Exporting is quite different from selling in the domestic market. The differences are:
1) The markets in various countries have different tastes and preferences. The exporter has to understand and adjust to these differences.
2) The way of doing business differs from country to country. In a country like Germany they may just go by the attributes of the product and the reputation of the firm. In China, it will depend on the personal relationship between the managers of the buyer and seller.
3) One has to personally visit the market and get a feel for the conditions in the market.
4) One must do a thorough market analysis before venturing into any market. Failure to do so could lead to losing an opportunity or adopting the wrong strategy.
5) The firm has to understand to what degree the product needs to be customized to be sold in a market.
6) Exporting always involves a certain degree of paper work. This is usually much more than is required in the domestic market. There are certain mandatory documents that have to be made available to the buyer without which he cannot take delivery of the goods in his country. Failure to provide these documents could leave the goods rotting at the port.
7) There are also some complex formalities that have to be followed by both the buyer and the seller, sometimes in their own country, and sometimes in each other's countries.
The firm that does not acknowledge these factors will run the risk of failure. Some are scared away by the complex nature of the transactions and would rather stay away from the export market.
Countertrade is an alternative method of concluding an international transaction. This method is often used when the conventional payment methods are costly difficult or just not available. This usually happens with countries with balance of payments problems and where there is a dire shortage of foreign exchange to pay for imports into the country.
Normally these governments try to protect their foreign exchange reserves so that they can pay their debts and use it for crucial imports only. This presents a major problem for exporters wanting to sell to that country. Countertrade represents a whole range of agreements where goods and services imported into the host nation are bartered for goods and services which are provided by the host nation. These are in lieu for the payment for the imported goods and services.
It is also possible that some government would place countertrade as a conditions for the acceptance of a particular order. It can therefore be used as a strategic marketing weapon.
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.