Deck 14: Exporting, Importing, and Countertrade

Question 1

An alternative to using a letter of credit is export credit insurance. What are the advantages and disadvantages of using export credit insurance rather than a letter of credit for exporting (a) a luxury yacht from California to Canada and (b) machine tools from New York to Ukraine?

Answer 1

a) A luxury yacht: Not a lot of people buy Yachts, but a lot of businesses are capable of making them. So more or less the buyer is in a position to dictate terms. And asking the buyer to open a letter of credit may result in the loss of sale.
But to protect against the risk of losing payment the seller can opt for export credit insurance. Here one advantage of export credit insurance is the exporter is more likely to make the sale in a competitive market such as this. If there is a default, the insurance should cushion the blow. However, Canada and California are not known for opaque or radically different legal systems, are not too far away, and do not have linguistic or other barriers. In the event of default, the Yacht is likely to be returned.
b) Machine tools: Again, one advantage is that the New York exporter is more likely to make the sale; the exporter's position however is strong due to the fact that not a lot of people make precision machine tools as they are hard to make and have high fixed investment costs. Ukraine does not have a strong rule of law, had some issues with nationalizations, is a long way from New York, and has a radically different language and culture. These facts are political and legal risks that could increase the likelihood of default, making insurance more expensive. Insurance expense compared to an almost free letter of credit is a disadvantage.
Thus letter of credit is the most viable option in this case.

Question 2

What is the function of a bill of lading?

Answer 2

A Bill of Lading ( B/L ) is a transport document on an ocean going vessel. These days the B/L has been replaced by a Combined Transport Document due to the multi-modal transport which is used in international contracts. This is a negotiable document and is used to transfer title of the goods. Here the goods are consigned to the buyer by the seller. If required by the L/C the goods could be consigned to the buyer's bank.
The seller attaches a B/L to the set of documents that are submitted to his bank. He normally "blank endorses" the B/L. This enables the seller's bank to assume the title of the goods. It also serves as collateral for the bank to advance funds to the byer even before it receives funds from overseas. The seller's bank now endorses the B/L to the buyer's bank and sends it with the set of documents. The buyer's bank will endorse the B/L over to the buyer, either against payment or as would be their financial arrangement. They buyer can now take possession of the goods on arrival.
In case of transport by air it is replaced by an airway bill. However since the goods will reach before the physical document reach, this is not a negotiable document.

Question 3

Why does Vellus export through local distributors rather than set up its own sales force in country? What are the risks associated with using local distributors? How can these risks be reduced?

Answer 3

V# exports pet shampoos. These the firm prefers to export though local distributors in each country because:
1) The market for pet shampoos is a niche market and requires a lot of local knowledge.
2) This enables the firm to enter many markets almost simultaneously without using much of its own resources. The product although a specialized product does not involve any high technology.
3) Also by registering the trademark in all the countries where it operates it is protecting its brand value.
4) It has gained a first-mover advantage in all these markets.
5) The degree of customization required in the markets is very small so the firm can standardize its products and benefit from the economies of scale.
The danger in this approach lies in the fact that the distributor that has been chosen may not be as familiar with the pet market as is required for this product. His lack of knowledge and general incompetence could sales in this market for the product.
However these problems could be avoided by:
1) Proper vetting of the distributor before appointment. Conduct complete background checks.
2) Learn the nuances of the local market.
3) Learn the local culture.
4) Adapt the firm's products to the market and the particular methods employed in the usage of the products.
With these simple steps, costly mistakes that could cost the firm lost time and money could be avoided.

Question 4

How important has government assistance been to Vellus Products? Do you think helping firms such as Vellus represents good use of taxpayer money?

Question 5

A firm based in Washington State wants to export a shipload of finished lumber to the Philippines. The would-be importer cannot get sufficient credit from domestic sources to pay for the shipment but insists that the finished lumber can quickly be resold in the Philippines for a profit. Outline the steps the exporter should take to effect this export to the Philippines.

Question 6

How do you explain the use of countertrade? Under what scenarios might its use increase further by 2015? Under what scenarios might its use decline?

Question 7

What are the benefits of exporting?

Question 8

How might a company make strategic use of countertrade schemes as a marketing weapon to generate export revenues? What are the risks associated with pursuing such a strategy?

Question 9

What steps can a company take to improve its export performance?

Question 10

What is a letter of credit? Why is a letter of credit necessary for exporting?

Question 11

When would a company want to engage in countertrade?

Question 12

Exporting, Importing, and Countertrade Use the globalEDGE Resource Desk (http://globaledge.msu.edu/Reference-Desk) to complete the following exercises:
The Internet is rich with resources that provide guidance for companies wishing to expand their markets through exporting. globalEDGE provides links through its Global Resource Directory under a category called Trade Tutorials. Identify three sources listed by globalEDGE and provide a description of the services available for new exporters through each of these sources.

Question 13

Vellus's original entry into exporting was both reactive and serendipitous. Do you think this is the exception or the rule for small businesses? What might be done to make small firms more proactive with regard to exporting?

Question 14

You are the assistant to the CEO of a small textile firm that manufactures quality, premium-priced, stylish clothing. The CEO has decided to see what the opportunities are for exporting and has asked you for advice as to the steps the company should take. What advice would you give the CEO?

Question 15

What are the risks and pitfalls associated with exporting?

Question 16

Outline the benefits and risks of using an export management company.

Question 17

What is a draft (or bill of exchange)?

Question 18

What are the drawbacks of countertrade?

Question 19

What lessons about successful exporting can be derived from the Vellus case?