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Global Business Today 11e by Charles W.L. Hill and G. Tomas M. Hult ©VIPRESIONA/Shutterstock ©McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education. ©McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education. Part 6: International Business Functions Chapter 14: Exporting, Importing, and Countertrade ©McGraw-Hill Education Source: ©Jonathan Nackstrand/AFP/Getty Images Learning Objectives 14-1 Explain the promises and risks associated with exporting. 14-2 Identify the steps managers can take to improve their firm’s export performance. 14-3 Recognize the basic steps involved in export financing. 14-4 Identify information sources and government programs that exist to help exporters. 14-5 Describe how countertrade can be used to facilitate exports. ©McGraw-Hill Education Opening Case: Spotify and SoundCloud Stockholm produces second-highest number of billion dollar tech companies per capita, after Silicon Valley • Pace of new business creation has been accelerating Start-ups create jobs, spur economy, and foster entrepreneurism • Sweden’s population is just 10 million so exports are important for company growth Service exports are an increasing trend in global trade • Spotify founded in 2008, has 160 million users • SoundCloud established in 2007, has 40 million users ©McGraw-Hill Education Introduction Both large and small firms can benefit from exporting The volume of export activity in the world economy is increasing as exporting has become easier • Regional economic agreements • The decline in trade barriers under the WTO • Modern communication and transportation technologies have alleviated logistical problems ©McGraw-Hill Education Did You Know? Did you know you can call Sweden and France and chat with a random person from those countries? Click to play video ©McGraw-Hill Education For Which Product is Autarky a Good Choice for Countries? The word autarky refers to the quality and belief that a country should be selfsufficient and avoid trade and/or external assistance with other nations. Many economists regard autarky as an idealistic, but impractical, goal of countries. Basically, it sounds like a nice idea to be self-sufficient and practice autarky. In reality, throughout history countries have tried to achieve autarky but soon discovered they could not produce the wide range of products and services customers in their population want and need. These countries also found out that manufacturing products at competitive prices over the long term became a daunting task. In fact, those countries found themselves worse off economically than nations that engaged in international trade. So, a word to the wise; unless your country can efficiently produce everything it needs, the country needs to engage in international trade. A more logical and achievable possibility is to focus on being self-sufficient in certain areas, for certain products or services. Which product or service do you think a country should strive to be self-sufficient in? Sources: “China Pursues Lithium Autarky,” Strategic Risk, March 27, 2018; J. Heathcote, Catherine Rampell, “The Dangerous New Age of Global Autarky,” The Washington Post, June 6, 2016; and Mahdi Amirisefat, “Autarky and Trade Wars: What Does Economic Theory Say?” PressTV, March 10, 2018. ©McGraw-Hill Education Figure 14.1 Product Readiness and Company Readiness to Export or Import Source: Adapted from T. Hult, D. Closs, and D. Frayer, Global Supply Chain Management: Leveraging Processes, Measurements, and Tools for Strategic Corporate Advantage (New York: McGraw-Hill, 2014). Access the text alternative for these images. ©McGraw-Hill Education The Promise and Pitfalls of Exporting 1 The benefits from exporting can be great—the world is a much larger market than the domestic market Larger firms may be proactive in seeking out new export opportunities, but many smaller firms take a reactive approach to exporting Unfamiliarity and intimidation may explain why exporters account for a tiny percentage of U.S. firms Many novice exporters have run into significant problems when first trying to do business abroad, souring them on subsequent opportunities ©McGraw-Hill Education The Promise and Pitfalls of Exporting 2 Common pitfalls for exporters: • Poor market analysis • Poor understanding of competitive conditions • Failure to customize the product offering • Lack of an effective distribution program • Poorly executed promotional campaign • Problems securing financing • Voluminous paperwork, complex formalities, potential delays and errors ©McGraw-Hill Education Improving Export Performance 1 International Comparisons • Many firms fail to consider export opportunities simply because they lack knowledge of the opportunities available • Both Germany and Japan have developed extensive institutional structures for promoting exports • Japanese exporters can also take advantage of the knowledge and contacts of sogo shosha, Japan’s trading houses • U.S. has not developed an institutional structure for promoting exports similar to Germany or Japan ©McGraw-Hill Education Is China Exporting the Next Edge for the Country? With hundreds of television sets stacked high, Changhong Electronics’ warehouse in Shunde resembles many other storage depots in southern China, but their destinations reveal an important shift in global trade patterns. While Changhong’s smaller sets are headed for Europe, its 50-inch plasma screens, which dominate the warehouse, will be shipped to South Africa. Fast growth in developing countries and sluggish Western economies are prompting these companies to abandon their obsession with the United States and Europe and to try to capitalize on rapidly growing markets in Asia, Africa, and Latin America. The socalled China price—a vastly lower price because of low labor costs and the low cost of capital for large government-owned companies—now applies to industrial goods, not just consumer goods. Experts believe that cheap Chinese exports could provide a boost to investment in the developing world, just as they once did to consumption in the developed world. Can China boost investment in the developing world and also boost its own economy? ©McGraw-Hill Education Improving Export Performance 2 Information Sources • The U.S. Department of Commerce is the most comprehensive source of information for U.S. firms • U.S. and Foreign Commercial Service and International Trade Administration • Firms can get a “best prospects” list of potential foreign distributors • Firms can also participate in trade events or get assistance from the Small Business Administration • State and local trade commissions • Private organizations ©McGraw-Hill Education Improving Export Performance 3 Service Providers • Freight forwarder • Export management companies (EMC) handle all aspects of exporting • Export trading company • Export packaging company • Customs brokers • Confirming houses (buying agents) • Export agents, merchants, remarketers • Piggyback marketing • Economic processing zones (EPZs) ©McGraw-Hill Education Improving Export Performance 4 Export Strategy • Hire an EMC to help identify opportunities and navigate paperwork • Start by focusing initially on just one or a few markets • Enter a foreign market on a small scale • Recognize time and managerial commitment involved • Devote a lot of attention to building strong and enduring relationships with local distributors and/or customers • Hire local personnel • Be proactive about seeking export opportunities • Retain the option of local production ©McGraw-Hill Education Improving Export Performance 5 The globalEDGETM Exporting Tool • Top-ranked website for international business resources • Free site • Company Readiness to Export (CORE) tool • Assesses company’s readiness to export • Assesses the product’s readiness to be exported ©McGraw-Hill Education Figure 14.2 Company Readiness to Export ©McGraw-Hill Education Access the text alternative for these images. Source: C. W. L. Hill and G. T. M. Hult, International Business: Competing in the Global Marketplace (New York: McGraw-Hill Education, 2017). Export and Import Financing 1 Lack of Trust • Exporters and importers have to trust someone who may be difficult to track down if they default on an obligation • Each party has different preferences • Exporters prefer to be paid in advance, while importers prefer to pay after shipment arrives • Problems arising from the lack of trust can be solved by using a third party—typically a reputable bank ©McGraw-Hill Education How Trusting Can You Be? We discussed the fact that firms that are engaged in international trade have to trust someone they may have never seen, who lives in a different country, who speaks a different language, who abides by (or does not abide by) a different legal system, and who could be very difficult to track down if he or she defaults on an obligation. Basically, there is a lot of potential for unknown issues to arise and for complications to happen, given the lack of established trust between trading partners. With almost 200 countries in the world, lots of cultural values and beliefs, and many potential avenues to run into complications, how much trust would you place on a relationship that involved (1) an organization from a country like yours (e.g., Swedish people doing business with Danish people) or (2) an organization from a country very different from yours (e.g., a Canadian doing business with someone from Turkey)? ©McGraw-Hill Education Figure 14.4 Preference of the U.S. Exporter Figure 14.5 Preference of the French Importer ©McGraw-Hill Education Source: C. W. L. Hill and G. T. M. Hult, International Business: Competing in the Global Marketplace (New York: McGraw-Hill Education, 2017). Figure 14.6 The Use of a Third Party Access the text alternative for these images. ©McGraw-Hill Education Source: C. W. L. Hill and G. T. M. Hult, International Business: Competing in the Global Marketplace (New York: McGraw-Hill Education, 2017). Export and Import Financing 2 Letter of Credit • Issued by a bank at the request of an importer stating the bank will pay a specified sum of money to a beneficiary, normally the exporter, on presentation of particular, specified documents • This system is attractive because both parties are likely to trust a reputable bank even if they do not trust each other ©McGraw-Hill Education Export and Import Financing 3 Draft • Most export transactions involve a draft: an order written by an exporter instructing an importer, or an importer’s agent, to pay a specified amount at a specified time • Also called a bill of exchange • A sight draft is payable on presentation to the drawee • A time draft allows for a delay in payment • 30, 60, 90, or 120 days • Time drafts are negotiable ©McGraw-Hill Education Export and Import Financing 4 Bill of lading • The bill of lading is issued to the exporter by the common carrier transporting the merchandise • It serves three purposes: • Receipt • Contract • Document of title ©McGraw-Hill Education Figure 14.7 A Typical International Trade Transaction Access the text alternative for these images. ©McGraw-Hill Education Source: C. W. L. Hill and G. T. M. Hult, International Business: Competing in the Global Marketplace (New York: McGraw-Hill Education, 2017). Export Assistance 1 U.S. exporters can draw on two forms of governmentbacked assistance to help their export programs 1. They can get financing aid from the Export-Import Bank 2. They can get export credit insurance from the Foreign Credit Insurance Association ©McGraw-Hill Education Export Assistance 2 Export-Import Bank • The Export Import Bank (Ex-Im Bank) is a wholly owned U.S. government corporation • Established in 1934 • Designed to supplement, not compete, with capital lending • Provides financing aid that will facilitate exports, imports, and the exchange of commodities between the U.S. and other countries • Has a direct lending operation to lend dollars to foreign borrowers for use in purchasing U.S. exports ©McGraw-Hill Education Export Assistance 3 Export Credit Insurance • Insures exporter against risk that foreign importer will default on payment • Provided by Foreign Credit Insurance Association • Provides coverage against commercial and political risks ©McGraw-Hill Education Countertrade 1 Exporters can use countertrade when conventional means of payment are difficult, costly, or nonexistent • A range of barter-like agreements that facilitate the trade of goods and services for other goods and services when they cannot be traded for money • Example: Philip Morris shipped cigarettes to Russia, for which it received chemicals that can be used to make fertilizer. Philip Morris shipped the chemicals to China, and in return, China shipped glassware to North America for retail sale by Philip Morris. ©McGraw-Hill Education Countertrade 2 The Popularity of Countertrade • In the 1960s, the Soviet Union and the Communist states of Eastern Europe, whose currencies were generally nonconvertible, turned to countertrade to purchase imports • A short-term spike in the volume of countertrade can follow periodic financial crises • Notable increase in the volume of countertrade after the Asian financial crisis of 1997 ©McGraw-Hill Education Countertrade 3 Types of Countertrade 1. Barter: a direct exchange of goods and/or services between two parties without a cash transaction • The most restrictive countertrade arrangement • Used primarily for one-time-only deals in transactions with trading partners who are not creditworthy or trustworthy 2. Counterpurchase: a reciprocal buying agreement • Occurs when a firm agrees to purchase a certain amount of materials back from a country to which a sale is made ©McGraw-Hill Education Countertrade 4 Types of Countertrade continued 3. Offset: similar to counterpurchase—one party agrees to purchase goods and services with a specified percentage of the proceeds from the original sale • This party can fulfill the obligation with any firm in the country to which the sale is being made 4. Switch Trading: occurs when a specialized third-party trading house buys a firm’s counterpurchase credits and sells them to another firm ©McGraw-Hill Education Countertrade 5 Types of Countertrade continued 5. Compensation or Buybacks: occur when a firm builds a plant in a country—or supplies technology, equipment, training, or other services to the country—and agrees to take a percentage of the plant’s output as a partial payment for the contract ©McGraw-Hill Education Benefiting from Countertrade A subsea oil and gas tree is lowered into a testing pool at a GE plant in Montrose, United Kingdom. Large, diverse, global companies like GE can benefit from countertrade agreements. ©McGraw-Hill Education Source: ©Simon Dawson/Bloomberg/Getty Images Countertrade 6 Pros and Cons of Countertrade • Countertrade is a way for firms to finance an export deal when other means are not available • Firms that are unwilling to engage in countertrade may lose an export opportunity to a competitor that will • Countertrade may be required by the government of a country to which a firm is exporting goods or services ©McGraw-Hill Education Countertrade 7 Pros and Cons of Countertrade continued • Countertrade can be unattractive • Most firms prefer to be paid in hard currency • It may involve the exchange of unusable or poor-quality goods that the firm cannot dispose of profitably • Countertrade is most attractive to large, diverse multinational enterprises that can use their worldwide network of contacts to dispose of goods acquired in countertrade • Japan’s sogo shosha are masters at countertrade ©McGraw-Hill Education Summary In this chapter, we have • Explained the promises and risks associated with exporting. • Identified the steps managers can take to improve their firm’s export performance. • Recognized the basic steps involved in export financing. • Identified information sources and government programs that exist to help exporters. • Described how countertrade can be used to facilitate exports. ©McGraw-Hill Education Tata Motors and Exporting This activity is important because, as a manager, you must be able to understand exporting as a mode of foreign market entry, its promise and pitfalls, and how to use it to improve overall profitability. The goal of this exercise is to demonstrate your understanding of exporting and how firms can use exporting to increase their profitability. Read the case and answer the questions that follow. Tata Motors Limited (tatamotors.com) was formerly called TELCO, an abbreviation for Tata Engineering and Locomotive Company. Today, Tata Motors is an Indian multinational automotive company headquartered in Mumbai and a core member of the very successful Tata Group. The Tata Group was founded in 1868 and has annual sales of more than 105 billion U.S. dollars, of which Tata Motors makes up about INR 262,796 crores or about 42 billion U.S. dollars. Tata Motors has more than 60,000 employees; was founded in 1945; and serves a worldwide clientele with Tata Motors Cars, Jaguar Land Rover, Tata Daewoo, and Tata Hispano. The company entered the passenger vehicle market in 1991 with the launch of the model Tata Sierra (a three-door sport utility vehicle). Tata Motors thrives in exporting, strategically using exporting as a global vehicle to sell cars worldwide, as well as to help offset cyclical tendencies in sales in the home market of India. Tata Motors exported about 55,000 commercial vehicles last year and plans to export 100,000 commercial units within two years. The target for the increase in exporting is everywhere worldwide except Europe and North America. The global strategy for Tata Motors specifically includes making deeper inroads into the Middle East, Africa, and Latin America. As the fourth-largest bus manufacturer globally, Tata Motors provides innovatively designed and technologically sophisticated buses for the smart cities of tomorrow. The buses personify safety and comfort, reliability, and profitability. Designed using the most advanced technology, Tata Motors’ bus chassis are a benchmark in terms of performance and reliability in the bus industry. Fully finished, built buses from Tata Motors are often viewed as a hallmark of excellence, and these buses have been designed with the utmost quality standards in mind. Tata Motors exports buses and trucks to nearly 47 countries, including 18 countries in Africa; four markets in Latin America; Russia; and various countries in Europe, the Middle East, and Asia Pacific. Some of the popular vehicles exported include the company’s globally benchmarked range of Prima and Ultra. These brands have been developed with modern design and global markets in mind. Tata Motors also export a variety of premium buses and coaches, from luxurious intercity travel vehicles to safe transportation choices for elementary school children. The buses come in 12 seaters to 67 seaters. Additionally, in the pickup and small commercial vehicle (SCV) segments, Xenon XT and Super Ace have been popular choices in many of the countries. Future exporting activities for Tata Motors are mainly planned to target an increased presence in emerging countries (e.g., Africa, Asia Pacific, Middle Eastern, and Latin America). The company will place its worldwide bets on world-class products like the Xenon, Super Ace, Prima, and Ultra range of trucks. The overall exporting goal is to continue to enter into new markets and keep expanding the global footprint of Tata Motors. Sources: Shally Seth Mohile, “Tata Motors Plans to Double Export of Commercial Vehicles in Two Years,” Live Mint, September 16, 2016; “Tata Motors Exports Up 12% in December at 5,119 Units,” Indian Information Online (IIFL), January 2, 2017; and “Tata Motors Expect 30% Growth in Exports,” Business Standard, October 23, 2015.