Transcript MASTER - Texas Tech University

CERTIFIED GLOBAL BUSINESS PROFESSIONAL
Online/Distance Learning Course
SECTION 16
COSTS, PRICING ISSUES, GRAY MARKETS, AND PRICING STRATEGIES
ALAN L. WHITEBREAD
UNDERSTANDING INTERNATIONAL
COSTS
• PRODUCT COST
• TRANSACTION COST
• LANDED COST
• TOTAL COST
INTERNATIONAL PRICING ISSUES
•
•
•
•
•
•
•
MARKET FORCES
PRICE STRATEGIES
TRANSFER PRICING
DUMPING
GRAY MARKETS
COUNTERTRADE
COLLECTION ISSUES
• Duty and Tax
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 
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
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.
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
BUYER PRICE ESCALATION
Standard cost
Cost plus
Marginal cost
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
12.32
14.72
11.52
VAT 10%
1.23
1.47
1.15
Distributor margin 25%
4.52
5.40
4.22
18.07
21.59
16.89
Landed cost
Retailer cost
INTERNATIONAL SHIPMENT COSTS
• International shipment costs are frequently
increased due to
– PRODUCT MODIFICATION [INCLUDING
PACKAGING], and
– CONTAINER ISSUES, and
– DOCUMENTS AND FEES.
INTERNATIONAL SHIPMENT COSTS
• ADDITIONAL ADDITIONS TO
INTERNATIONAL BUYER COSTS
INCLUDE
– COMMISSIONS AND INCENTIVES
• Resellers fees
– INSURANCE
• Air or marine
• Supplemental
– FREIGHT
– ADVERTISING & RELATED EXPENSES
GLOBAL PRICING ISSUES:
MARKET FORCES AND SENSITIVITY
• MARKET
• New / emerging – developed – mature /
declining
• PRODUCT LIFE CYCLE
• Stage
• Introduction, Growth, Maturity, Decline
• Competitive positioning and FABs
• COMPETITION
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]
PRICING STRATEGIES:
NEW 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.
PRICING STRATEGIES:
CURRENCY 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.
CURRENCY NEUTRALIZATION
0.92
USD TO EURO
0.86
0.84
0.82
0.8
0.78
0.76
0.74
0.72
0.7
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.
GLOBAL PRICING ISSUES
TRANSFER 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, …]
DUMPING: DEFINITION
http://www.wto.org/english/thewto_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 exporter’s domestic market
– 2-the price charged by the exporter in another country
– 3-production costs, other expenses, and normal profit
margins
GLOBAL PRICING ISSUES
DUMPING: 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?
TARIFF CALCULATIONS:
COMPONENTS vs. FINISHED PRODUCT
Standard cost
Cost plus
Marginal 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
Landed Cost
GLOBAL PRICING ISSUES
DUMPING: 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) 
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
manufacturer’s 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
[2] 9,350 Euros
Distributor in
Frankfurt,
Germany
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.
COUNTERTRADE: BARTER
US Exporter/Buyer
Mexican Exporter/Buyer
1. US Exporter ships cotton to the Mexican Buyer.
2. Mexican Buyer pays for US Exporter’s cotton by shipping
Mexican oil to the US Exporter.
GLOBAL COLLECTION ISSUES
DUTY 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.
GLOBAL COLLECTION ISSUES
VALUE 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
CERTIFIED GLOBAL BUSINESS PROFESSIONAL
Online/Distance Learning Course
SECTION 17A
BASICS OF INTERNATIONAL FINANCIAL INSTRUMENTS:
FOREIGN EXCHANGE AND CURRENCY TRANSACTIONS
ALAN L. WHITEBREAD
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
HYPERINFLATION: ZIMBABWE 2006
Interest Rates
11/09/06
Overnight 300%
Interbank
23%
Inflation Rate
July, 2006
CPI
198,559.1
M-O-M 25.11%
Y-O-Y
93.64%
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.
FOREIGN EXCHANGE
• THE VALUE OF ONE CURRENCY
EXPRESSED IN TERMS OF ANOTHER.
FOREIGN EXCHANGE
• MANAGING RISK 
– CURRENCY REGULATION [TYPES, VOLUME]
• IMF CLAUSE VIII
– GUARANTEES CURRENCY CONVERSION
– THERE ARE POTENTIAL P&L AND BALANCE
SHEET ISSUES DUE TO TRANSACTIONS AND /
OR FINANCIAL STATEMENT CONSOLIDATION.

• ISSUES
– INFLATION
– GOVERNMENT POLICIES
• Taxation, investment, money flow, …
Issues Affecting Foreign Exchange
Rates
• Fiscal Policy includes
– Taxation
– Monetary Policies
– Interest Rates
Sales Contract Payable in Foreign Currency
US Exporter
Brazilian Importer
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.
CROSS-EXCHANGE TABLE
YOU SELL FOR
USD
GBP
EUR
JPY
-
1.616
1.1378
0.0084
GBP
0.619
-
0.7041
0.0052
EUR
0.879
1.420
JPY
118.9750
192.2800
USD
YOU BUY AT
-
135.3500
0.0074
-
HEDGING TOOLS
• Common tools
– Spot contracts
– Forward transactions / Futures transactions
– Options [contracts]
– Currency swaps
• Less common tools
– Window forwards
– Non-deliverable forwards
HEDGING: CURRENCY EXCHANGE:
THE 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.
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
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.
CURRENCY TRADING
FUTURES 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 [OEXFORCO]
– British Pound, Canadian Dollar, Euro,
Japanese Yen, and the Swiss Franc
CURRENCY TRADING
FUTURES 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.
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 reexchange 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.
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-regulating—there is no oversight
body! 
CERTIFIED GLOBAL BUSINESS PROFESSIONAL
Online/Distance Learning Course
SECTION 17B
BASICS OF INTERNATIONAL FINANCIAL INSTRUMENTS:
METHODS OF PAYMENT
ALAN L. WHITEBREAD
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.
METHODS OF PAYMENT
Least
Cash in
Advance
RISK TO THE EXPORTER
Confirmed
Irrevocable
L/C
Irrevocable
L/C
Documentary Collection
Sight Draft
for
Documents
Against
Payment
Most
Least
Most
Consignment
Open
Account
Time Draft
for
Documents
Against
Acceptance
COST FOR THE BUYER
Least
AMOUNT OF TRUST IN THE RELATIONSHIP
Most
CASH IN ADVANCE
1. The IMPORTER pays for goods per the EXPORTER’s 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.
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 highrisk; or
– There is significant currency fluctuation or
currency exchange issues in that country; or
– There are small and/or Internet transactions
OPEN ACCOUNT
1. The EXPORTER ships goods only after IMPORTER’s 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.
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.
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.
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
Uniform Rules for Collections No. 522
[URC 522 - 1995]
• Provides rules for collections
• Banks are under no obligation to do
collections for a client.
AN INTERNATIONAL DOCUMENTS
AGAINST PAYMENT FLOW CHART
1. BUYER receives
an Inquiry Letter [IL]
from SELLER.
2. BUYER examines
the IL and makes a
counter offer to
SELLER .
4. SELLER issues a
Pro Forma invoice to
the BUYER.
5. BUYER takes the
Pro Forma invoice to
its BANK to apply for
a L/C.
7. SELLER verifies
L/C is correct.
8. SELLER notifies
BUYER all is in order
and the order will ship
on x date.
3. SELLER notifies
BUYER it agrees with
the counter offer.
6. SELLER receives
L/C from BUYER via
SELLER’s BANK and
BUYER’s BANK.
AN INTERNATIONAL DOCUMENTS
AGAINST PAYMENT FLOW CHART
9. SELLER ships
merchandise.
12. BUYER’s BANK
notifies BUYER it has
received the export
documents.
10. SELLER sends
export documents to
SELLER’s BANK for
collection
11. SELLER’s BANK
sends the documents
to BUYER’s BANK.
13. BUYER inspects
the documents. If
they are in order
BUYER accepts the
draft and authorizes
BUYER’s BANK to
remit payment at
maturity.
14. BUYER’s BANK
remits payment at
maturity
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! 
15. BUYER’s BANK
releases the export
documents to
BUYER.
16. Only upon
payment, can BUYER
collect the goods.
SIGHT DRAFT DRAWN ON BUYER’S
BANK
A Sight Draft is payable on demand [when it is presented].
Lubbock, Texas, U.S.A.
March 15, 2003
At
PAY TO THE ORDER OF
30,598.00
U.S.$
Sight
JET III Export Trading Co.
Thirty Thousand Five Hundred Ninety-Eight and No/100-------------
DOLLARS
Brazilian Importer Co., Ltd.
No. 75 Lin An Road
Sao Paulo, Brazil
for value received and charge to the account of
To:
Banco do Brasil, S.A.
Sao Paulo, Brazil
Draft No.
By:
JET III Export Trading Co.
AN INTERNATIONAL DOCUMENTS
AGAINST ACCEPTANCE FLOW CHART
1. SELLER receives
an Inquiry Letter [IL]
from BUYER.
4. SELLER issues a
Pro Forma invoice to
the BUYER.
7. SELLER verifies
documents are
correct.
2. SELLER examines
the IL and makes a
counter offer to
BUYER .
5. BUYER takes the
Pro Forma invoice to
its BANK to apply for
funds if necessary.
8. SELLER notifies
BUYER all is in order
and the order will ship
on x date.
3. BUYER notifies
SELLER it agrees
with the counter offer.
6. BUYER receives
documents from SELLER
through the involved
banks.
AN INTERNATIONAL DOCUMENTS
AGAINST ACCEPTANCE FLOW CHART
9. SELLER ships
merchandise.
12. BUYER’s BANK
notifies BUYER it has
received the export
documents.
10. SELLER sends
export documents to
SELLER’s BANK for
collection
11. SELLER’s BANK
sends the documents
to BUYER’s BANK.
13. BUYER inspects
documents. If they
are in order BUYER
accepts the draft and
authorizes BUYER’s
BANK to remit
payment at maturity.
14. BUYER’s BANK
releases the export
documents to
BUYER. BUYER can
collect the goods.
Unlike a Letter of Credit, this is a
commitment of the BUYER to pay—not
the BUYER’S BANK to pay! 
15. BUYER’s BANK
remits payment at
maturity.
TIME DRAFT DRAWN ON BUYER’S
BANK
A Time Draft is payable on n number of days after the
documents are presented.
Lubbock, Texas, U.S.A.
March 15, 2003
At
PAY TO THE ORDER OF
30,598.00
U.S.$
90 Days Sight
JET III Export Trading Co.
Thirty Thousand Five Hundred Ninety-Eight and No/100-------------
DOLLARS
Brazilian Importer Co., Ltd.
No. 75 Lin An Road
Sao Paulo, Brazil
for value received and charge to the account of
To:
Banco do Brasil, S.A.
Sao Paulo, Brazil
Draft No.
By:
JET III Export Trading Co.
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.
LAWS AND RULES GOVERNING
LETTERS OF CREDIT
• The International Chamber of Commerce’s
Uniform Customs and Practices [UCP] for
Documentary Letters of Credit Publication No.
600. [UCP 600]
• Uniform Commercial Code [UCC] - Article 5
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
UNIFORM CUSTOMS AND
PRACTICES UCP 600
• UCP 600
– See
http://wer2031.coolfreepages.com/docs/UCP500.htm
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.
THE BANK ROLE IN AN L/C
1.
Facilitate the transaction and verify
documents.
2.
Dishonor-the bank may not refuse an L/C due
to
–
–
3.
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
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
LETTER OF CREDIT
A THIRD PARTY
COMMITMENT
Bank
Sales Contract
Buyer/
Importer/
Applicant
Seller/
Exporter/
Beneficiary
LETTER OF CREDIT
EXPORTER
IMPORTER
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.
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.
IMPORTER’s Bank requires IMPORTER to complete and sign an
Application & Agreement for a Commercial Letter of Credit.
IMPORTER’s line of credit is reduced by the amount of the L/C
when it is issued.
IMPORTER’s [ISSUING]
BANK
LETTER OF CREDIT
BUYER’s [ADVISING] BANK
IMPORTER’s [ISSUING]
BANK
3. IMPORTER’s [ISSUING] BANK issues a L/C and sends it to the BUYER’s
[ADVISING] BANK electronically through SWIFT [Society for Worldwide Interbank
Financial Telecommunications]. A few L/C’s are delivered in other methods.
LETTER OF CREDIT
USE A FREIGHT
FORWARDER?
EXPORTER
TRANSPORTATION
COMPANIES
4. EXPORTER contracts with a TRANSPORTATION COMPANY, either directly
or through a FREIGHT FORWARDER or CUSTOMS BROKER, to pick up and
deliver merchandise to IMPORTER’s named place per the INCOTERM.
LETTER OF CREDIT
USE A FREIGHT
FORWARDER?
EXPORTER
EXPORTER’s
[NEGOTIATING]
BANK
5. EXPORTER, either directly or through a FREIGHT FORWARDER or
CUSTOMS BROKER, prepares and sends documents required under the L/C
to the EXPORTER’s NEGOTIATING BANK for payment.
LETTER OF CREDIT
EXPORTER
EXPORTER’s
[NEGOTIATING]
BANK
6. The EXPORTER’s
[NEGOTIATING] BANK, checks
documents against the terms and
conditions of the L/C. If they are in
full compliance, EXPORTER’s
[NEGOTIATING] BANK remits full
payment to the EXPORTER.
IMPORTER’s
[ISSUING] BANK
7. The EXPORTER’s
[NEGOTIATING] BANK sends
Exporter’s documents to the
IMPORTER’s [ISSUING] BANK.
LETTER OF CREDIT
IMPORTER’s
[ISSUING] BANK
IMPORTER
8. The IMPORTER’s [ISSUING] BANK, checks
documents against the terms and conditions of the
L/C. If they are in full compliance, IMPORTER’s
[ISSUING] BANK sends EXPORTER’s documents
to the IMPORTER.
In this example, we will assume the ISSUING BANK forwards payment to
the NEGOTIATING BANK at this point.
LETTER OF CREDIT
IMPORTER
CUSTOMS
9. IMPORTER, either directly or through a
CUSTOMS HOUSE BROKER, sends documents to
CUSTOMS and the TRANSPORTATION
COMPANY to clear EXPORTER’s merchandise
through CUSTOMS.
10. Once the merchandise is cleared, the
TRANSPORTATION COMPANY picks up
and delivers EXPORTER’s merchandise
to the IMPORTER.
TRANSPORTATION
COMPANY
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.
LETTER OF CREDIT ATTRIBUTES
• Confirmed
– SELLER’s 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
BUYER’s bank.
OR
• Unconfirmed
– SELLER’s bank does not guarantee payment
for the L/C issued by BUYER’s bank. Only
the issuing bank is assuring payment.
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.
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 exporter’s named suppliers within a
certain amount of time but before payment is due on the
original L/C.
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.
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 BUYER’s bank.
• Green Clause
– Very similar to a Red Clause L/C but advances are
made only on presentation of SELLER’s warehouse
receipts. It is very rare in the U.S.
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.
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
CONSIGNMENT
EXPORTER
MANUFACTURER’s
[SALES]
REPRESENTATIVE
1. EXPORTER delivers goods to a
MANUFACTURER’s [Sales] REPRESENTATIVE
under agreement that the Manufacturer’s
Representative sells the merchandise for the
EXPORTER.
2. The MANUFACTURER’s [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].
BANKER’S 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.
TRADE ACCEPTANCE
• The same as a Banker’s Acceptance
except it is between firms and does not
involve a bank.
ELECTRONIC METHODS OF
PAYMENT
• Society for Worldwide Interbank
Financial Telecommunication [SWIFT]
http://www.swift.com
• TradeCard
– http://www.tradecard.com/
CERTIFIED GLOBAL BUSINESS PROFESSIONAL
Online/Distance Learning Course
SECTION 17C
BASICS OF INTERNATIONAL FINANCIAL INSTRUMENTS:
CREDIT AND COLLECTIONS
ALAN L. WHITEBREAD
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?
CHECKING CREDIT WORTHINESS
• The equivalent of a D&B 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
INTERNATIONALCREDIT
ASSESSMENT
• A variety of information is required.
– Credit Bureaus / Services
• D&B, Hoover’s [now part of D&B], Experian, others
• Generally $100-300 per international credit report
– Trade references
• Be careful—it could be a relative. 
– Bank references
• Be careful! Is it a bank? If it is, is it real? 
– Industry Credit Associations
INTERNATIONAL COLLECTIONS
• Good, established customers
• New customers
– Risk can be minimized through “irrevocable L/C’s
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
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 BUYER[s] 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.
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
NONPAYMENT
• Numerous collection challenges exist.
– Collection in country
– Arbitration, mediation, conciliation
– Legal action [Litigation]
LITIGATION
• Use garnishments or attachments to tie up
Buyer’s assets at the beginning.
• Use fear of the court system.
• Results are always uncertain.
• Can be very expensive—potentially
multiples of the cost of the suit in the U.S.
MINIMIZING THE RISK OF NONPAYMENT
•
•
•
•
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
CERTIFIED GLOBAL BUSINESS PROFESSIONAL
Online/Distance Learning Course
SECTION 18
ADVANCED INTERNATIONAL FINANCING OF EXPORTS:
BORROWING, FINANCING, AND GOVERNMENT ASSISTANCE
ALAN L. WHITEBREAD
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 $...?
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
[n=42]. What would you be making when you
retired.
– The formula is FV = S * [1+rn]
– Build a spreadsheet and calculate the answer.
– Did you get $181,747.40?
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 * [1+r]n
– Build a spreadsheet and calculate the answer.
– Did you get $101,380.67?
PRESENT VALUE [PV]
• The value of a fixed amount n time periods expressed in
today’s currency.
• Assume you are making $100,000 [$S] per year. Your
employer offers you a five-year contract [n=5] 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/[1+r]n]
– Build a spreadsheet and calculate the answer.
– Did you find that the $150,000 in year five was worth only
$97,489.71 in today’s money?
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.
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
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.
BORROWING BASE EXAMPLE
• Cash
• Stocks/Bonds
• Accounts Receivable
– Open Account
• Insured
• Uninsured
• 100%
• 50%
•
•
75%
40%
•
•
75%
60%
•
•
75%
20%
•
•
90%
80%
•
60%
– Documents Against Payment
• Insured
• Uninsured
– Documents Against Acceptance
• Insured
• Uninsured
– Letters of Credit
• Confirmed
• Not Confirmed
• Inventory
BORROWING BASE EXAMPLE
• Asset Value
• Less Payables
– Outstanding Checks
– Open Account Payables
• Less Loan Amount
• Less Outstanding L/Cs/Guarantees
• Net Margin
SELLER FINANCING:
EXPORT 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%]
SELLER FINANCING:
FORFAITING
• 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
FINANCING INTERNATIONAL SALES:
SELLER 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
SUPPLIER FINANCING:
SUPPLIER / 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
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
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/
BUYER FINANCING
• Bank
– Lines of Credit
– Revolving Lines of Credit
– Letters of Credit
– Bankers Acceptance
• Supplier
– Trade Acceptance
FINANCING INTERNATIONAL SALES:
BUYER 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
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.
GOVERNMENT ASSISTANCE:
EXIMBANK
• Supported countries
– http://www.exim.gov/tools/country/country_limits.html#tblL
• 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
GOVERNMENT ASSISTANCE:
OPIC
• Overseas Private Investment Corporation
[OPIC]
– Economic development in new and emerging
markets
– Foreign direct investment [FDI]
GOVERNMENT ASSISTANCE:
OPIC
• 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
COMMERCIAL SOURCES OF PRIVATE
EXPORT CREDIT INSURANCE
• These reimburse the seller for losses due to a buyer’s
bankruptcy, insolvency, or payment default. It extends to
include non-payment due to political events in the
buyer’s 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
CERTIFIED GLOBAL BUSINESS PROFESSIONAL
Online/Distance Learning Course
SECTION 19
WORLD AND REGIONAL BANKS;
CUSTOMS SERVICE DEALINGS
ALAN L. WHITEBREAD
THE WORLD BANK
http://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
US$19.5 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
World Bank Group
• IBRD - reduce poverty in middle-income and creditworthy
poorer countries
• IDA - helps the world’s 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
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 >65,000 organizations
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
1.
2.
3.
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.
U.S. CUSTOMS SERVICE GOALS
1.
2.
3.
4.
5.
Assure compliance with U.S. laws
Prevent smuggling
Prevent money laundering
Collect tariffs and fees
Oversee export controls
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
DEALING WITH FOREIGN CUSTOMS
WHAT 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 won’t the customs office clear the
shipment to your buyer/importer?
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?
U.S. CUSTOMS ENFORCEMENT PENALTIES
[Plus other laws and penalties are likely to be invoked.
Criminal
Gross
Negligence
Negligence
Records
$10,000
Willful
$100,00
knowing
Twice
revenue loss
OR
20% of
dutiable
goods value
Four times
revenue loss
OR
40% of
dutiable
goods value
Fraud
Market
OR
resale value
of the goods
seized
OR
forfeited
Goods
seized
OR
forfeited
PLUS
$500,000
per count
PLUS
5 years in
Jail
per count
Least severe to most severe penalties per charged count.
ADVANCED DOCUMENTS:
SPECIAL FORMS
• 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
• THESE ARE PRODUCT
DEPENDENT AND
SOMETIMES COUNTRY
DEPENDENT FOR
EXPORTS AND FOR
IMPORTS!
CERTIFIED GLOBAL BUSINESS PROFESSIONAL
Online/Distance Learning Course
SECTION 20
SALES AND AFTER-SALES SERVICE
ALAN L. WHITEBREAD
SERVICES MARKETING
• SIMILAR TO PRODUCT MARKETING
• SIGNIFICANT DIFFERENCES EXIST
• YOU MUST SET REALISTIC
EXPECTATIONS TO SUCCEED
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
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
SERVICES – INTERNATIONAL
DIFFERENCES
• The personal contact
• Cultural sensitivity
• What other differences can you identify?
SERVICES – GOODS CONTINUUM
How do channels change for services?
How to sales organizations change for services?
How does the IMC change for services?
Mostly
Pure
Product
Groceries
TANGIBLE
Product
Some
Service
Autos
Hybrid:
Nearly
equal mix
of Product
& Service
Restaurants
CHARACTERISTICS
Mostly
Service
Some
Product
Pure
Service
Rental
Movies
Medical
Care
INTANGIBLE
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, …
SERVICES – GOODS CONTINUUM
HIGH IN
SEARCH
QUALITIES
HIGH IN
EXPERIENCE
QUALITIES
Mostly
Pure
Product
Groceries
TANGIBLE
Product
Some
Service
Autos
Hybrid:
Nearly
equal mix
of Product
& Service
Restaurants
CHARACTERISTICS
HIGH IN
CREDENCE
QUALITIES
Mostly
Service
Some
Product
Pure
Service
Rental
Movies
Medical
Care
INTANGIBLE
TYPES OF SERVICES
• Government services
• Professional services
• For-profit services
• Nonprofit services
PRODUCT & SERVICES CONCEPT:
THE AUGMENTED PRODUCT
BUSINESS [B2B]
CONSUMER
Delivery
Customization
Installation
Design
Training
Engineering
Maintenance/repair
CORE
Installation
Training
Field upgrades
Maintenance/repair
BRANDED
AUGMENTED
Field upgrades
THE SERVICE CONCEPT IN ACTION
Express carriers like DHL, FedEx, UPS and others
1
Help Solve Problems
Issue Invoices
[Billing] and
Credits
Provide Advice and Information
2
8
Take Orders
CORE
BUSINESS:
7
Provide Item
Tracing and
Expediting
3
The overnight
transportation and
delivery of packages
4
6
5
Assist with Documentation
[Domestic and Foreign]
Provide Supplies
Provide Pickup Service
DIFFERENTIATING SERVICES
• HAVE A UNIQUE OFFER
• ORDERING / ACCESS EASE
• DELIVERY EXPERIENCE
– Including installation and training
• IMAGE
• INNOVATIVENESS
• VALUE
– LOCATION / REMOTE
– PERCEPTION
SERVICE EXCELLENCE
•
•
•
•
A STRATEGIC CONCEPT
ORGANIZATIONAL COMMITMENT
HIGH STANDARDS
CONTINUALLY MONITOR AND
IMPROVE QUALITY
• SATISFY PUBLICS
– Customers, employees, vendors, shareholders, …
• MANAGE PRODUCTIVITY
CUSTOMER SERVICES & SUPPORT
• DETERMINING METRICS
– WHAT ARE THEY?
– WHAT ARE THE RELEVANT MEASURES?
• CRITICAL-INCIDENT TECHNIQUE
• IMPORTANCE-PERFORMANCE
ANALYSIS
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).
EVALUATING BUSINESS SERVICES
• The technical competence of a service provider
• The competence of a provider’s personnel
• The quality of the service delivery [friendliness,
thoroughness, response time, time to completion, …]
• Speed of delivery
• Successful outcome
EXPORT SERVICES: FINANCING
• Intangible nature causes financial security
[collateral] concerns
– Performance guarantees
– Liability concerns
• Export regulations control certain services
– Information services
– Encryption
INTERNAL SERVICES
• EVERYONE IS A CUSTOMER
– Stress teamwork
• cooperation
– Benefit from empowerment
• rapid response / better decisions
– Value individual contribution
• rewards
– Value individual needs
• training