Chapter 7: Avoiding and Managing Common Mistakes and Problems
7-1 COMMON PITFALLS
Pg. 216-223
There are errors that businesses make and they can be grouped into four different
categories, Costing, Standards, Marketing, and Infrastructure.
 Costing: Correctly calculating the full landed cost of a product is essential for any
business. A distributor or wholesaler must figure out this cost when determining a
suggested local retail price for either imports or exports. A manufacturer requires the
full landed cost of supplies, parts, and machinery when developing a budget,
proposal, or cost analysis.
 Standards: Many nations have standards for manufacturing, sizing, labeling, and
packaging that are different from Canadian standards. Failure to recognize the
differences and adapt to them can cause costly errors.
 Marketing: Exporting companies sometimes fail to research and therefore, do not
understand their target foreign market, its distribution channels, its types of
consumer marketing, the time it requires to arrange deals and introduce products,
and its local sensitivities and preferences.
 Infrastructure: Companies often do not consider the problems that may arise as a
result of the infrastructure of the target country. Internal transportation, human and
material resources, communication systems, health and safety, bureaucracy--and in
some cases, corruption and bribery in businesses or government—all can be
potential obstacles to international business.
Potential Costing Errors
A Canadian purchasing agent is acting on behalf of a Canadian retail chain that wants a
new and interesting line of preserves for its upscale customers. The agent visits a trade
show in France to look for suitable European suppliers. One booth at the show displays
a dozen different jams, jellies, and compotes that are not available in Canada. All look
delicious and are beautifully packaged. The buyer knows that these products would be
perfect for the client. The price of each jar of jam is marked at 1.50 Euro.
To make a profit a retailer must sell a product at a standard markup, which is usually
twice the products cost.
Opportunities for error in determining the actual cost are considerable. Besides the price
of the product, which is 1.50 Euro for the jam, the buyer must consider tariffs and duties,
brokerage fees, transportation cots, insurance costs for goods in transit, currency
exchange rates and any other hidden costs. A costing error can negate (cancel out) any
advantage provided by the foreign trade.
Exchange Rates and Currency Strategies
The first step in pricing a product is to convert its cost from its currency into Canadian
dollars.
The euro like the Canadian dollar is a hard currency, which means that it can easily be
converted to another currency by most banks. Many countries like China, Russia, or the
Ukraine have soft currency, which is a currency that fluctuate in value and as a result do
not covert into Canadian dollars easily.
Currency is rated from “AAA” to the lowest at “D”. A currency’s rating is based on the
country’s degree or confidence in the world market that is judged but its political and
economic stability. Hard currency’s are rated “BBB” and above. Canada’s rating has
recently been reestablished in the triple-A category.
Businesses usually only deal in hard currencies. Some countries restrict the amount of
foreign currency that people can own or purchase.
Protection Agents Currency Fluctuations
To secure the price of a product companies often buy forward. That means they
purchase the amount of currency needed at the time of the order. This protects them
agent’s fluctuations in exchange rates.
To minimize the effect of currency change and guarantee the price of the product the
Canadian importing company can buy euros at $1.39 CAN exchange rate when the
order of a product is placed. Then if the exchange rate changes the value of the product
for the Canadian market will not change.
The seller makes the same amount regardless, because the price is fixed in its
currency.
However the importers are in the business to sell products for a profit, so exchange
rates are important to make competitive pricing decisions.
Letters of Credit
The Jam manufacturer will want to be sure that it will be paid when the transaction is
completed. This is where banks come in. The Canadian bank can issue a letter of
credit to the French bank.
Letters of credit are an important method of reducing risk in international business.
They allow an importer to give the exporter a guarantee that they will be paid. After all
costs have been calculated, the importer applies to the issuing bank for a letter of credit
for the entire amount of the transaction. The importer must provide collateral for the
letter such as stocks, bonds, or other financial assets.
If the issuing bank approves the buyer’s credit, it sends the letter of credit to the
advising bank, which tells the seller that it has been received. Now the seller can ship
the jam to Canada. The advising bank monitors the shipment, and when it reaches its
destination, it will pay the exporter. The issuing bank then pays the advising bank and
collects the money from the importer. After the buyer pays the bank, the bank will give
it documents that allow it to pick up the jam.
If one country has a bad banking system, it will be difficult or impossible to arrange a
letter of credit. Without a letter of credit, the companies involved in the transaction must
have a great amount of trust in each other. Few businesses are willing to take the risks
of trusting another business to this extent. Most international businesses will only trade
with countries that have a good bank system in place.
Tariffs and duties
People can get good jams from companies inside of Canada. The import of foreign
jams could affect the sales of domestic products, so to protect the Canadian companies,
the government levies takes on imports that compete with Canadian made goods.
Tariffs increase the price of a foreign product, which allows the Canadian product to be
more profitable.
Tariff rates depend on product being imported and on Canada’s relationship with the
source country. Jam from France enters Canada under a Most-Favoured-Nation tariff,
so it would be about 8.5%.
The WTO facilitates discussions among countries about the setting of tariff rates for
each product. Each member must agree about these rates. Countries can negotiate
lower tariff levels with each other if they have good trade history. Where free trade
exists, tariffs are removed; however, certain goods may still have tariffs.
Transportation
Charges for transporting goods are affected by five factors:
 The agent and shipping company for freight forwarder
 The shipment method
 The weight of the goods
 The size or volume of the goods
 The distance to their final destination
Shipping companies as well as freight forwarders are very competitive. Many specialize
in particular destinations and offer attractive rates for shipments to those destinations.
Some offer special rated for large shipments, while others specialize in smaller, more
delicate shipments to have special requirements, such as refrigeration. Many
businesses use a shipping agent that can help the exporter or importer select the most
appropriate firm. An agent’s commission is based on the values of the goods shipped.
The cost to ship goods is one of the largest components of the landed cost. Any goods
being shipped over seas must travel either by water or air for a portion of the journey,
wile importers must weigh cost against speed. The faster a shipping method is, the
more it will cost. Most shipments are trucked to an airport, or dock where they are then
shipped across the world.
Hidden Costs
If you fail to realize the hidden costs in transporting items/goods, you may loose money.
Importers may have to travel in order to find the right merchandise needed as well as
make shipping arrangements. Travel has its costs. Businesses are sometimes surprised
by costs of transportation. Importers need to estimate the hidden costs and add them to
the expected charges for shipment to calculate the total cost per item or unit. Only then
they can arrive at an accurate price for the product in the Canadian market.