Article Assignments: This assignment is a review/analysis and critique of an article. The article chosen may be selected from the tw

THE NEXT FOUR CHAPTERS EXPLAIN THE BASICS OF THE IMPORT/ export transaction. They apply to manufactured products as well as growing service industries such as computer software, construction engineering, and insurance.

These basics are "the bridge" from producer to buyer. They have been in place for many years and are tested over time. Nevertheless, it is possible to perceive the import/export transaction process as an obstacle. Don't let it deter you. Anyone can grasp the nuts and bolts of international trade. Invest time and money in yourself by learning as much as you can about the process before you commit to an import/export project.

This chapter addresses the first six commonalities of the import/export transaction. If you understand these steps, your import/export business will get off to an excellent start toward early profitability.

1. Learn the terminology.

2. Do your homework.

3. Choose the product or service.

4. Make contacts.

5. Conduct market research.

6. Define the bottom line.

Don't mistakenly assume that the order presented in this book represents a hierarchy of importance, or that these steps precisely parallel every import/export project. In reality sometimes things happen simultaneously.

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TERMINOLOGY

Because of increasing international interdependency, trade literacy has become as important as Internet and computer literacy in modern business. As you progress in your reading, frequently refer to the extensive Glossary found at the end of this book. Many of these terms are also defined when they first appear in the text. Don't be frightened off by the new terminology-you can learn it!

HOMEWORK

Research is one of the keys to winning the trade game. Even if you have some experience in international trade, it's unwise to jump into an unresearched project. In fact, it's not unusual to spend several weeks learning about a product and its profit potential before getting serious. Think of it as an investment to reduce the number of inevitable mistakes.

FOUR QUESTIONS

Before deciding whether an import/export project merits further commitment of time and funds, you need to answer four preliminary questions:

Question 1: What Product or Service? In what product or service are you interested or do you have some expertise? For the prospective importer/exporter, this decision is personal as well as technical. For the manufacturer of a product or provider of a service, this step is moot-you sell your own product or service.

Question 2: What Contacts? To whom will you sell the product or service? And from whom will you obtain the product or service? Who are your contacts? Do you have more than one source for the product you intend to import or export? Choose very carefully the country where you intend to sell your product.

Question 3: What Research? Must you do research? Yes! Are people and/or firms willing to buy this product or service? Although products and services that carry the label "Made in Country X" continue to be popular, they no longer sell themselves. But if a local product has a mature market, it very likely has a market in other parts of the world. On the one hand, the fact that many foreign goods cost less increases sales potential. On the other hand, if the product is unique to a given culture or the quality is cheap, many people will not buy it.

Question 4: What's the Bottom Line? Do the rough calculations of price and quantity warrant undertaking the project? Determine whether the margin of profit makes the project worthwhile. What changes must you make to the product to ensure a profitable export or import? Bear in mind that just as much work goes into importing or exporting an unprofitable product or service as trading a profitable one. Don't waste time with losers.

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CHOOSING THE PRODUCT OR SERVICE

The question asked most often is "What product should I select to import or export? Should it be rugs or machinery?"

Of course, if your firm already manufactures merchandise or provides a service, that product or service is what you sell. But for your own import/export business, your job will be to sell someone else's product or service. In other words, you will be the middleman.

The Personal Decision

Most people begin with a single product or service they know and understand or have experience with. Others begin with a line of products, or define their products in terms of an industry with which they are familiar. Above all, product selection is a personal decision, but the decision should make common sense. For example, if you aren't an engineer, don't begin by exporting gas turbine engines. Or if you are an electronics engineer, don't start with fashionable textiles.

A good example is the American house painter who began making excellent profits exporting a line of automated painting equipment to Europe. He knew the equipment before he began.

Start your business with a product or service that gives you an advantage. You can gain that advantage by having prior knowledge, by doing library research on a product, by making or using contacts, or by understanding a language or culture.

HOT TIP: Keep it simple in the beginning.

The Technical Marketing Decisions

Keep in mind that the product you select may have to adapt to the cultures of other countries.

Product Standards. There is a movement toward harmonizing world product standards such as flammability, labeling, pollution, food and drug laws, and safety standards. ISO 9000 (product registration) and ISO 14000 (environmental management registration) are the international quality assurance series. They have been in effect for well over a decade and are unlikely to go away. Therefore it is important to check your products for compliance.

Technical Specifications and Codes. Most of the world operates on 220 V, 50 Hz, but products in the United States use 120 V, 60 Hz. Similarly, most of the world uses the metric system of weights and measures. Determine how you can convert your product to meet these specifications and codes.

Quality and Product Life Cycle. In the life cycle of product innovation, new products are typically introduced to developed countries (DCs), leaving an opportunity for sales of earlier models to less developed countries (LDCs). Assess the stage in the life cycle in which you find your import/export product.

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Other Uses. Different countries use products for differing purposes. For example, motorcycles and bicycles are largely recreation vehicles in the United States, but in many countries they are the primary means of transportation.

Developed countries: The more industrialized nations-including all member countries of the Organization for Economic Cooperation and Development (OECD)-as distinguished from "developing" or "less developed" countries.

Least developed countries: Some 36 of the world's poorest countries are considered by the United Nations to be the least developed of the less developed countries. Most of them are small in terms of both area and population, and some are landlocked or island countries. They are generally characterized by:

• Low per capita incomes, literacy levels, and medical standards

• Subsistence agriculture

• Lack of exploitable minerals and competitive industries

Many LDCs are in Africa (see Chapter 12), but a few, such as Bangladesh, Afghanistan, Laos, and Nepal, are in Asia. Haiti is the only country in the Western Hemisphere classified by the United Nations as "least developed."

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MAKING CONTACTS

Importers and exporters need contacts to get started. The exporter must convince a domestic manufacturer of his or her ability to sell the manufacturer's product or service internationally. The importer, on the other hand, must find an overseas manufacturer or middleman from whom to buy the product or service.

Contacts are classified in two categories. By making these two groups overlap, you can expand your import/export network:

1. Sourcing (finding) a manufacturer or provider of the product or service you wish to import or export.

2. Marketing (selling) that product or service.

Sourcing Contacts

If you are an exporter, any product or service you select falls into an industry classification and that industry very likely has an association. Almost every industry has a publication-if not a magazine, at least a newsletter. Begin looking for manufacturers of your product or service in the appropriate industry publication. In Chapter 7 you will find other sources of information that may help you make contacts for products to export.

Contacts for importers are only slightly more difficult to obtain. Assuming you know in which country your product is manufactured, you need a contact in that industry in that country. Start with the nearest consulate office. Next, contact the International Chamber of Commerce in that country. You can also make contacts through your embassy or through a corresponding industry association. Furthermore, you can make direct contact with the government of the country in which you are interested.

Next, establish communications with the contact to seek further information or to ask for product samples and prices. You can make contact by letter, fax, or e-mail. (Communications are covered in Chapter 3.)

Eventually, take a trip to the country with which you intend to trade. It will make a big difference. (Travel is also explained in Chapter 3.)

Marketing Contacts

Marketing methods and channels of distribution are the same in most countries. Agents, distributors, wholesalers, and retailers exist everywhere, and you make marketing contacts through these channels.

For domestic marketing contacts, use trade shows, direct sales, direct mail, and manufacturers' representatives, as well as swap meets, flea markets, home parties, or wholesalers. Most governments will also help you find contacts.

Foreign sales representative: A representative residing in a foreign country who acts as a

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sales agent for a U.S. manufacturer, usually for a commission. Sometimes referred to as a "sales agent" or "commission agent."

Distributor: Afirm that (1) sells directly for a manufacturer, usually on an exclusive basis for a specified territory, and (2) maintains an inventory of the manufacturer's goods.

The international marketeer (trader) also can make contacts through world trade centers (WTC) (see Chapter 9), trade shows, direct sales, distributors, or agents who serve as the equivalent of manufacturers' representatives. Trade fairs or shows are often the single most effective means to make con tacts and to learn about products, markets, competition, potential customers, and distributors. The term trade show or fair includes everything from catalog shows through local exhibits to major specialized international industry shows. At these shows exhibitors offer literature and samples of the product.

Lists of worldwide trade shows and international conferences are available from most large airlines such as Lufthansa as well as from the U.S. Department of Commerce or Chamber of Commerce (COC). Your industry association will know when and where the appropriate trade shows take place.

Table 2-1 offers a range of ideas that should assist you, the importer or exporter, in making either sourcing or market contacts.

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CONDUCTING RESEARCH

Market research is vital to the success of your import/export business. Is your product salable? Does anyone care? You must be able to sell enough of the product or service to justify undertaking the import/export project. If you are presenting a new product, you may have to create a market. But a good rule of thumb for the new import/export business is: "If the market isn't there, get out of the project and find another product."

International market research will save money and time. Unfortunately, too many newcomers plunge into import/export without determining whether they can sell the product at a profit. Following are checklists of research items for importers and exporters.

Exporter Checklist

Q Is there already a market for the product?

Q What is the market price?

Cd What is the sales volume for that product?

Q Who has market share, and what are the shares?

What is the location of the market, including its size and population? People in major urban areas generally have more money than people elsewhere.

Wf What are the climate, geography, and terrain of the market country?

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What are the economics of the country, including its GNP, major industries, and sources of income?

What is the local currency? How stable is it? Is barter commonplace?

Who are the employees of the country? How much do they earn? Where do they live?

Is the government stable? Do they like Americans? Does the country have a good credit record?

Q What are the tariffs, restrictions, and quotas?

What are the other barriers to market entry, such as taxation and repatriation of income?

What language is spoken? Are there dialects? Does the business community speak English?

Q How modern is the country?

Q Do people use the Internet?

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Q Is there electric power?

Q How do businesses move their goods?

Q How good is the hard infrastructure (roads, trains, etc.)?

Q What about the soft infrastructure (schools, etc.)?

Does the country manufacture your product? How much does it produce? How much is sold there?

Q What kind of and how much advertising is generally used? Are there local advertising firms? Are there trade fairs and exhibitions?

What distribution channels are used? What levels of inventory are carried? Are adequate storage facilities available?

Who are the customers? Where do they live? What influences a customer's buying decisions? Is it price, convenience, or habit?

Q What kinds of services are expected? Do customers throw away or repair? Can repair services be set up?

Q What about competition? Are there sales organizations? How do they price?

Q What are the property right implications?

Importer Checklist

Q Is there already a market for the product?

Q What is the market price?

Q What is the sales volume for that product?

Q Who has market share, and what are the shares?

Q What is the location of the market, including its size and population? People in major urban areas generally have more money than people elsewhere.

Q Who are the wholesalers?

What kind of and how much advertising is generally used? Are there local advertising firms? Are there trade fairs and exhibitions?

Q What distribution channels are used? What levels of inventory are carried? Are adequate storage facilities available?

Q Who are the customers? Where do they live? What influences a customer's buying decisions? Is it price, convenience, or habit?

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What kinds of services are expected? Do customers throw away or repair? Can repair services be set up?

What about competition? Are there sales organizations? How do they price?

Gf What are the property right implications?

The answers to these questions are available through most good libraries, the U.S. Department of Commerce or Chamber of Commerce, or private market research companies. (See Chapters 7 and 8 for export and import information sources.)

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DEFINING THE BOTTOM LINE

Profit is an internal, individual decision that varies from product to product, from industry to industry, and within the market channel. Desirable profit relates to the goals you plan for your import/export business. For instance, one person's goal might be to cover expenses, take a small salary, and be pleased if the business supports occasional travel to exotic places. Another person might seek to expand the business into a major trading company. Yet another might decide to work for only five or six years, sell the business at a profit, and retire on the capital gain.

This segment of the chapter discusses the profit aspects of international trade, beginning with initial quotations, terms of sale, the market channel, and pricing.

Initial Quotations

Initial quotes begin either with a request for quotation (RFQ) sent by the importer to the exporter or with an unsolicited offer from the exporter. A simple letter or fax can be a request for a quotation. Figure 2-1 shows a sample letter of inquiry.

The pro forma invoice, a normal invoice document visibly marked "pro forma," is the method most often used to initiate negotiations. This provisional invoice is forwarded by the seller of goods, prior to a contemplated shipment, advising the buyer of the kinds and quantities of goods to be sent, their value, and important specifications (weight, size, etc.). Its purpose is to describe in advance certain items and details. The invoice contains the major elements of a contract that will be used later in shipping and collection documents such as letters of credit (discussed in Chapter 5).

Keep in mind that everything in a pro forma invoice is negotiable, so carefully think through any terms entered on this document. Once accepted by the purchaser, it becomes a binding sales agreement or legal contract, and the seller is bound to the terms stated. Figure 2-2 is an example of a pro forma invoice, showing the key elements of the contract:

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Fig. 2-1. Typical letter of inquiry

• Product description and specifications • Material costs

• Price

• Quantity

• Shipping costs

• Delivery terms

• Procedures

Terms of Sale

In international business, suppliers use pricing terms, called terms of sale. These pricing terms quite simply define the geographical point where the risks and costs of the exporter and importer begin and end.

The International Chamber of Commerce (ICC) has, over time, developed a set of international rules for the interpretation of the most commonly used trade terms, called INCOTERMS. If, when drawing up the contract, both buyer and seller specifically refer to INCOTERMS, they can be sure of defining their respective responsibilities. In so doing,

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buyer and seller eliminate any possibility of misunderstanding and subsequent dispute. A copy of INCOTERMS 2000 (effective January 1, 2000) can be ordered from: ICC Publishing Corporation, Inc., 156 Fifth Avenue, Suite 417, New York, NY 10010; phone: (212) 206-1150; fax: (212) 633-6025; e-mail: [email protected]; Web: www.iccbooks.com.

There are many variant terms of sale. INCOTERMS organize them into four groups; "E group" for EXW points of origin; "F group" for FCA, FAS, and FOB; "C group" for terms in which the seller has to contract for carriage (CFR, CIF, CPT, CIP); and "D group" for terms in which the seller has to bear all costs and risks to bring the goods to the place of destination (DAF, DES, DEQ, DDU, and DDP).

Among all these terms there are four-EXW, FAS, CIF, and DAF-that are most commonly used. Figure 2-3 shows how these terms function.

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Fig. 2-2. Typical pro forma invoice

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Fig. 2-3. Where the risks and costs (obligations) begin and end

EXW is used with a named place or point of origin. Examples are Ex-Factory (named place) and Ex-works (named place). This term represents minimum seller responsibility. Seller covers all charges to the agreed to "specified delivery point." The buyer pays all costs and accepts all risk from the point where the goods are made available, including export clearances.

FAS (free alongside a ship) is usually followed by a named port of export. A seller quotes this term for the price of goods that includes charges for delivery alongside a vessel at the port. The buyer is responsible thereafter.

CIF (cost, marine insurance, freight) is used with a named overseas port of import. The seller is responsible for charges up to the port of final destination.

DAF (delivered at frontier) is used with a named place of import. The seller delivers when the goods are placed, unloaded, at the disposal of the buyer on the arriving means of transport. The goods are cleared for export, but not cleared for import at the frontier-that is, they must still pass the customs border of the named country.

Marine insurance: Insurance that will compensate the owner of goods transported on the seas in the event of loss if such loss would not be legally recovered from the carrier. Also covers overseas air shipments.

Specific delivery point: A point in sales quotations that designates specifically where and within what geographical locale the goods will be delivered at the expense and responsibility of the seller (e.g., FAS named vessel at named port of export).

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The Market Channel

In general, the international market channel includes: • The manufacturer

• The foreign import/export agent

• Any distributors (wholesalers)

• Any retailers

• The buyers or customers

Figure 2-4 shows how the market channel might look.

Fig. 2-4. Market channel

Pricing for Profit

The price of your product should be high enough to generate a suitable profit but low enough to be competitive. Ideally, the importer or exporter strives to buy at or below factory prices. This can be done by eliminating from the overseas price the manufacturer's cost of domestic sales and advertising expenses.

Each step along the market channel has a cost. If a product is entirely new to the market or has unique features, you may be able to command higher prices. On the other hand, to gain a foothold in a very competitive market, you can use marginal cost pricing. In marginal cost pricing, you set the market entry price at or just above the threshold at which you would incur a loss. (Under WTO rules it is illegal to dump-that is, gain market share-by incurring a loss.)

Most new importers and exporters simply use the domestic factory price plus freight, packing, insurance, and so on. Prices may be quoted in U.S. dollars or in the currency of the buyer. In general, pricing should be based on long-run profitmaximizing objectives. Market share and volume should be targeted for the long-term export commitment.

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It is important that you understand not only the elements that make up your price but also those of your overseas trading associate. Remember there are no "free lunches"; everything has a cost.

Figure 2-5 illustrates how an importer or exporter might move a product from one country to another. In particular, it shows how the selling price in one country becomes the buying price in the other. Typical commissions are between 7 and 20 percent for an export middleman and between 5 and 20 percent for an import middleman (foreign distributor or agent), although commissions may be as low as 1 percent and as high as 40 percent. The key issues are the price of the product and the number of units (sales volume) that you can sell. If, for instance, the product is a big-ticket item (high sales price), the commission percentage may be quite low, but a small percentage of a million-dollar sale can be very good business.

Table 2-2 shows a set of fictitious cost elements associated with a CIF quotation, corresponding to the steps shown in Figure 2-5. Figures 2-6 and 2-7 are worksheets to aid you in accurate costing of your product.

Is there sufficient profit at the volumes (number of units) you can sell to make it worth your while and meet your personal profit goals? Recall that the same amount of work goes into importing or exporting a product that makes no profit as goes into one that makes a good profit.

HOT TIP: A word of caution for manufacturers. If at first exporting doesn't appear profitable, check your manufacturing costs. It may be necessary to import less costly components in order to compete internationally.

Now that you are satisfied that you have a viable project, the next step is to lay out a written long-range market plan. The next chapter explains how to develop that plan, then how to put it into action to make a transaction.

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Fig. 2-5. Pricing model

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Fig. 2-6. Export costing worksheet

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Fig. 2-7. Import costing worksheet

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