CERTIFIED GLOBAL BUSINESS PROFESSIONAL Online/Distance Learning Course SECTION 16 COSTS, PRICING ISSUES, GRAY MARKETS, AND PRICING STRATEGIES ALAN L. WHITEBREAD

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CERTIFIED GLOBAL BUSINESS PROFESSIONALOnline/Dist
ance Learning Course SECTION 16COSTS,
PRICING ISSUES, GRAY MARKETS, AND PRICING
STRATEGIESALAN L. WHITEBREAD
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UNDERSTANDING INTERNATIONAL COSTS

• PRODUCT COST
• TRANSACTION COST
• LANDED COST
• TOTAL COST

3
INTERNATIONAL PRICING ISSUES

• MARKET FORCES
• PRICE STRATEGIES
• TRANSFER PRICING
• DUMPING
• GRAY MARKETS
• COUNTERTRADE
• COLLECTION ISSUES
• Duty and Tax

4
MARKET FACTORS AFFECTING PRICING STRATEGIES
DECISIONS

• CORPORATE OBJECTIVES
• CHANNEL ISSUES ?
• MARKET SEGMENT ISSUES
• PRODUCT LINE DEFINITION
• Positioning, Product Life Cycle
• COMPETITION / COUNTRY PRICING
• LEGAL REGULATORY ISSUES ?
• SERVICE ISSUES
• FOREIGN EXCHANGE ?

5
INTERNATIONAL PRICING ISSUES

• PRICE SCHEDULES
• Terms and conditions
• How many should you have?
• TERMS OF SALE
• Should there be different ones?
• THE COST ESCALATION TO BUYER IS DUE TO
• Packaging, handling, and shipping PLUS
• Tariffs, duties, taxes, and fees

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COST TO SELLING PRICE EXAMPLES
Standard cost of components Cost plus Marginal cost
Price is a function of the selected cost system in the following examples. Price is a function of the selected cost system in the following examples. Price is a function of the selected cost system in the following examples. Price is a function of the selected cost system in the following examples.
Production 5.00 5.00 5.00
Foreign Product 0.00 0.50 0.50
Overhead 0.50 0.50 0.00
G A 1.50 1.50 0.00
Foreign marketing 0.00 1.00 1.00
Margin (30) 3.00 3.64 2.79
Selling Price 10.00 12.14 9.29
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BUYER PRICE ESCALATION
Standard cost Cost plus Marginal cost
Price is a function of the selected cost system in the following examples. Price is a function of the selected cost system in the following examples. Price is a function of the selected cost system in the following examples. Price is a function of the selected cost system in the following examples.
Net Price 10.00 12.14 9.29
Transportation CIF 1.00 1.00 1.00
Tariff 12 of CIF 1.32 1.58 1.23
Landed cost 12.32 14.72 11.52
VAT 10 1.23 1.47 1.15
Distributor margin 25 4.52 5.40 4.22
Retailer cost 18.07 21.59 16.89
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INTERNATIONAL SHIPMENT COSTS

• International shipment costs are frequently
  increased due to
• PRODUCT MODIFICATION INCLUDING PACKAGING, and
• CONTAINER ISSUES, and
• DOCUMENTS AND FEES.

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INTERNATIONAL SHIPMENT COSTS

• ADDITIONAL ADDITIONS TO INTERNATIONAL BUYER COSTS
  INCLUDE
• COMMISSIONS AND INCENTIVES
• Resellers fees
• INSURANCE
• Air or marine
• Supplemental
• FREIGHT
• ADVERTISING RELATED EXPENSES

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GLOBAL PRICING ISSUESMARKET FORCES AND
SENSITIVITY

• MARKET
• New / emerging developed mature / declining
• PRODUCT LIFE CYCLE
• Stage
• Introduction, Growth, Maturity, Decline
• Competitive positioning and FABs
• COMPETITION

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GLOBAL PRICING

• Polycentric pricing
• Allow little flexibility at the local level
  national
• Geocentric pricing
• Use comparison prices and margins regional
• Ethnocentric pricing
• One price for all countries global

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PRICING STRATEGIESNEW PRODUCTS

• MARKET PENETRATION PRICING
• is used to grow share volume. This has very
  dangerous long-term issues. ?
• SKIMMING PRICING
• High price / high quality positioning
• Very high initial price to recover new product
  development costs as rapidly as possible. Very
  sharp price declines follow.

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PRICING STRATEGIESCURRENCY NEUTRALIZATION

• Adjust prices so that source-country currency
  appreciation does not automatically pass through
  to the customer.
• RESULT You may have to accept lower margins in
  the target market. ?

Why would you use this strategy? See the next
slide for help.
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CURRENCY NEUTRALIZATION
0.92
If you projected the USD would continue to rise
like the dotted line, you may want to consider a
currency neutralization strategy to keep your
products reasonably priced in the EURO nations.
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PRICE THEORY

• PRICE FLOOR
• The selling price is bounded by cost factors.
• PRICE CEILING
• The selling price is bounded by competitive
  pressures.
• OPTIMUM PRICE
• Is a selling price somewhere between floor and
  ceiling that meets your corporate objectives.

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GLOBAL PRICING ISSUESTRANSFER PRICING

• The price paid by another legal entity of the
  organization when the product crosses a national
  border. The three tests are
• Arms-length price
• unrelated parties
• Most favored customer
• best
• No significant tax implications
• tax evasion of duties, income,

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DUMPING DEFINITIONhttp//www.wto.org/english/the
wto_e/whatis_e/tif_e/agrm7_e.htm

• a nation exports a product at a price lower
  than the price it normally charges on its own
  home market
• Is the price permanent or temporary?
• Three methods of calculating normal value
• 1-price in the exporters domestic market
• 2-the price charged by the exporter in another
  country
• 3-production costs, other expenses, and normal
  profit margins

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GLOBAL PRICING ISSUESDUMPING WTO VS. PRACTICAL

• COMMONLY DEFINED IN SELLING GOODS IN A MARKET
  BELOW COST
• What is the cost basis?
• How long was it being sold below cost?

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TARIFF CALCULATIONSCOMPONENTS vs. FINISHED
PRODUCT
Standard cost Cost plus Marginal cost
Landed Cost 10.00 12.14 9.29
Tariff (complete) (18) 1.80 2.19 1.67
TLC (complete) 11.80 14.33 10.96
Tariff (parts) (6) 0.60 0.73 0.56
TLC (parts) 10.60 12.87 9.85
Difference 1.20 1.46 1.11
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GLOBAL PRICING ISSUESDUMPING WTO PRACTICAL

• COMMONLY DEFINED IN SELLING GOODS IN A MARKET
  BELOW COST
• What is the cost basis?
• Is it permanent or temporary?
• PENALTY
• Antidumping duty ?
• Counterveiling duty (USA) ?

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GLOBAL PRICING ISSUES

• GRAY TRADE
• Channel members offer unauthorized lower prices
  because of differences in exchange rates.
• Notice what happens in the following example.
  The manufacturers price in Spain is undercut by
  1,150.

Price of the Spanish manufacturer to a
distributor in Spain is 10,500 Euros
1 8,500 Euros
Distributor in Frankfurt, Germany
2 9,350 Euros
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COUNTERTRADE

• Transactions that involve at least partial
  payment in some form of non-cash unit. There are
  numerous forms of countertrade.
• Clearing agreement
• Two entities agree to import a set amount of
  merchandise from each another.

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COUNTERTRADE BARTER
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GLOBAL COLLECTION ISSUESDUTY AND DUTY DRAWBACK

• DUTY
• A tax paid on the importation of selected items.
• DUTY DRAWBACK
• A process which allows a firm to have the paid
  duty refunded to them if the product was never
  sold in that country.

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GLOBAL COLLECTION ISSUESVALUE ADDED TAX VAT

• A VAT is roughly the equivalent of US sales taxes
  but on a national level.
• Purpose
• Reduce trade deficits
• Provide government financing

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CERTIFIED GLOBAL BUSINESS PROFESSIONALOnline/Dist
ance Learning Course SECTION 17ABASICS OF
INTERNATIONAL FINANCIAL INSTRUMENTSFOREIGN
EXCHANGE AND CURRENCY TRANSACTIONSALAN L.
WHITEBREAD
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FINANCIAL CRISES - CONTAGION

• July 2, 1997 The Thai Baht collapses due to
• growing current-account deficit, and
• excessive short-term foreign borrowing, and
• banks weighed down by speculative property loans,
  and
• corrupt government and business practices!
• It was followed quickly by the collapse of the
• Indonesian Rupiah
• Malaysian Ringgit
• Philippine Peso

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HYPERINFLATION ZIMBABWE 2006
Interest Rates 11/09/06 Overnight 300 Interbank
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Inflation Rate July, 2006 CPI 198,559.1 M-O-M
25.11 Y-O-Y 93.64
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CURRENCY DEVALUATION

• The process of converting a larger numerical
  value of an old currency for a lesser numerical
  value of a new one with no translation loss.
• The Azerbaijan central bank devalued their
  currency starting Jan. 1, 2006. You could
  convert 5,000 old Manats for 1 new Manat. There
  are 100 Gapiks in a Manat.
• The opposite of this is revaluation. It is a
  much more rare currency event.

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FOREIGN EXCHANGE

• THE VALUE OF ONE CURRENCY EXPRESSED IN TERMS OF
  ANOTHER.

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FOREIGN EXCHANGE

• MANAGING RISK ?
• CURRENCY REGULATION TYPES, VOLUME
• IMF CLAUSE VIII
• GUARANTEES CURRENCY CONVERSION
• THERE ARE POTENTIAL PL AND BALANCE SHEET ISSUES
  DUE TO TRANSACTIONS AND / OR FINANCIAL STATEMENT
  CONSOLIDATION. ?
• ISSUES
• INFLATION
• GOVERNMENT POLICIES
• Taxation, investment, money flow,

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Issues Affecting Foreign Exchange Rates

• Fiscal Policy includes
• Taxation
• Monetary Policies
• Interest Rates

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Sales Contract Payable in Foreign Currency
Brazilian Importer
US Exporter
The EXPORTER and IMPORTER enter into a Sales
Contract requiring payment to be made in
Brazilian Reals. So the IMPORTER must convert
the Reals into their home currency. Businesses
use a foreign exchange table or a cross-exchange
table to determine rates.
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CROSS-EXCHANGE TABLE
YOU SELL FOR
USD GBP EUR JPY
USD - 1.616 1.1378 0.0084
GBP 0.619 - 0.7041 0.0052
EUR 0.879 1.420 - 0.0074
JPY 118.9750 192.2800 135.3500 -
YOU BUY AT
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HEDGING TOOLS

• Common tools
• Spot contracts
• Forward transactions / Futures transactions
• Options contracts
• Currency swaps
• Less common tools
• Window forwards
• Non-deliverable forwards

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HEDGING CURRENCY EXCHANGETHE INTERBANK MARKET

• A way of converting one currency into another. 
• Types
• Spot contract
• Allows you to buy or sell foreign currency at
  today's exchange rate, with final settlement
  occurring usually within two business days.
• Forward transaction trades over-the-counter
  unconditional
• A way of eliminating exchange rate risk with a
  foreign currency transaction in the future.  This
  enables you to buy or sell a currency at a fixed
  rate on a specified future date. By linking this
  date to the date of your currency payment, you in
  lock in the exchange rate you want and eliminate
  the risk of future volatility. Settles two or
  more days in the future and can be medium or long
  term.
• Futures transaction trades on an exchange
  unconditional
• Very similar to a forward transaction.
• See http//en.wikipedia.org/wiki/Futures_contract
  for details.

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CURRENCY TRADING FUTURES TRANSACTIONS - CONTRACTS

• Transactions are mandatory.
• The agreed-to price is the strike price.
• Trades are always on the first Friday of each
  month.
• Currency call option
• The right to buy a currency at the strike price
  within a specified period of time
• Currency put option
• The right to sell a currency at the strike price
  within a specified period of time

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HEDGING FUTURES CONTRACT

• A financial tool used to protect against losses
  from currency fluctuations.
• You are a BUYER outside the U.S. and believe the
  dollar will strengthen and your national
  currency will weaken. You will be paying in
  your national currency. You should hedge your
  position by buying a futures contract for U.S.
  dollars. This would lock in the exchange rate so
  that you know your purchase price at the time of
  purchasing the hedge.

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CURRENCY TRADINGFUTURES MARKET OPTIONS CONTRACTS

• Traded in Chicago on the International Money
  Market IMM.
• The transaction is not mandatory e.g.
  conditional.
• You must meet margin requirements.
• Off Exchange Currency Options OEX-FORCO
• British Pound, Canadian Dollar, Euro, Japanese
  Yen, and the Swiss Franc

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CURRENCY TRADINGFUTURES MARKET OPTIONS CONTRACTS

• Guarantees a worst-case exchange rate for the
  future purchase of one currency for another
  currency for a fee.
• Unlike a forward contract, the option does not
  obligate the buyer to deliver a currency on the
  settlement date unless that option is exercised.
• Foreign exchange options protect you against
  unfavorable currency movements and allow you to
  participate in favorable movements.

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HEDGING CURRENCY SWAPS

• A way for an entity with 1 recurring cash flows
  in a foreign currency, or 2 seeking financing
  in a foreign country, to eliminate exchange rate
  risk.
• You simultaneously purchase and sell a given
  currency at a fixed exchange rate and then
  re-exchange those currencies at a future date.
• This allows you to fix the exchange rate for a
  stream of cash flows in one currency into another
  currency.

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HEDGING CURRENCY SWAPS

• Characteristics
• It is a continuous market.
• There is a specified amount, rate, and date of
  exchange.
• There is no last trade information so you are
  blind to the latest trade data. ?
• The minimum trade is 1,000,000.
• It is self-regulatingthere is no oversight body!
  ?

43
CERTIFIED GLOBAL BUSINESS PROFESSIONALOnline/Dist
ance Learning Course SECTION 17BBASICS OF
INTERNATIONAL FINANCIAL INSTRUMENTSMETHODS OF
PAYMENTALAN L. WHITEBREAD
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METHODS OF PAYMENT

• International trade presents a spectrum of risk,
  causing uncertainty over the timing of payments
  between the exporter Seller and the importer
  Buyer.
• After reviewing the slides read the Trade Finance
  Guide by the U.S. DOC International Trade
  Administration in the Reading sections to get
  more detail about the individual payment methods.

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METHODS OF PAYMENT
Least RISK TO THE EXPORTER
Most
Cash in Advance
Confirmed Irrevocable L/C
Irrevocable L/C
Consignment
Open Account
Documentary Collection
Sight Draft for Documents Against Payment
Time Draft for Documents Against Acceptance
Most COST FOR THE BUYER
Least
Least AMOUNT OF TRUST IN THE RELATIONSHIP
Most
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CASH IN ADVANCE
1. The IMPORTER pays for goods per the
EXPORTERs terms.
IMPORTER
EXPORTER
2. The EXPORTER only ships goods after receiving
and validating payment from the IMPORTER.
This is the most favorable term for the SELLER.
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CASH IN ADVANCE

• THE MOST LIKELY USE IS IF
• The Buyer is a new firm or
• There is little or no credit information in the
  Buyer's country or
• Expert sources put Buyer's country as high-risk
  or
• There is significant currency fluctuation or
  currency exchange issues in that country or
• There are small and/or Internet transactions

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OPEN ACCOUNT
1. The EXPORTER ships goods only after
IMPORTERs credit has been checked and a line of
credit has been established. Credit is based on
history and there is no guarantee of payment.
IMPORTER
EXPORTER
2. The IMPORTER pays after the goods are received
in accordance with the terms agreed to with the
EXPORTER.
This is the most favorable term for the BUYER.
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OPEN ACCOUNT

• THE MOST LIKELY USE IS FOR
• a very good customer with a long history of good
  prompt payment or
• orders from multinationals or
• subsidiary payments.

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DOCUMENTARY COLLECTIONS

• Documents against payment is when
• the presenting bank may only release the
  documents simultaneously with payment from the
  BUYER.
• Documents against acceptance is when
• the presenting bank may only release the
  documents against formal acceptance of a draft
  bill of exchange by the BUYER guaranteeing
  payment n days after the goods were shipped.

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THE BANK ROLES IN A DOCUMENTARY COLLECTION

1. Facilitate the transaction and verify documents.
2. Assure compliance with the collection order.
3. Act in good faith as agents for collection

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Uniform Rules for Collections No. 522URC 522 -
1995

• Provides rules for collections
• Banks are under no obligation to do collections
  for a client.

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AN INTERNATIONAL DOCUMENTS AGAINST PAYMENT FLOW
CHART
2. BUYER examines the IL and makes a counter
offer to SELLER .
1. BUYER receives an Inquiry Letter IL from
SELLER.
3. SELLER notifies BUYER it agrees with the
counter offer.
6. SELLER receives L/C from BUYER via SELLERs
BANK and BUYERs BANK.
5. BUYER takes the Pro Forma invoice to its BANK
to apply for a L/C.
4. SELLER issues a Pro Forma invoice to the BUYER.
8. SELLER notifies BUYER all is in order and the
order will ship on x date.
7. SELLER verifies L/C is correct.
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AN INTERNATIONAL DOCUMENTS AGAINST PAYMENT FLOW
CHART
10. SELLER sends export documents to SELLERs
BANK for collection
11. SELLERs BANK sends the documents to BUYERs
BANK.
9. SELLER ships merchandise.
13. BUYER inspects the documents. If they are in
order BUYER accepts the draft and authorizes
BUYERs BANK to remit payment at maturity.
14. BUYERs BANK remits payment at maturity
12. BUYERs BANK notifies BUYER it has received
the export documents.
15. BUYERs BANK releases the export documents to
BUYER. 16. Only upon payment, can BUYER collect
the goods.
This is accurate for an ocean waybill only! If
BUYER has an air, rail, or truck waybill they can
collect the goods even though payment is not
approved! ?
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SIGHT DRAFT DRAWN ON BUYERS BANK
A Sight Draft is payable on demand when it is
presented.
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AN INTERNATIONAL DOCUMENTS AGAINST ACCEPTANCE
FLOW CHART
1. SELLER receives an Inquiry Letter IL from
BUYER.
2. SELLER examines the IL and makes a counter
offer to BUYER .
3. BUYER notifies SELLER it agrees with the
counter offer.
6. BUYER receives documents from SELLER through
the involved banks.
5. BUYER takes the Pro Forma invoice to its BANK
to apply for funds if necessary.
4. SELLER issues a Pro Forma invoice to the BUYER.
8. SELLER notifies BUYER all is in order and the
order will ship on x date.
7. SELLER verifies documents are correct.
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AN INTERNATIONAL DOCUMENTS AGAINST ACCEPTANCE
FLOW CHART
10. SELLER sends export documents to SELLERs
BANK for collection
11. SELLERs BANK sends the documents to BUYERs
BANK.
9. SELLER ships merchandise.
13. BUYER inspects documents. If they are in
order BUYER accepts the draft and authorizes
BUYERs BANK to remit payment at maturity.
14. BUYERs BANK releases the export documents to
BUYER. BUYER can collect the goods.
12. BUYERs BANK notifies BUYER it has received
the export documents.
15. BUYERs BANK remits payment at maturity.
Unlike a Letter of Credit, this is a commitment
of the BUYER to paynot the BUYERS BANK to pay! ?
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TIME DRAFT DRAWN ON BUYERS BANK
A Time Draft is payable on n number of days after
the documents are presented.
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LETTER OF CREDIT L/C DEFINITION

• A written document by the Issuing Bank given to
  the SELLER beneficiary at the request, and in
  compliance with the instructions, of the BUYER
  Applicant or Account Party to make a payment
• OR
• by accepting or negotiating bills of exchange up
  to a stated amount, within a prescribed time, and
  against specified documents.

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LAWS AND RULES GOVERNINGLETTERS OF CREDIT

• The International Chamber of Commerces Uniform
  Customs and Practices UCP for Documentary
  Letters of Credit Publication No. 600. UCP 600
• Uniform Commercial Code UCC - Article 5

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UCP 600

• Allows for acceptance, partial acceptance, or
  rejection of amendments to Letters of Credit.
• Provides issuance rules for banks
• Defines the roles of various banks
• Defines acceptable dates
• Provides guidance for transfers and transport
  documents

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UNIFORM CUSTOMS AND PRACTICES UCP 600

• UCP 600
• See http//wer2031.coolfreepages.com/docs/UCP500.h
  tm for detailed information.
• eUCP
• bridges the current UCP of paper-based documents
  with the processing of the electronic equivalent
  documents
• Find detailed information on the Internet.
• International Standby Practices 1998 ISP98
  became effective Jan. 1, 1999
• Search the web for detailed information.

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THE BANK ROLE IN AN L/C

• Facilitate the transaction and verify documents.
• Dishonor-the bank may not refuse an L/C due to
• Breach of contract or non-conformity of goods
• Bank believes it would not be reimbursed
• Rule of Strict Compliance
• The documents are linked to the same goods
• The goods must be fully described

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UCC

• Defines injunctive relief
• In other words, money alone cannot compensate for
  the damage.
• Outlines remedies
• Provides guidelines for security interest and
  subrogation of the parties.
• Addresses warranties

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LETTER OF CREDITA THIRD PARTY COMMITMENT
66
LETTER OF CREDIT
IMPORTER
EXPORTER
1. EXPORTER and IMPORTER enter into a Sales
Contract requiring a specific type of L/C be used
as the method of payment for transactions under
the Sales Contract.
67
LETTER OF CREDIT
IMPORTER
2. IMPORTER or the Applicant requests its Bank
to issue a L/C in their behalf to technically
and in favor of the EXPORTER. IMPORTERs Bank
requires IMPORTER to complete and sign an
Application Agreement for a Commercial Letter
of Credit. IMPORTERs line of credit is reduced
by the amount of the L/C when it is issued.
IMPORTERs ISSUING BANK
68
LETTER OF CREDIT
IMPORTERs ISSUING BANK
BUYERs ADVISING BANK
3. IMPORTERs ISSUING BANK issues a L/C and
sends it to the BUYERs ADVISING BANK
electronically through SWIFT Society for
Worldwide Interbank Financial Telecommunications.
A few L/Cs are delivered in other methods.
69
LETTER OF CREDIT
USE A FREIGHT FORWARDER?
TRANSPORTATION COMPANIES
EXPORTER
4. EXPORTER contracts with a TRANSPORTATION
COMPANY, either directly or through a FREIGHT
FORWARDER or CUSTOMS BROKER, to pick up and
deliver merchandise to IMPORTERs named place per
the INCOTERM.
70
LETTER OF CREDIT
USE A FREIGHT FORWARDER?
EXPORTERs NEGOTIATING BANK
EXPORTER
5. EXPORTER, either directly or through a
FREIGHT FORWARDER or CUSTOMS BROKER, prepares and
sends documents required under the L/C to the
EXPORTERs NEGOTIATING BANK for payment.
71
LETTER OF CREDIT
72
LETTER OF CREDIT
In this example, we will assume the ISSUING BANK
forwards payment to the NEGOTIATING BANK at this
point.
73
LETTER OF CREDIT
74
LETTER OF CREDIT ATTRIBUTES

• Irrevocable
• Terms and conditions of the L/C cannot be amended
  or cancelled without the written agreement of all
  parties to the L/C.
• This type is strongly preferred by financial
  institutions and sellers and is the most common
  form. ?
• OR
• Revocable
• The issuing bank on behalf of the BUYER may
  amend or cancel simply by notifying the accepting
  bank.
• The most likely use is for a parent company to
  cover a very large purchase for one of its
  subsidiaries. It is rare.

75
LETTER OF CREDIT ATTRIBUTES

• Confirmed
• SELLERs bank has verified the L/C and the
  issuing bank and has added its guarantee for
  payment to SELLER for the L/C issued by BUYERs
  bank.
• OR
• Unconfirmed
• SELLERs bank does not guarantee payment for the
  L/C issued by BUYERs bank. Only the issuing
  bank is assuring payment.

76
TYPES OF LETTERS OF CREDIT

• Transferable
• This must be marked as transferable on it face.
• It allows two or more parties to be paid from the
  L/C while keeping their identities unknown to
  each other.
• The most likely use is for an exporter acting as
  an intermediary of some type.
• For instance, a transferable L/C is issued to the
  exporter. The exporter pays its supplier. The
  L/C is transferred to the exporter which then
  receives the balance of the L/C.

77
TYPES OF LETTERS OF CREDIT

• Back-to-Back
• It is marked as back-to-back on it face and
  separate from the original L/C.
• It allows some payments before collections are
  received.
• The most likely use is for an exporter having to
  pay suppliers to complete an order before the
  customer pays for the goods.
• For instance, an exporter has an L/C. Then a
  Back-to-Back L/C is issued to pay the exporters
  named suppliers within a certain amount of time
  but before payment is due on the original L/C.

78
TYPES OF LETTERS OF CREDIT

• Revolving
• It allows a credit limit to allow a free flow of
  goods until the expiration date. Thus, it
  eliminates the need for opening an L/C for every
  shipment.
• The most likely use is for a BUYER wanting to
  purchase merchandise from numerous suppliers on a
  regular basis.
• For instance, BUYER opens a Revolving L/C for
  1,000,000. Buyer can then arrange for payment
  in favor of however many suppliers and amounts
  as long as it does not exceed the original amount
  unless amended.

79
TYPES OF LETTERS OF CREDIT

• Red Clause
• It allows payment to an exporter before documents
  are presented. This provides pre-export
  financing for the purchase or manufacture of the
  goods.
• The most likely use is for a BUYER to provide
  credit for a small but key supplier. Payment can
  be in part or in full as specified and is
  financed by BUYERs bank.
• Green Clause
• Very similar to a Red Clause L/C but advances are
  made only on presentation of SELLERs warehouse
  receipts. It is very rare in the U.S.

80
TYPES OF LETTERS OF CREDIT

• Standby
• It is used to guarantee that a party will fulfill
  all its obligations.
• The most likely use is for a parent company to
  provide access to a certain amount of money for
  subsidiary if it is needed for usually specified
  reasons.
• It may also be used similarly to a performance
  bond. In this manner, if the SELLER can not
  perform according to the sales contract, BUYER
  can draw the balance from the Standby L/C.

81
LETTERS OF CREDIT

• Letter of Credit Review
• Conduct a through review of all the checklist
  items for an L/C to minimize bank charges for
  discrepancies.
• See Readings.
• Letter of Credit Common Discrepancies
• See Readings

82
CONSIGNMENT
MANUFACTURERs SALES REPRESENTATIVE
EXPORTER
1. EXPORTER delivers goods to a MANUFACTURERs
Sales REPRESENTATIVE under agreement that the
Manufacturers Representative sells the
merchandise for the EXPORTER.
2. The MANUFACTURERs SALES REPRESENTATIVE
sells the goods for a commission and the EXPORTER
receives payment. Payment of the commission
occurs according to agreed terms usually after
the EXPORTER receives payment.
Consignment may also occur at distributors
industrial products and dealers or retailers
consumer products.
83
BANKERS ACCEPTANCE

• Negotiable instruments time drafts to finance
  the export, import, domestic shipment or storage
  of goods.
• Must be drawn on and accepted by a bank.
• It is accepted only when a bank writes accepted
  on the draft which shows its agreement to pay the
  draft at maturity.
• A bank may accept the draft for either the drawer
  or the holder.

84
TRADE ACCEPTANCE

• The same as a Bankers Acceptance except it is
  between firms and does not involve a bank.

85
ELECTRONIC METHODS OF PAYMENT

• Society for Worldwide Interbank Financial
  Telecommunication SWIFT http//www.swift.com
• TradeCard
• http//www.tradecard.com/

86
CERTIFIED GLOBAL BUSINESS PROFESSIONALOnline/Dist
ance Learning Course SECTION 17CBASICS OF
INTERNATIONAL FINANCIAL INSTRUMENTSCREDIT AND
COLLECTIONSALAN L. WHITEBREAD
87
SALES EFFORTS

• You must define the terms and conditions of sales
  your sales people may offer!
• What are the limits of authority for a sales
  person?
• What, if any, changes are allowed to the sales
  contract?
• Which INCOTERMs can be used?
• What are the payment terms?
• What are the conditions of sale?
• What is the pricing?
• How can they get approval for an exception?

88
CHECKING CREDIT WORTHINESS

• The equivalent of a DB U.S. credit service is
  not available in most nations.
• You can get some foreign company references from
  U.S. credit reporting firms but they tend to be
  expensive compared to a credit check on a U.S.
  firm.
• You must thoroughly check
• Bank references
• Trade references
• Industry credit associations

89
INTERNATIONALCREDIT ASSESSMENT

• A variety of information is required.
• Credit Bureaus / Services
• DB, Hoovers now part of DB, Experian, others
• Generally 100-300 per international credit
  report
• Trade references
• Be carefulit could be a relative. ?
• Bank references
• Be careful! Is it a bank? If it is, is it real?
  ?
• Industry Credit Associations

90
INTERNATIONAL COLLECTIONS

• Good, established customers
• New customers
• Risk can be minimized through irrevocable L/Cs
  confirmed by your bank name goes here national
  bank.
• Questionable to bad customers ?
• Often use difficult, evasive, or stalling tactics
• Are always looking for additional concessions

91
BANK GUARANTEES

• Bid bond
• A surety bond is filed by bidders which
  guarantees that the successful bidder will sign a
  contract and furnish a performance bond.
• Advance payment guarantee
• This provides protection for BUYERs who are
  asked to provide payment before goods or services
  are supplied. If SELLER fails to fulfill their
  contract, BUYER has recourse to the guarantor to
  recover any advance payment they have made.
• Performance bond
• This guarantees the fulfillment of the contract
  and payment to all subcontractors and material
  suppliers. It is submitted by the winning bidder
  upon award of the contract.
• Staged payment structure
• Allows specific payments at specific points in
  time or at the fulfillment of key events.

92
NONPAYMENT

• Nonpayment may occur for
• Cancellation / failure to grant U.S. export
  license or country import license, or
• Civil unrest, or
• Foreign currency controls, delays, or shortages

93
NONPAYMENT

• Numerous collection challenges exist.
• Collection in country
• Arbitration, mediation, conciliation
• Legal action Litigation

94
LITIGATION

• Use garnishments or attachments to tie up Buyers
  assets at the beginning.
• Use fear of the court system.
• Results are always uncertain.
• Can be very expensivepotentially multiples of
  the cost of the suit in the U.S.

95
MINIMIZING THE RISK OF NON-PAYMENT

• Cash in Advance CIA
• Payment against documents
• Irrevocable L/C confirmed by a US bank
• Security interests in or liens against the
  property being sold or delivered
• Not available in every country
• Purchase export credit insurance

96
CERTIFIED GLOBAL BUSINESS PROFESSIONALOnline/Dist
ance Learning Course SECTION 18 ADVANCED
INTERNATIONAL FINANCING OF EXPORTSBORROWING,
FINANCING, AND GOVERNMENT ASSISTANCE ALAN L.
WHITEBREAD
97
WORKING CAPITAL MANAGEMENT

• This is the management of short-term assets and
  liabilities.
• Net working capital equals
• Current assets current liabilities
• Some of the key questions it must answer include
• How much cash should we hold?
• How much inventory should we carry?
• What are the financial implications of our credit
  policy?
• Where can we get short-term loans up to ...?

98
FUTURE VALUE FV

• The value of a fixed amount n time periods in the
  future.
• Assume you start your career making 35,000 per
  year S. Also assume you never change jobs but
  keep up with the average rate of inflation r
  4 for your entire 42-year career n42. What
  would you be making when you retired.
• The formula is FV S 1rn
• Build a spreadsheet and calculate the answer.
• Did you get 181,747.40?

99
COMPOUNDING

• The value of identical cash deposits at the end
  of each time period for n periods.
• Assume you deposit 1,200 per year in a savings
  account and earn an interest rate net after
  taxes of r 3 for your entire 42-year
  career. How much money will this provide toward
  your retirement?
• The formula is C S 1rn
• Build a spreadsheet and calculate the answer.
• Did you get 101,380.67?

100
PRESENT VALUE PV

• The value of a fixed amount n time periods
  expressed in todays currency.
• Assume you are making 100,000 S per year.
  Your employer offers you a five-year contract
  n5 that will increase your annual salary to
  150,000 per year in the fifth year. Assuming a
  9 r inflation rate, will this be worth more or
  less than you are currently making?
• The formula is PV S 1/1rn
• Build a spreadsheet and calculate the answer.
• Did you find that the 150,000 in year five was
  worth only 97,489.71 in todays money?

101
DISCOUNTED CASH FLOW DCF

• This is the process of valuation by finding the
  present value PV of some amount in the future.
• It can be calculated for a single amount or for
  multiple amounts over time.
• The quick way to find the appropriate rate is to
  consult a PV table in a corporate finance or a
  managerial / corporate finance book.

102
SELLER FINANCING BANKS

• Types
• Line of Credit
• Revolving Line of Credit
• Letters of Credit
• Benefits
• Cost
• Disadvantages
• Documentation Requirements
• Documentation Requirements
• Inventory, Accounts Receivable and Accounts
  Payable Report
• Evidence of Insurance Coverage of Inventory
• Personal guarantee

103
BORROWING BASE EXAMPLE

• The following two slides provide a hypothetical
  example of how a bank may value your various
  assets when you are applying for some type of
  credit.

104
BORROWING BASE EXAMPLE

• Cash
• Stocks/Bonds
• Accounts Receivable
• Open Account
• Insured
• Uninsured
• Documents Against Payment
• Insured
• Uninsured
• Documents Against Acceptance
• Insured
• Uninsured
• Letters of Credit
• Confirmed
• Not Confirmed
• Inventory

• 100
• 50
• 75
• 40
• 75
• 60
• 75
• 20
• 90
• 80
• 60

105
BORROWING BASE EXAMPLE

• Asset Value
• Less Payables
• Outstanding Checks
• Open Account Payables
• Less Loan Amount
• Less Outstanding L/Cs/Guarantees
• Net Margin

106
SELLER FINANCINGEXPORT FINANCE / FACTORING FIRMS

• Types up to 180 days
• Receivable Based Lending
• Asset / Receivable Based Lending
• Benefits
• Eliminates Buyer Risks
• An Additional Source of Funding
• Improves Liquidity
• Disadvantages
• Cost minimum of 2 - 4

107
SELLER FINANCINGFORFAITING

• Receivable Based Lending 180 days to 7 years
• Benefits
• Eliminates Buyer Risks
• An Additional Source of Funding
• Improves Liquidity
• Disadvantages
• Cost
• More expensive than export insurance
• Not generally available for high risk countries
  where it is needed

108
FINANCING INTERNATIONAL SALESSELLER FINANCING

• Types
• Trade Acceptance
• Deferred Payments
• Benefits
• An Additional Source of Funding
• Improves Liquidity
• Lower Interest Rates
• Disadvantages
• Normal only available to long term customer
  relationships

109
SUPPLIER FINANCINGSUPPLIER / CORPORATE FUNDS

• Terms and conditions of sale at 30, 60, or 90
  days net or as agreed in contract
• Benefits
• An Additional Source of Funding
• Improves Liquidity
• Disadvantages
• Normal only available to long term customer
  relationships
• Documentation
• Purchase Order

110
CARRIER FINANCING

• Freight Charges Open Account
• Benefits
• An Additional Source of Funding
• Improves Liquidity
• Disadvantages
• Normal only available to long term customer
  relationships
• Documentation
• Service Contract

111
TradeCard

• All of the previous financing methods
• Benefits
• An Additional Source of Funding
• Improves Liquidity
• Disadvantages
• Only for transactions under 100,000
• Documentation
• Depending on type of Financing
• TradeCard includes numerous reports about
  improving your supply chain operations at
• http//www.tradecard.com/

112
BUYER FINANCING

• Bank
• Lines of Credit
• Revolving Lines of Credit
• Letters of Credit
• Bankers Acceptance
• Supplier
• Trade Acceptance

113
FINANCING INTERNATIONAL SALESBUYER FINANCING
THROUGH BANKS

• Types
• Line of Credit
• Revolving Lines of Credit
• Letters of Credit
• Bankers Acceptance
• Benefits
• Cost
• Disadvantages ?
• Documentation Requirements
• Documentation Requirements
• Inventory, Accounts Receivable and Accounts
  Payable Report
• Evidence of Insurance Coverage of Inventory
• Personal Guarantee

114
CONFIRMING HOUSE

• Primarily European esp. UK firms
• Uses its credit where there is
• a high cost of money, or
• for a country with a high risk credit environment
• Exporter may receive payment from the confirming
  house when the goods are shipped.

115
GOVERNMENT ASSISTANCEEXIMBANK

• Supported countries
• http//www.exim.gov/tools/country/country_limits.h
  tmltblL
• Products
• Working capital 90 - 100 bank coverage
• Insurance generally up to 85 of contract value
• Loan guarantee up to 100 to 10,000,000
• Direct loan generally over 10,000,000
• Special initiatives
• http//www.exim.gov/products/special/index.html

116
GOVERNMENT ASSISTANCEOPIC

• Overseas Private Investment Corporation OPIC
• Economic development in new and emerging markets
• Foreign direct investment FDI

117
GOVERNMENT ASSISTANCEOPIC

• Products
• FDI Political risk to 270 on initial
  investment
• Currency inconvertibility
• Expropriation
• Political violence
• Lending
• Many programs any size of business
• Investment and private equity funds

118
COMMERCIAL SOURCES OF PRIVATE EXPORT CREDIT
INSURANCE

• These reimburse the seller for losses due to a
  buyers bankruptcy, insolvency, or payment
  default. It extends to include non-payment due
  to political events in the buyers country, such
  as currency inconvertibility or import license
  cancellation
• It enables you to offer open terms of payment to
  Qualified Buyers. Some sources include
• CNA
• Hartford
• Chubb
• Many others

119
CERTIFIED GLOBAL BUSINESS PROFESSIONALOnline/Dist
ance Learning Course SECTION 19WORLD AND
REGIONAL BANKSCUSTOMS SERVICE DEALINGSALAN
L. WHITEBREAD
120
THE WORLD BANKhttp//www.worldbank.org/
The World Bank Group is one of the world's
largest sources of development assistance. In FY
2002, it provided more than US19.5 billion in
loans to its client countries. It works in more
than 100 developing economies with the primary
focus of helping the poorest people and the
poorest countries...184 MEMBER COUNTRIES
 Institutions include World Bank Group IBRD IDA IFC MIGA and ICSID


121
World Bank Group

• IBRD - reduce poverty in middle-income and
  creditworthy poorer countries
• IDA - helps the worlds poorest countries
• IFC - provides investments and advisory services
  to build the private sector in developing
  countries
• MIGA guarantees to offset risk of FDI in
  developing member countries
• ICSID - provide facilities for conciliation and
  arbitration of international investment disputes

122
REGIONAL DEVELOPMENT BANKS

• Multilateral Development Banks World Bank Group
• AFRICAN DEVELOPMENT BANK GROUP
• ASIAN DEVELOPMENT BANK
• EUROPEAN BANK FOR RECONSTRUCTION AND DEVELOPMENT
• INTER-AMERICAN DEVELOPMENT BANK
• CARIBBEAN DEVELOPMENT BANK
• Directory of Development Organizations 2010 lists
  gt65,000 organizations

123
INTERNATIONAL MONETARY FUND IMF
http//www.imf.org/

• The IMF has grown from less than 50 members in
  1945 to 184 member countries in 2003. It was
  established to
• promote international monetary cooperation and
  exchange stability,
• foster economic growth and high levels of
  employment, and
• provide temporary financial assistance to
  countries to help ease balance of payments
  problems.

The IMF is also a great source of country data
and special studies.
124
U.S. CUSTOMS SERVICE GOALS

1. Assure compliance with U.S. laws
2. Prevent smuggling
3. Prevent money laundering
4. Collect tariffs and fees
5. Oversee export controls

125
US CUSTOMS

• More than 7 million cargo containers enter U.S.
  seaports annually.
• Of those, usually less than 50 sea containers
  were barred from U.S.-bound ships because of
  insufficient details about their contents.
• In 2004, it totaled the equivalent of 11,925,261
  40 containers.
• http//www.marad.dot.gov/ - see the statistics
  section
• It is critically important to prevent terrorists
  from using sea containers to smuggle nuclear,
  chemical, biological or other deadly weapons.
• CBP videos

126
DEALING WITH FOREIGN CUSTOMSWHAT IS THE PROBLEM?

• Is there a problem?
• 2006 it takes an average of two hours to clear a
  container in Liverpool, UK but 20 days in
  Eritrea.
• Is the product misclassified?
• Are duties higher than anticipated?
• Why wont the customs office clear the shipment
  to your buyer/importer?

127
WHAT HAVE YOU DONE TO RESOLVE THE PROBLEM?

• Have you
• involved the buyer/importer?
• involved your shipping company?
• Do you believe you've done everything you can do
  to resolve the issue?
• If so, do you have all copies of all
  correspondence and documents related to the
  dispute?

128
U.S. CUSTOMS ENFORCEMENT PENALTIESPlus other
laws and penalties are likely to be invoked.
Criminal Goods seized OR forfeited PLUS 500,000
per count PLUS 5 years in Jail per count
Fraud Market OR resale value of the
goods seized OR forfeited
Gross Negligence Four times revenue loss OR 40
of dutiable goods value
Negligence Twice revenue loss OR 20
of dutiable goods value
Records 10,000 Willful - 100,00 knowing
Least severe to most severe penalties per charged
count.
129
ADVANCED DOCUMENTSSPECIAL FORMS

• THESE ARE PRODUCT DEPENDENT AND SOMETIMES COUNTRY
  DEPENDENT FOR EXPORTS AND FOR IMPORTS!

• Certificates
• Analysis
• Disinfection
• Free Sale
• Resale
• Origin
• Hazardous Cargo
• Health
• Inspection
• Phytosanitary or Sanitary
• Food or animals are clean, safe, and meet
  applicable standards
• Pre-shipment Inspection
• Validated License
• Many, many others

130
CERTIFIED GLOBAL BUSINESS PROFESSIONALOnline/Dist
ance Learning Course SECTION 20SALES AND
AFTER-SALES SERVICEALAN L. WHITEBREAD
131
SERVICES MARKETING

• SIMILAR TO PRODUCT MARKETING
• SIGNIFICANT DIFFERENCES EXIST
• YOU MUST SET REALISTIC EXPECTATIONS TO SUCCEED

132
CHARACTERISTICS OF SERVICES

• SERVICES ARE SIMULTANEOUSLY PRODUCED AND
  CONSUMED. THEY ARE
• INTANGIBLE
• Cannot be felt, heard, seen or tasted before
  purchase
• INSEPARABLE
• Cannot be separated from its provider
• PERISHABLE
• Must be consumed when available no storage or
  inventory
• VARIABLE
• Quality depends on who, where, when, and how

133
SERVICES - DIFFERENCES

• HETEROGENEITY IS KEY
• Less standardization / less uniformity is desired
  by marketers
• Services are extremely difficult to compare
• Why?
• What are the benefits of this?
• Personalization and the personal service
  perception

134
SERVICES INTERNATIONAL DIFFERENCES

• The personal contact
• Cultural sensitivity
• What other differences can you identify?

135
SERVICES GOODS CONTINUUM
How do channels change for services? How to sales
organizations change for services? How does the
IMC change for services?
Hybrid Nearly equal mix of Product Service
Mostly Product Some Service
Mostly Service Some Product
Pure Product
Pure Service
136
CONSUMER DIMENSIONS OF SERVICES

• SEARCH
• Potential customers can examine or try prior to
  purchase
• Examples color, style, fit, smell,
• EXPERIENCE
• Product characteristics that potential customers
  can determine during / after consumption
• Examples vacations,
• CREDENCE
• Attributes that are difficult for potential
  customers to evaluate even after they have been
  experienced
• Examples medical diagnosis, surgical operation,

137
SERVICES GOODS CONTINUUM
Hybrid Nearly equal mix of Product Service
Mostly Product Some Service
Mostly Service Some Product
Pure Product
Pure Service
138
TYPES OF SERVICES

• Government services
• Professional services
• For-profit services
• Nonprofit services

139
PRODUCT SERVICES CONCEPTTHE AUGMENTED PRODUCT
BUSINESS B2B Customization Design Engineering In
stallation Training Maintenance/repair Field
upgrades
CONSUMER Delivery Installation Training Maintenanc
e/repair Field upgrades
140
THE SERVICE CONCEPT IN ACTIONExpress carriers
like DHL, FedEx, UPS and others
Provide Advice and Information
1
2
8
Help Solve Problems
Take Orders
CORE BUSINESS The overnight transportation and
delivery of packages
Issue Invoices Billing and Credits
3
7
Provide Supplies
Provide Item Tracing and Expediting
4
6
Provide Pickup Service
5
Assist with Documentation Domestic and Foreign
141
DIFFERENTIATING SERVICES

• HAVE A UNIQUE OFFER
• ORDERING / ACCESS EASE
• DELIVERY EXPERIENCE
• Including installation and training
• IMAGE
• INNOVATIVENESS
• VALUE
• LOCATION / REMOTE
• PERCEPTION

142
SERVICE EXCELLENCE

• A STRATEGIC CONCEPT
• ORGANIZATIONAL COMMITMENT
• HIGH STANDARDS
• CONTINUALLY MONITOR AND IMPROVE QUALITY
• SATISFY PUBLICS
• Customers, employees, vendors, shareholders,
• MANAGE PRODUCTIVITY

143
CUSTOMER SERVICES SUPPORT

• DETERMINING METRICS
• WHAT ARE THEY?
• WHAT ARE THE RELEVANT MEASURES?
• CRITICAL-INCIDENT TECHNIQUE
• IMPORTANCE-PERFORMANCE ANALYSIS

144
BUSINESS SERVICES
Source Christian Homburg and Bernd Garbe,
Towards an Improved Understanding of Industrial
Services Quality Dimensions and Their Impact on
Buyer-Seller Relationships (ISBM Report 9-1999,
Working Paper of the Institute for the Study of
Business Markets, Smeal College of Business,
Pennsylvania State University 1999).
145
EVALUATING BUSINESS SERVICES

• The technical competence of a service provider
• The competence of a providers personnel
• The quality of the service delivery
  friendliness, thoroughness, response time, time
  to completion,
• Speed of delivery
• Successful outcome

146
EXPORT SERVICES FINANCING

• Intangible nature causes financial security
  collateral concerns
• Performance guarantees
• Liability concerns
• Export regulations control certain services
• Information services
• Encryption

147
INTERNAL SERVICES

• EVERYONE IS A CUSTOMER
• Stress teamwork
• cooperation
• Benefit from empowerment
• rapid response / better decisions
• Value individual contribution
• rewards
• Value individual needs
• training