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8/2/2019 Going Global Export Expansion 3046
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Going GlobalExport
Expansion
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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
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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
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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
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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
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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
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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!!
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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.
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Letter of Credit
Advance payment is done by Letter of Credit arranged by Buyer
Exporter ExportersBank
Importers
BankImporter
Overseas
Home Country
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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
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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
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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
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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
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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
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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
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Export Expansion Strategy
Internationalizing needs an orderly export
expansion strategy.
Typically companies tend to follow one ofthe two strategies
Waterfall Strategy
Sprinkler Strategy
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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
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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
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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
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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
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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
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Direct Exporting involves learning about
overseas transportation, international trade
credit, tariff barriers, Legal rules ®ulations in foreign country etc. This
requires quite an investment for a
beginner