which builds and runs a factory to buy the products made in the factory.
      • One party purchases the output of another party that is derived from technology or equipment supplied by the purchasing party.
      • Example:
      • A German firm builds and runs a factory in an African country. The factory is owned by the local government but it has no money to pay for it and not skilled staff to run it. Part of the factories output goes to the firm that built and runs it at predetermined price as payment for the factory and as compensation for running it.
    • 43. Offsets
      • Purchases by a governmental buyer are matched (offset) to investments by the seller in non-related industries in the buyer’s country.
      • Example:
      • The Spanish government buys fighter jest from a foreign corporation. The corporation promises in a separate but linked contract to manufacture the wings in Spain.
    • 44. Switch Trading
      • Two Contracts
      • Example:
      • A British firm sells machine tools to a Polish firm. The Poles wanted to pay in goods only. The Brits did not need Polish goods but French goods. They find a French firm that needs Polish goods. The French firm receives the Polish goods and sends its own goods to the British firm as payment.
    • 45. Debt Swaps
      • Debt swaps
        • debt-for-debt swap
        • debt-for-equity swap
        • debt-for-purchase swap
        • debt-for-nature swap
        • debt-for-education swap
    • 46. Countertrade Usage - By Type
    • 47. Ormita: Business Assistance
      • Four types of business-centric free services :
      • Assistance in selection of export markets
      • Provide analysis on various modes of market entry
      • Work within budgetary constraints to create a broad-scale market entry plan which is offset against guaranteed new sales
      • Develop media plans which are offset against guaranteed new sales
      • Fee-based services :
      • Implementation of export strategy and budgetary expense offsets
      • Implementation of media and PR campaigns in new markets
      • Consulting on countertrade issues
    • 48. Ormita: Countertrade Services
      • Provides financial services to exporters and/or banks, allowing them the ability to offer their products on commercially attractive terms
      • Offers a solution for insurance against the risk of debt losses for commercial and political reasons
      • Allows governmental support of exports into various countries enabling:
        • access to global markets
        • business development in riskier, emerging markets
      • Contributes to business competitiveness in a rapidly changing environment
    • 49. General Acceptance Criteria
      • Eligibility for promotion
      • Is the business particularly deserving of promotion?
      • Is the product or service useful for the target market?
      • Is the entry part of a long-term strategy?
      • Justifiability of Risk
      • Reasonable prospect for the smooth execution of sales by the supplier without the occurrence of a claim
      • Terms of Contract
      • Terms of payment in accordance with international rules and basic agreements for export business
      • Budget
      • Is the budget suitable?
    • 50. Examples of Barter
      • A major restaurant chain was faced with disposing $1 million worth of flavoured ground beef that had tested well but didn't sell well. The chain traded the meat in exchange for spot TV, while the barter shop sold the meat for cash, at a discount, to a state prison system.
      • A beer company needed to destroy product that was past its sell-by date. It ended up selling the bottles to a barter shop, which then recycled the glass, in exchange for media credits.
      • Excess guava puree was swapped for media credits through a barter company. The company eventually sold the puree to a beverage company that used it to make orange soda.
      • Log-home kits, aircraft skeleton frames and poultry have all been swapped for a wide-range of media, including TV, digital, print and radio ads, in the U.S. and abroad.
    • 51. Examples of Government Countertrade
      • The Philippine Government is embarking on a program to carry out a barter system for its coffee products with the products of lucrative markets. This will help them promote the exports of their coffee and in turn get defense equipments from former U.S.S.R. member nations like Romania.
      • In 2009 Saudi Arabia agreed with Pakistan to swap oil for food.
      • Israel barters Calcium Carbonate, Talc and Dolomite and other raw materials with the USA, UK and many European Union countries.
      • The Thai Government recently traded fruits for Chinese-made locomotives, passenger buses, and armoured cars.
      • Malaysia is currently supplying India with palm oil (from six state-owned companies) worth $121 million in exchange for a contract awarded to the Indian Railway Construction International Company. They will lay 31.5 km. of tracks in the southern Malaysian state of Johor.
      • The Democratic Republic of the Congo and the China Railway Engineering Corporation (CREC) have entered barter. According to this barter the Chinese company will provide Congo the desperately needed infrastructure in exchange for a slice of Congo’s precious natural resources to feed its booming industries.