Lecture_07 - The Astro Home Page
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Lecture 07 Export-Import and Counter-trade © Ram Mudambi, Temple University, 2007 1 Outline Exporting Exports vs counter-trade Government support for exporting Typical export transaction Counter-trade Types of counter-trade © Ram Mudambi, Temple University, 2007 2 Exporting To ship to another country for sale or exchange. © Ram Mudambi, Temple University, 2007 3 Pure export vs. countertrade Goods Home Seller Pure export: cash payment Foreign Buyer Countertrade: Alternative payment mechanisms © Ram Mudambi, Temple University, 2007 4 The Export Value Chain International Inter-firm operations Logistics: Goods flow Money flow Shipping, Freight forwarding FOB Seller CIF Distributor Final Market Retailer Firm boundary National Border © Ram Mudambi, Temple University, 2007 5 Government Support for Exports www.bundesregierung.de www.meti.go.jp © Ram Mudambi, Temple University, 2007 https://www.uktradeinvest.gov.uk/ 6 US Export Support www.doc.gov www.ita.doc.gov © Ram Mudambi, Temple University, 2007 7 US firms and exporting Historically, only large firms in the US have been exporters. Risks with doing business abroad Large domestic market This has been changing recently The internet and ‘accidental exporters’ © Ram Mudambi, Temple University, 2007 8 Ex-Im Bank www.exim.gov Provides loans and loan-guarantee programs Lends money to foreign borrowers to purchase U.S. exports Makes commercial banks more willing to lend to foreign enterprises © Ram Mudambi, Temple University, 2007 9 Foreign Credit Insurance Association Provides export credit insurance in case importer defaults in payment Consists of private commercial institutions operating under the guidance of Export-Import Bank Commercial and political risks taken into account © Ram Mudambi, Temple University, 2007 10 © Ram Mudambi, Temple University, 2007 11 Pitfalls of exporting Poor market analysis Ignorance and Intimidation Poor understanding of competitive conditions Poorly executed promotional campaign Poor distribution program Failure to customize product offering Problems securing financing © Ram Mudambi, Temple University, 2007 12 Exporting Strategy It helps to hire an Export Management Company or, at least, someone with experience – outsource turnkey export ops. Focus on one or a few markets. Enter markets on a fairly small scale until you ‘learn the ropes’. Add new lines after initial success. Need to recognize the time and managerial commitment. Build strong and lasting relationships. Hire locals to help firm establish itself. Keep the option of local production in mind. © Ram Mudambi, Temple University, 2007 13 Export/Import Financing Letters of Credit (LOC) Bank guarantee on behalf of importer to exporter assuring payment when exporter presents specified documents Drafts (Bill of Exchange) Written order exporter, telling an importer to pay a specified amount of money at a specified time. Bill of Lading Issued to exporter, by carrier. Serves as receipt, contract and document of title. © Ram Mudambi, Temple University, 2007 14 Preference of the US Exporter 1. Importer Pays for Goods German Importer American Exporter 2. Exporter Ships Goods After Being Paid © Ram Mudambi, Temple University, 2007 15 Preference of the French Importer 2. Importer pays after the Goods are Received German Importer American Exporter 1. Exporter Ships the Goods © Ram Mudambi, Temple University, 2007 16 The Use of a Third Party 1. Importer Obtains Bank’s Promise to Pay on Importers Behalf German Importer 6. Importer Pays Bank 5. Bank Gives Merchandise to Importer © Ram Mudambi, Temple University, 2007 Bank 2. Bank Promises Exporter to Pay on Behalf of Importer American Exporter 4. Bank Pays Exporter 3. Exporter Ships “to the Bank.” Trusting Bank’s Promise to Pay 17 A Typical Letter of Credit transaction United States Germany Bank Buyer (Germany) Customhouse broker Steamship line © Ram Mudambi, Temple University, 2007 Letter of credit Documents Letter of Credit Shipping Documents Merchandise Merchandise Bank Seller (U.S.) Freight forwarder Steamship line 18 A Typical LOC Transaction 1. Importer Orders Goods 3. Importer Arranges for LOC 2. Exporter Agrees to Fill Order American Exporter 10 and 11 Exporter Sells Draft to Bank German Importer 6. Goods Shipped to France 7. Exporter Presents Draft to Bank 12. Bank Tells Importer Documents 14. B of NY Presents Matured Arrive Draft and Gets Payment Bank of New York 5. B of NY Informs Exporter of LOC 13. Importer Pays Bank Deutsche Bank 8. B of NY Presents Draft to Bank of Paris 9. Deutsche Bank Returns Accepted Draft 4. Deutsche Bank Sends LOC to B of NY © Ram Mudambi, Temple University, 2007 19 Countertrade Countertrade consists of transactions which have as a basic characteristic a linkage, legal or otherwise, between exports and imports of goods or services in addition to, or in place of, financial settlements. Countertrade can be used as an effective international business tool. Countertrade plays a part in 20-25 percent of world trade. © Ram Mudambi, Temple University, 2007 20 Countertrade Trade carried out wholly or partially in goods rather than money. Primarily used when a firm exports to a country whose currency is not freely convertible Importing country may lack the foreign exchange reserves required Accounts for between 8 to 20% of world trade © Ram Mudambi, Temple University, 2007 21 Counter-trade An umbrella term – typically appears in 5 forms Barter Counter-purchase Offset Compensation trading or Buyback Switch trading © Ram Mudambi, Temple University, 2007 22 Types of Counter-trade Barter: direct exchange of goods and/or services without a cash transaction. Goods Importing agency Exporter Goods Importer © Ram Mudambi, Temple University, 2007 23 Barter: Example Aircraft Saudi Government Trading Agency Boeing Oil Saudia (National airline) © Ram Mudambi, Temple University, 2007 24 Counter-purchase: reciprocal buying agreement Exporting agency % of total sale spent on specified products Goods Importing agency Exporter F/X Importer © Ram Mudambi, Temple University, 2007 25 Offset: like counter-purchase, but exporter can buy goods from any firm in country. % of total sale spent on any goods from importing country Exporting agency Goods Importing agency Exporter F/X Importer © Ram Mudambi, Temple University, 2007 26 Switch trading: uses third-party trading house. 3rd party arbitrageur Importing firm Exporting agency Re-purchase credits Goods Exporter Importing agency F/X (% in repurchase credits) Importer © Ram Mudambi, Temple University, 2007 27 Buybacks: foreign plant takes products as contract payment. HOST Flow of capital goods Importer HOME Exporter F/X payment 3rd Country Re-purchased output © Ram Mudambi, Temple University, 2007 Re-export and local sale 28 Countertrade – Summary Transaction involves reciprocal commitments other than cash payments Yes No Involves the use of money Yes Counter-purchase, buyback or offset Limited to purchase of goods No Barter Yes No Goods results of initial exports? Yes Buyback No Counter-purchase © Ram Mudambi, Temple University, 2007 Offset Straight sales Cash or credit 29 Why Countertrade? Lack of sufficient foreign currency reserves. Situations where the importing country has political reasons to protect certain domestic industries Suitable to MNCs with wide network of contacts However: How do you determine value? Difficulties in disposition of goods. Costs of engagement. Countertrade: Pros and Cons Pro: Provides business a way to finance an export deal when other means are not available. Con: Business may receive unusable or poor quality goods that can be disposed of profitably. © Ram Mudambi, Temple University, 2007 31 Countertrade Practice 100 Percent of 80 companies engaged in each countertrade 60 practice 73 60 40 19 20 3 0 22 Offset Switch Trading Barter Buyback Counterpurchase Takeaways Exporting is one area where corporate and home country political interests are aligned. Exporting always has support from the home government In exporting to soft currency countries, engagement with the foreign government may be necessary This requires creativity and leads to countertrade © Ram Mudambi, Temple University, 2007 33
