EXPORT GUIDE
Successful Exporting A concise guide
Introduction:................................................................................................................ 4 STEP 1: Target your export markets .......................................................................... 5 A. 1. 2. B. C.
D.
Analyse potential markets 5 Qualitative research ......................................................................................... 5 Quantitative research....................................................................................... 6 Competitor analysis
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Determine profitability 8 1. Define your product or service ......................................................................... 8 2. Position and adapt your product or service...................................................... 9 3. Segment your market..................................................................................... 10 4. Identify your distribution method .................................................................... 12 5. Design your export service ............................................................................ 16 6. Build your pricing strategy.............................................................................. 17 7. Assess your full financial commitment ........................................................... 18 Management and cost control
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STEP 2: Prepare your organisation .......................................................................... 22 A.
Assess your exporting goals
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B.
Internal diagnostics
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C.
Manage the inherent risks 24 1. Economic risks............................................................................................... 24 2. Secure orders ................................................................................................ 24 3. International legal risks .................................................................................. 26 4. Intellectual property protection ....................................................................... 28 5. Political environment changes ....................................................................... 29 6. Protecting yourself from these risks ............................................................... 30
D.
Logistics
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E.
International payments
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F.
Formulate your promotion plan
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G. Implement your strategy
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Conclusion................................................................................................................ 36 Glossary ................................................................................................................... 37 A.
Incoterms
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B.
Essential export documents
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C.
Support from Luxembourg public institutions
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D.
References
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E.
Disclaimer
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Introduction:
Exports are essential to any competitive economy. The disciplines of exporting favour those who are informed and resourceful. Exporting requires that companies build on their strengths; research market potentials thoroughly, initiate a realistic financial plan, and enact effective delivery practices. If a company accomplishes these preparations and the follow-through, its internationalisation efforts are deemed successful. This guide offers practical insights to SMEs that want to expand into international markets. In the pages that follow, we review processes, procedures and challenges that can help you determine the directions and timetables you need to execute a productive export plan.
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STEP 1: Target your export markets
A. Analyse potential markets Market research is your starting point to discover whether exporting can develop your business potential. Market research is recommended for any large and small organisations. While building your company’s business strategy, it is important to collect and analyse data about a particular target market, competitors, and the market’s environment. This increases your understanding of challenges and opportunities. Such market research usually screens a range of countries to short-list the most suitable target markets. Your research team is most likely to require two methods of data collection: Primary research: information collected to generate specific data about targeted areas of concern. Secondary or desk research: information collected from existing data such as reports, newspapers, magazines, journal content, and government statistics. Your studies should be designed to assess: • • • •
Potential future markets Criteria to choose among pre-selected markets Priority market launches Maximum uses of trade shows and other closely-targeted initiatives
Three methods can shape your market research, uncover and design opportunities, and collect crucial answers to your strategic questions. They are qualitative research and quantitative research.
1. Qualitative research Qualitative research examines how and why things are as they are. It directs your attention to issues and concerns that directly affect the human side of business.
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2. Quantitative research
Quantitative research examines what can be measured numerically. It usually measures market phenomena and other concerns with statistical analysis. Your customers in different markets have developed varying interests and motivations as well as different political, social, political and economic standpoints. External PEST (P for political, E for Economic, S for social and T for technological) analysis examines opportunities and challenges that can be anticipated. This strategic analysis observes key issues affecting your target markets according to five criteria below. The following aspects of any potential market should be well-researched and analysed before your company launches commercial initiatives: Market structure: • • • • •
Market potential and size Capacities of retailers and local players Buyer tastes Buyer preferences Buyer responsiveness
Legal environment: • • • •
Type of local legal system Effects of local regulations Protection of intellectual property, patents, licenses, rights Availability of arbitration and mediation
Competitive environment: • • •
Local competitors’ performance Nature of your competition Existing relationships between your competitors
Economic environment: • • • • •
Local economic trends Balance-of-payments trends Strength/weakness of local currency Trade barriers to market entry Financial risks
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Political environment: • • • •
Government support for local imports Political stability Attitudes toward foreign products/foreign investments Forces of nationalism and protectionism
Physical and demographical environment: • • • • • • • •
Demographic characteristics (age, gender, income, family structure, occupation, cultural beliefs, etc.) Population trends Effects of climate Physical barriers to transportation and communication Local languages Educational levels and social structures Attitudes toward change Values of consumption
Technological environment: • • • • •
Types and sizes of businesses Rules for business conduct Role of businesses in society Technology standards and reliability Capacity to maintain technological advances
Social and cultural environment: • • •
Prevalent practices and beliefs Local value systems Attitudes about foreign goods and services
A basic understanding of these market aspects will help you adapt your business communications, improve intercultural effectiveness, and develop strategies for overcoming cultural obstacles. Sharing short- and long-term plans with your network of contacts should be particularly informative. Such contacts include potential customers, other exporters, potential local partners, and professionals at conferences and trade events.
B. Competitor analysis Your business strategies should be informed not only by your capabilities and intentions but also by competitors’ policies and methods. Competitor analysis helps predict their behaviours. This can help you determine:
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• • • •
Which competitors share your market segment or niche Competitors’ strategies and expected actions Who local representatives collaborate with and how they do it Ways to influence competitors’ behaviour to your firm's own advantage
This analysis should use organised intelligence-gathering techniques that pattern a wide array of information to support well-informed strategic decisions. Michael Porter (1985) analyses competitors according to four central qualities: • • • •
Objectives Assumptions Strategies Capabilities
A competitor analysis should include the market’s strongest competitors, as well as potential competitors that might also begin exporting to your target area. Moreover, competitors who offer products different from yours can pose a threat to your export strategy by offering an alternative. They are called indirect competitors and should be closely monitored.
C. Determine profitability You need to clarify exactly what you intend to export. Your marketing team will play a key role in this task by defining a product positioning and creating competitive advantages. Do not forget to incorporate information and advice from your representative or a local marketing expert in order for you to understand your intended consumers’ perspectives. Your strategy should include the following steps:
1. Define your product or service Your product range can expand to suit market demands such as seasonal fluctuations or consumer evolution. A product can also be repositioned to make it more competitive over a long-term plan. To choose the right product positioning and to create a competitive advantage, the following factors must be carefully analysed: • • • • •
Price Quality Technologies and know-how Design After-sales service
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• • •
Brand image Packaging Service
When the analysis is complete, a few decisions must be made, such as whether: • • • •
to keep the product and its features as they are to modify its characteristics according to local preferences to improve the product to cancel the export of this product
2. Position and adapt your product or service
Sometimes, you may need to modify a particular product (and its manuals) to satisfy buyer tastes or needs in foreign markets. You should adapt to: • • • • • • • •
Buyer’s preferences Standards of living Cultural specificity Availability of resources Logistical concerns Metric, degree, and mile systems Government regulations Geographic and climatic conditions
Exporters should start commercialising products which do not require major reconceptualisation or technical modification. Yet services should cater to the local criteria for satisfaction, which may be significantly different from your local market. Once you have assessed that your goods and services will be viable in your chosen market, determine your short-and long-term goals. Then execute the required modifications and consider: • • • •
Creation of a complementary range Norms and regulation adaptations Commercial and transport packaging Adaptations of design, taste, colour and use
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3. Segment your market
First, different geographic factors must be assessed in segmentations to gain global, national, city, postal code or rural perspectives. The economic, cultural and political differences between countries can have significant influences on any marketing. Secondly, you need to segment targeted international markets into factors that will help you clarify how those markets fit your business identity. This requires the analysis of several criteria, all of which affect whether consumers would be appropriate for what you would export: Demographic: • • • •
Consumers’ likely age range Family size Affect of marital status (more impactful in Islamic countries) Gender
Socioeconomic: • • • • •
Size of income groups Sensitivity about social classes Vocations Education levels Religion and ethnicity
Lifestyle/personality: • • • •
Attitudes/opinions Interests Avocations Tastes and preferences
Product characteristics: • • • • • •
User type Price sensitivity (important for developing countries) Consumption patterns (frequency of usage) Perceived benefits Brand loyalty Purchase occasions and availability
Priority should be given to foreign markets that: • •
Have similar demographic characteristics or specifications for goods Require only slight product- or service-modification
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•
Produce a unique product that is sold on the basis of its status or foreign appeal, or a product with few or no distinguishing features that is sold almost exclusively on a commodity or price basis
Market characteristics: • • • •
Structure Buyer tastes Buyer preferences Buyer responsiveness
Identify the most attractive market segments you can serve according to segment preferences, patterns of competition, and company strengths.
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4. Identify your distribution method
Your distribution method should target your selected segment, best employ your resources, and minimise the need for switching to other strategies later. The foundational and day-to-day aspects of a profitable export enterprise rely on the decisions you make about the following considerations. Decide which sales and distribution networks work best for you: •
A complete sales and distribution network created from scratch. o This can be a high cost, high risk strategy, especially if you did not first establish substantial market knowledge or effective contacts.
•
A local base, using sales agents with better market knowledge and experience, as well as connections with potential clients. o This can be efficient for costs and effort.
•
A foreign distributor who undertakes the whole sales and commercial process on your behalf. o This is the more competitive option but you lose control over goods once they have been shipped.
Selecting a reliable distributor or agent can be challenging as it can be hard to obtain accurate information about the quality, honesty and efficiency of various agents. The chart below outlines a way to effectively select your distribution method.
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Distinctions between these methods depend on the company's engagement in local activities. They can also be used alone or in combination: Exporting directly This method is the most complex. The exporter handles every aspect of the process from first market approach to after-sales services. Consequently, the export team should be committed totally to understanding and serving foreign customers properly. While complex, this method tends to be most profitable over a long-term growth if based on quality research. Establishing a local office directly controls and therefore usually increases your efficiency. This office acts as your distributor and allows you to exchange information efficiently with overseas end-users and retailers. While exporting directly, you will need to canvass your market segment. Such prospecting will position you in front of a client. Presenting your product or service directly can show you whether the relationship with the client is worth pursuing. Plan the first exploratory visit to the market so that it coincides with a local trade show if you can. Trade shows can be a valuable way of gaining ground information. Plan your business stages around an annual calendar that includes the local interesting events. Options for contacting your potential clients are: • • • • • • • •
Fairs and trade shows Canvassing trips International mailing Advertising in international magazines Business offers Contact with transit foreigners Public tenders and call for bids Export assistance
Exporting through intermediaries A selected intermediary will sell your products abroad through existing contacts and assume a major part of the risks. To make this effective for your firm’s needs, you should insist that this agent enacts your preferred strategy and development plan. The foreign intermediary generally provides support and service for the product, relieving the company of these responsibilities. The distributor usually carries a product inventory and sufficient spare parts, and maintains adequate facilities and personnel for servicing operations. Distributors typically deliver a range of complementary products to retailers or dealers that belong to a pre-established network. It is essential that you ensure their commitment not to represent your competition.
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Depending on your business model and product type, other options are available: •
Franchising: the franchisor grants an independent operator the right to use his manual, products, techniques, and trademarks for a percentage of gross monthly sales and a royalty fee (e.g., Quick, Starbucks, Zara, etc.)
•
Licensing: the licensor's intellectual property (copyrights, patents, trademarks, trade secrets, etc.) is made available to a licensee for compensation that is negotiated in advance. This compensation may be a lump sum or a royalty. You can license your technology to your local counterpart who will use it to manufacture and sell products in his market
•
Joint-Venture: two partners join to incorporate a joint corporation. All parties agree to share the profits and losses of the enterprise. It is important to check the local market’s legislation to ensure that you comply with all laws and requirements
A partner knowledgeable from a local perspective can teach you about competitors, technological shifts, and new opportunities likely in your target market. A welldesigned development plan for the local market will help you retain considerable control over the local process. To carefully identify, qualify and select your future representative, consider closely the following criteria: • • • • • • • • • •
Financial resources Product knowledge Market knowledge Workforce experience and languages spoken Available storage After-sales service, technical and installation capacities Collaboration costs, commission policies Trust and affinity Management and organisation Recommendations
When local counterparts purchase products directly, packing and marking the products to their own specifications and under their own names, this is called a private label approach. In such transactions, you relinquish control over the marketing and promotion process. Local intermediates for indirect sales include: • • • • • •
Retailers’ and dealers’ networks Regional or national agents Several regional distributors Dealer, reseller, or re-marketer Commercial companies, merchants, or traders Official purchasing agencies
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Different approaches to domestic intermediates handling your exports include: • • •
Exporter with complementary products Export broker or purchasing office Export management companies
Your new partnership can: • Help you manufacture your product or OEM locally, reducing entry barriers and costs • Partly finance your local activities • Take advantage of an existing distribution network and communicate locally • Provide market knowledge or technological expertise to improve your product • Increase your credibility with another company that already has credibility in the marketplace
5. Design your export service
Every exporting organisation must create a dedicated foreign trade team which performs all tasks related to international sales, facilitates strategies and procedures, and carries out policies that promote the corporate presence in international markets. Train new collaborators about your export structure in detail and provide them with complete job descriptions. Members of the export team should build consistent, effective interactions with their partners abroad. Different export team organisation structures can be appropriate: • • •
An impermanent task group A subsidiary specialised in export management An export service set up as a profit centre by:
Geographical situation Function Project Product
An international relation can deteriorate quickly without frequent communication and monthly or quarterly visits. The local counterpart should be treated as well as a domestic client. For example, partners should be notified consistently and frequently of all changes in price, contacts, addresses, and data changes. Such commitments will ensure strong product visibility in the marketplace. Products and services delivered to your clients are inseparable from the team that renders them. The quality of service is determined by the service skills of each team 16
member. Because these team members maintain ongoing contact with the client, they should demonstrate sophisticated interpersonal skills and cultural sensitivity. Prepare after-sale services: After-sale service and cost-effective maintenance are critical for any products that require diligent pre- and post-sale service. If your distribution network has to provide this service backup, conduct a strict training programme with a knowledgeable local team, periodically assess service quality, and ensure that spare parts are readily available.
6. Build your pricing strategy
The main components of pricing are market demand, costs, and competition. Your market research should include an analysis of all of variables that impact pricing. Take into account additional costs inherent in the export process, as they substantially increase the final price paid by the importer. These include transport, transaction costs, customs tax, foreign exchange fees, and value-added taxes. Discuss expenses and pricing with your accountant. Evaluating each factor will likely result in export prices that differ from domestic prices. The market-linked parameters below must be considered in calculating your export price: • • • • • • • • •
Price that the market is ready to pay Competitors’ pricing strategies After-sales service costs Custom taxes Local promotion costs Safety stock Potential turnover Export risks Size of order
The internal parameters below must be considered when calculating your export price: • • •
Ex-work prices Export fixed costs Indirect product costs:
Adaptation to the market Dedicated packaging
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• •
Gross profit margin Market approach costs :
•
Transportation costs:
•
Market research Promotion campaign Samples shipment Documentation Commissioning the local representative Discount and rebates
Shipment Packaging Insurances Documents
Financial costs:
Terms of payment Methods of payment
7. Assess your full financial commitment
SMEs traditionally have been restrained from conducting international trade because of their limited resources, even when their underlying profitability was sound, because international activities usually require planning for an investment over a period of time. Management should monitor continually the financial implications of becoming a viable exporter. Below are strategies that can address these challenges: Complete a cash flow forecast The export component of your business should be self-sustaining as soon as possible. The best way to ensure this is an accurate cash flow forecast. You need to ensure that you identify the initial capital outlay to fund export set-up costs, have more money coming in than going out, and provide for the daily money flow. A cash flow forecast will also help you identify gaps in your planning. For example, if most or all of your sales will be credit rather than cash, payment could be delayed one to two months – or even longer – after the sale, depending on how efficiently you can secure payment.
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Prepare a sales forecast This will always be the most difficult aspect of any export budget. It is important to resist the temptation to make top-down market predictions. Your estimates should be carefully researched and cautious, based on your assessment of competitors and their market share, what the local customers are likely to buy, and what marketing and promotions can drive sales. Calculate the break-even point Once you have researched your selling price, identified your costs, and completed the cash flow forecast, you are in position to calculate your break-even point. This will help you assess whether the export process is feasible. It may also give you an indication of the minimum quantities you need to ship, or the hours you need to work, to make the effort worthwhile. You can then compare the required break-even point (minimum quantities or minimum hours) with your research on the level of demand in the actual market. This calculation should consider the following: • •
The shipment has to be a source of profit. It should actually make enough money out of the shipment to make it worthwhile Your break-even calculation may reveal that a higher number of sales is required
Explain your financials Many business owners seeking investment funding are unable to articulate their financial details. But investors should consider the following points crucial: • • • • • • •
The projected gross profit margin on export sales The current and the projected net profit margin The monthly variable costs for exporting The monthly overheads (fixed costs) The current performance against previous forecasts The cost structure The assumptions made in your forecasts
It is important to use specialist financial advisors, either in-house or service providers, to understand and control your company’s cash flow and financial position.
Internal Sources: • • •
Increases in capital Parent company financing the subsidiary Resources released from previous activities
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External Sources: • • •
Domestic or foreign banks Financial negotiations Investment firm or public agencies
Key export functions to allocate for your available financial resources: • • • • • • • • •
Cost of initial market research, market visits, product promotion, etc. Production capability, product adaptation, packaging and transportation Any period of credit granted to the buyer Hiring qualified employees Export, language and cultural awareness training New commercial supports, marketing tools, and investments Local visits and partners network development Existing export market development or new market launch Export Management Control
D. Management and cost control Computing the actual cost of producing your product and bringing it to the market is the essential determiner of whether or not exporting your product is financially viable. If your organisation uses the cost-plus method of calculation, you simply add administration, research and development, overhead, transportation, distributor margins, and customs charges to domestic manufacturing cost. Marginal cost-pricing is a more accurate method of pricing for new market entry. This method considers the direct expenses of producing and selling products as a floor beneath which prices cannot sink without incurring loss. Domestic and export products may have additional costs assigned to cover expenditures associated with their postage, necessary market research, and financing, etc. It is essential for an export company to handle these costs in a specific analytical accountancy rather than in its general accountancy. Additional costs often include: • • • • • • • • •
Market research and due diligence Travel expenses International postage and telephone expenses Translation costs Commissioning and training expenses Drafting of legal documents Offer, confirmation, and order control Transportation and logistics costs Documentation and commercial supports 20
• • • •
Financing costs Cost control management Consultants and freight forwarders Product adaptation, certifications, and special packaging
A few essential procedures allow your company to cut these costs: •
For running costs :
•
For marketing costs:
•
Economies of staff Regrouping activities Improvement of the communication between departments Reorganising departments Improving productivity with specific training Use of consultants instead of full-time employees Use of word processing machines with conformity modules Implementing widespread use of forms for repetitive communications
Use standard presentation documents Use existing available documents for market research Use shared stands in trade shows and fairs Seek discounts for business trips, credit cards, and hotels
For specific export costs:
Simplify control of orders Use standard international shipment documents Take advantage of competition between transport companies Outsource some services
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STEP 2: Prepare your organisation
A. Assess your exporting goals A well-managed strategic process helps exporters to gain a stronger marketing positioning and a higher profitability. Effective exporters usually design their strategies to: • • • • • • • • • •
Ensure that your company can make enough money to stay in international business several years to cover their start-up costs Carefully calculate export price to support profitability Reduce your dependency on a domestic market that’s saturated or tight a market segment too Launch an offensive into a new market before competitors do Generate an efficient level of production and reduce fixed costs Develop the company’s reputation, power and prestige in target sectors Improve level of expertise in target sectors Increase leverage for purchasing power Anticipate strategies needed to manage revenue fluctuations Extend domestic product life cycles by exporting them to target markets
The goals planned with the key members of your export team should be SMART: S – Specific: • Well defined and clear to anyone with basic knowledge of the project M – Measurable: •
Know if the goal is reasonable, how far it is from completion, and when it is achieved
A – Attainable: •
Accomplish small goals that lead to larger goals
R – Realistic: •
Work with enough resources, knowledge and time
T – Timely: •
Your goal is grounded in a time frame that provides motivation
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B. Internal diagnostics Newcomers in international markets often research for markets with needs and conditions similar to their domestic customers. You must know what your company is capable of before you expand its responsibilities. One key assessment tool is the internal SWOT (strengths, weaknesses, opportunities, and threats) analysis. This identifies a corporation’s core competencies as well as predictable advantages and disadvantages of entering a target market. The SWOT analysis provides a realistic picture of the organisation by examining: • • • • •
Target market knowledge Product or service characteristics Production flows Resources available at different level Available time and funding dedicated to the project
Any internal analysis of a company should be market-oriented because objectives and resources are only meaningful when they assist in meeting customer needs. Your assessments should include: •
Objectives:
•
Profit goals and specific commercial objectives Number of markets you want to enter, and in which market segments Level of control over marketing strategy The role of international marketing in your overall corporate strategy Organisation flexibility
Resources:
Unique or important features of your product range Current pricing strengths and weaknesses Precise distribution and promotional strategies Available expertise and skills in international marketing Capital resources and current level of borrowed funds Production capacity, research, and developmental possibilities
Other factors crucial for an accurate diagnostic include: •
Suitability: Strategic options should make full use of the organisation’s strengths and avoids adverse effects of organisational or external weaknesses
•
Feasibility: The strategy must work in practice
•
Acceptability: International expansion should fulfil the needs and objectives of management and shareholders
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C. Manage the inherent risks Export risk management requires precise compliance measures because international markets present unique risks due to the diversity of laws, currencies, habits, political regimes, and culture.
1. Economic risks Economic risks arise in a variety of forms. They can threaten the seller’s ability to collect payment for goods and services. There are risks in supplying goods on credit to a person you may not have met, who is far away, speaks a different language, has a differing cultural view of life, and whose business objectives contrast with yours. In this arena of increased risk, export development also incurs initial capital outlay and operating costs in markets whose demand level may not yet be assured. Elements of economic risk include: • • • •
Payment default from the buyer Buyer’s insolvency Market-changing political events Disasters
Currency risks include: • Fluctuations in exchange rates: Payment is usually made in either the buyer’s or the seller currency or in a third, mutually agreed-upon currency. Currency exchange shifts that occur between the date of sales and payment can minimise or wipe out profit margins •
Convertibility risks: A buyer might receive the goods promised and be ready to make payment but cannot because the buyer’s government bars the conversion of its local currency to that of another country
2. Secure orders
Economic indicator movement: Political and economic stability, protectionist tendencies, GDP, growth, inflation and unemployment can all impact profitability. Risks during execution of the order: Unforeseen increases in production costs or cancellations during execution of an order can disrupt initiatives.
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Export transactions usually begin with an inquiry from abroad that is followed by a request for a quotation. The offer or order confirmation should include these key documents: • • •
Specific terms of sale for the contract Price list Payment conditions
The preferred method for export transactions is a pro forma invoice, a quotation prepared in invoice format. Pro forma invoices are not used for payment purposes. In foreign trade, prospective buyers usually enquire about information on quantity, quality, delivery date, quotation, and other terms. A well-structured offer describes the product, pricing, logistic conditions and also specifies the terms of sale and terms of payment. Foreign buyers who are not familiar with the product are usually offered a more detailed description than that which would be offered to a domestic buyer. An accurate quotation should include the following points: • • • • • • • • • •
Seller’s and buyer’s names and addresses Buyer's reference number and date of enquiry Listing of requested products and brief description Price of each item Logistics characteristics, insurance, shipping costs, delivery point and shipment date Terms of sale Terms of payment Validity period for quotation Total charges to be paid by customer Currency of sale
A pro forma invoice should include two statements: one that certifies that the pro forma invoice is true and correct and another that states the country of origin of the goods. The pro forma invoice should also be clearly labelled as such. A valid acceptance should include the following: • • •
The specific offer Oral or written acceptance Acceptance which reaches the seller within the time of validity
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3. International legal risks In intercontinental business, a contract is influenced by foreign legislation, linguistic barriers, and other cultural differences. These aspects could diminish the potential profits or the efficiency of the work collaboration. That is the reason why legal risks should be carefully studied.
Regulations Governments require official documents like health certificates, consular invoices, security norms, certificates of inspection, etc. Some export authorisations can be granted only after satisfying expensive scientific or technical controls. Local regulations can determine which products and technologies can or cannot be cleared through customs.
Warranties Warranties represent a commercial advantage if they distinguish your product from a competitor’s product. They can play a major role in negotiations for new markets. Levels of expectation for warranties vary by country, depending on production quality, local standards, competitive practices, the activism of consumer groups, etc. Because customers overseas typically expect a specific level of performance, be specific as to your warranty's coverage. Promise only what you can deliver. Warranty service should be handled locally with the assistance of a representative or distributor. Servicing warranties will probably be more expensive and troublesome in foreign markets and may raise your product cost. Therefore, offer only warranties that are market appropriate. Terms of sale The documented terms of sales should cover and explain in detail the following:
1. Payment conditions: •
Payment delays: These may be Usually they are set to 30, 60, or payment which are regulated and payment. Possible agreements payment date
•
No formal notice or mention of penalty conditions is required
established freely by the parties involved. 90 days. There should be penalties for late contingent upon the duration of the delay in could include interest starting from the
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•
Penalties calculation: The penalty rate is calculated by adding a legal premium of 7% to the key interest rate of the European Central Bank
•
Discount conditions: A discount given to the buyer should be informed by objective criteria. The seller may also offer a discount for cash on delivery. If this is offered to all clients, it should be mentioned in the terms of sale and should also appear on the invoice
2. Delivery terms: A documented agreement on delivery terms protects everyone from confusion over terminology that could lead to potential losses. Terms in international business transactions often sound similar to those used in domestic business, but frequently they have very dissimilar meanings. Exporters should know these terms before preparing a quotation or an invoice.
Representation contract Any contract is the reflection of an economic reality and a unique business situation. To avoid mistakes or miss important points, your representation contract should account for the following: • • • • • • • • • • • • • • • • • • • • • • • •
Representative's mandate and scope of action Scope of territory and products Good faith and fair dealing statement Order acceptance process (this is the responsibility of the principal) Non-competitive clause Sales organisation, advertising, promotion, and fares objectives Minimum sales target guarantee Sub-representative structures and long-term policy Principal to be informed consistently with reports Financial responsibility Trademarks, industrial property and symbols, secrecy clause Customers’ complaints management Territorial exclusivity Representatives' commissions Method of commission calculation Terms of contract, duration Unfinished business procedure Early termination of contract Indemnity in case of termination Return of documents and samples Arbitration and applicable law Nullity of previous agreements and modifications Transmissibility of contract Stocks and their outcome at end of contract
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4. Intellectual property protection Effective protection of intellectual property creates a significant barrier to competitors, builds credibility, adds value, and helps prevent other businesses from copying your products or services. To protect products, creations, and brand names, a company must comply with local laws on patents, copyrights, and registered property: Patents If your products comply with established technical conditions, you can apply for an international patent that covers the countries with markets you have targeted. The patent provides an enforceable monopoly for a certain period of time for any person or company to capitalise on new and innovative products and processes. Registered designs and models Registered designs and models provide an enforceable monopoly for a set period of time for certain new and/or original creations and designs such as shape, configuration, pattern, etc. Copyright Copyright is noted by the symbol © and gives rights to the authors of original works, including those of art, literature, music, recordings, and computer software… Registered Trademark A trademark is noted with the symbols ® or ™ that indicate that a mark or commercial name has been registered. This is your brand, which supports and defends your reputation. It distinguishes your product from similar products issued by competition. These protections vary from one country to another. In developing countries, barriers to the use of your own brand name or trademarks could exist. In some regions, piracy of brand names and counterfeiting of products can occur. It can be useful to obtain the advice of local lawyers and consultants when appropriate. Quality of service also affects a company’s intellectual property rights. If quality control is not maintained, the manufacturer can lose its rights to the product by the argument that it has abandoned the trademark to the distributor. Agreements with local representatives should therefore be specific about the nature of repairs, suitability and staffing of service facilities, inspection provisions, training programs, and payment of costs that these considerations require.
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Other ways to maintain control of your intellectual property while exporting include: • • • • • • • •
Capturing market share and reputation by speed to market Continually improving and innovating to keep on the cutting edge of the field Maintaining low operating costs so as to create a price advantage Targeting niche markets Maintaining product design and quality that puts you ahead of anticipated imitators Using marketing and branding which competitors will need time to emulate Maintaining secrecy about your process or formula Providing a unique service, valued by customers, which secures their loyalty to your product
5. Political environment changes If civil unrest breaks out in one of your foreign markets, import permits may be revoked, currency flow may be interrupted, and international payment moratoriums or boycotts may occur. Governments might also build barriers to limit their imports, including: duty, quota limits, imports licensing, tariff or non-tariff barriers, health regulations, and environmental standards. Exporting companies may find that "buy-local" policies restrict their products.
Tax treaty analysis If you incorporate a local branch, verify that the exporting country has a double taxation avoidance agreement (DTAA) with Luxembourg to avoid double taxation of your local profit. Tax is a critical and complex issue, so we strongly recommend that you discuss the subject with a reliable tax advisor in Luxembourg.
Confidentiality Confidentiality conditions and a signed non-disclosure agreement enable a company to disclose private information to a counterpart while protecting its property. Confusion about intellectual property could lead to legal action with another company. Overtrading Success is also a risk because it obliges you to remain committed to the defined export strategy and forecasted sales levels.
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6. Protecting yourself from these risks
Exporters can call on banking techniques, credit and/or insurance policies, and incentive measures. Transaction insurance, for example, is essential for a buyer who wishes to minimise economic risk. To select any of these risk-preventative tools, you need to first implement a quality diagnostic that will identify all the risks, evaluate financial needs, and find the optimal procedure that covers each risk. You can also: • • • •
Modify your contract to reflect demands of a new economic or political environment that the previous terms of the contract do not cover effectively An independent organisation is usually best in handling this Modify through conciliation and arbitration Use documentary credit, which deals only with documents that have to be standard, meaning that you are guaranteed that you will receive a credit from a bank that is unaffected by problems between buyer and seller
Not all risks originate in the international environment. Internal and strategic decisions can also lead to a failed export development. Below are scenarios that could lead to failures: • • • • • • • • • • • • • •
Inordinately high prices compared to your competition Unrealistic direct approach strategies with no local representative Lack of image Poor mutual comprehension through language, culture, etc. Confused delivery dates Problems with local authorities Poor product adaptation Minimum orders that are too large Buyer’s nationalism Lack of financing Prohibitive payment conditions Inaccurate canvassing and unrealistic approach to the market Poor return on investment or costly approach (trade shows, trips, etc.) Accumulation of stocks abroad
D. Logistics When shipping a product overseas, the exporter should strictly control packaging, labelling, documentation, and insurance requirements. This could lead to prompt delivery of the product, providing a key advantage in making the sale. Products must be documented correctly to meet local requirements. They must also arrive in without damage. Exporters should anticipate potential problems such as
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breakage, moisture, theft, and excess weight by insuring the goods against damage, loss and delay. The following table presents an optimal procedure for packing and shipping: Security of product
•
Handling
Use of available space
• • • • • • •
Regulation
•
Profitability of packaging
•
Protection of the product against mechanical and chemical aggressions (e.g., shocks, pressure, vibrations, falls, corrosion, pollution, etc.) Climatic aggression (humidity, cold, heat, etc.) Protection against theft and vandalism Protection against handling accidents Reduction of loading and unloading activities Control of stock activities Reduction of customs formalities Optimal space management, especially for products of non-standard shape Meet regulations for packing and marking hazardous or fragile products Nature and form of packaging according to technical specifications and cost
Marking and labelling should be used on export shipping cartons and containers to: • • • • •
Meet shipping regulations Ensure proper handling Conceal identity of contents Help receivers identify shipments Ensure compliance with environmental and safety standards
Most exporters rely on an international freight forwarder to perform these services because exporting physical goods requires time-consuming and multitudinous precautions. International freight forwards advise you about freight costs, port charges, consular fees, special documentation, insurance costs, and their handling fees. Incoterms or international commercial terms, a series of international sales terms published by the International Chamber of Commerce, are widely used in international commercial transactions. They are divide transaction costs and responsibilities between buyer and seller and reflect state-of-the-art transportation practices (see glossary for more details). In addition to the considerations above, you should secure a cargo insurance. Your export goods should be well-covered by insurance, and both parties involved in the export transaction must be aware fully of their responsibilities. Note that you may have an insurable interest long after the goods have left your possession, while your buyers are at risk until they receive your goods. The terms of cover are usually defined in the sale contract or letter of credit.
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E. International payments Because being paid in full and punctually is of great concern in any business, the level of risk in extending credit should not be taken lightly. Any new international customer has to be carefully evaluated, and a complete due diligence of the buyer's financial capabilities should be mandatory. If the risk is significant, an irrevocable and confirmed letter of credit or even payment in advance should be imposed. The customer relations manager should monitor older accounts periodically to identify unfavourable changes in a customer’s payment patterns. For difficult markets situations, international bankers and experts can advise you on how to cope with unusual circumstances. Common methods of payment are listed below, from most to least secure:
1. Cash in advance
The exporter is relieved of collection problems and has immediate use of the money. A wire transfer is commonly used and offers the advantage of being almost immediate. Payment by check is not recommended. Advance payments tend to incur cash flow problems and increased risks for the buyer. This solution is characteristically not for long-term collaboration.
2. Documentary letter of credit
Payment by letter of credit is based on pre-established documents, not on the terms of sale or the physical condition of the goods. The letter of credit specifies the documents that must be presented by the exporter, such as an ocean bill of lading (original and several copies), a consular invoice, a draft, and an insurance policy. The letter of credit also contains an expiration date. Before payment, the bank is responsible for making payment, and for verifying that all documents conform to the letter of credit requirements. If not, the discrepancy must be resolved before payment can be made and before the expiration date. A letter of credit may be irrevocable and thus cannot be changed unless both parties agree, or revocable, in which case either party may make changes. We do not recommend a revocable letter of credit because it exposes the exporter to additional risks.
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3. Open account
The exporter simply bills the customer, who is expected to pay under agreed terms at a fixed date. The absence of documents and banking channels can make it difficult to pursue the legal enforcement of claims; additionally, an exporter occasionally has to pursue collection abroad, which can be difficult and costly.
Methods for solving payment problems: •
Problems involving substantial debt are easier to avoid than they are to rectify once they have occurred. The methods above can help limit your risks. Still, exporters occasionally will face problems with buyers who default on their payment
•
The best way to handle a payment problem is to negotiate with the local counterpart. If there is no question of bad faith, an exporter can resolve conflicts to the satisfaction of both sides
•
When a simple misunderstanding or technical problem is the culprit, patience, understanding, and flexibility can help you reach an amicable agreement. The exporter sometimes has to be flexible to preserve the relationship with a valuable customer
•
In case of negotiation failure, and if the potential loss is your best course of action
F. Formulate your promotion plan Effective promotion is communication with customers and fine-tuning your product launch strategy in the market. Communication of your competitive advantages will provide information to the end user and encourage him to purchase your product or service. As your communication channels and strategies become increasingly efficient, choose local promotional tools that will increase your market penetration and brand awareness: • • • • • • •
Technical and commercial videos Precise documentation in appropriate language Public relations with local institutions and government Distribute promotional material to prospects (mainly retail) Specialised magazine advertisements Discounts and rebates for more aggressive selling Sample distribution, tasting, direct mailing, in-store display, etc.
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A variety of factors help you determine your promotional actions: • • • • •
Cost factor: Even if costly, successful promotion increases sales Competitors’ methods Possible short term return on investment Advice and ideas proposed by your distribution network Monitored impact on customer
Attending local business exhibitions can facilitate your development in the market. Showcase and demonstrate your latest products and service, study rivals, and learn about recent trends and opportunities. Building credibility with testimonials from previous customers rapidly becomes a competitive advantage and increases your credibility. This tactic will inspire your buyers’ confidence. Your promotional objectives should be clear, specific, brief, and set quantified goals. Your objectives represent a benchmark which you will monitor, evaluate, and improve. Once you are clear about your promotional objectives, decide which tactics or fusion of tactics will elicit the best results. Your tactics should be geared toward establishing connections. For example, you might send out a direct mailing package with brochures that you can follow up with a phone call. Or you could advertise in a trade journal targeting further enquiries or even generating immediate sales.
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G. Implement your strategy Strategy implementation is a critical and risky step, particularly if sequence and phasing are not carefully organised. Planning will strengthen your unique position in the market. Ensure that your resources and talent are aligned to secure the position for which you are aiming. Once you decide which market entry strategy you will use, it is important that you assign responsibility to appropriate personnel for each task. Bear in mind that if you need to travel to your target market, you may also need to delegate the responsibility of running your business back home while you are away. This factor should be included into your promotion plan.
Necessary steps Finding information
Forward planning
Execution
Control and improvement
Tasks • • • • • • • • • • • • • • •
Find available data on export market Market research and consumption studies Market test and mystery shopping Define objectives Choose strategies Draw a budget Product development and adaptation Set a price list Distribution and shipping Advertising and sales promotions Collect sales figures Look at performance of distribution network Look at performance and efficiency of advertising and promotional events Find and analyse discrepancies between execution and your plan Update various parts of marketing-mix
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Conclusion Exporting should improve your competitiveness by exposing your organisation to new environments and market conditions. If well-managed and controlled, exporting will facilitate growth and prosperity, and reap tangible benefits for your company. Developing a simple and flexible plan that takes into account the market conditions will help you to structure your activities, obtain a positive return and avoid most of the numerous risks that you face, as long as you adhere to local rules and regulations. Fully understanding your product’s competitive advantages enables you to institute an efficient and practical promotion plan that has measurable results. Strong credit protection and support from an experienced lawyer protecting your intellectual property also minimises your risk. Closely monitoring the end-users’ needs, the cultural factors, and the competition will ensure a successful exporter can ensure his payment and secure the gross profit margin through an accurate pricing. Once you choose your direction and clearly identify your objectives, it is essential that you fix a timetable and determine subsequent actions. Export managers should consider that it can take at least two years to build effective relationships, obtain sustainable growth and return, and consolidate an exporting revenue stream for their business. With many available market entry methods available, choosing between direct sales and a local alliance, or choosing a combination of both, is not easy. Selecting a suitable business counterpart that has an adequate distribution network is crucial to your local success. Finally, to ensure that you take a realistic approach, you should remember that: • • •
Exporting will always cost more than you anticipated Sales and revenue often take longer to generate than you have planned Customers may be slower to place orders than you have hoped
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Glossary
A. Incoterms Here is a list of important terms that are most frequently used in international trade: CIF (cost, insurance, freight) is given to a named foreign port where the seller quotes a price for the goods (including insurance), all transportation, and miscellaneous charges to the point of debarkation from the vessel. (Used only for ocean shipments) CFR (cost and freight) is given to a named foreign port where the seller quotes a price for goods that includes cost of transportation to the named point of debarkation. The buyer covers the cost of insurance. (Used only for ocean shipments) CPT (carriage paid to) and CIP (carriage and insurance paid to) are given to a named place of destination. These terms are used in place of CFR and CIF, respectively, for all modes of transportation, including intermodal. EXW (ex works) is given at a named point of origin (e.g., ex factory, ex mill, ex warehouse) where the price quoted applies only at the point of origin. The seller agrees to place the goods at the buyer's disposal at the specified place within the fixed time period. All other charges are put on the buyer's account. FAS (free alongside ship) is given at a named port of export where the seller quotes a price for the goods that includes the charge for delivery of goods alongside a vessel at the port. The seller handles the cost, while the buyer is accountable for the costs of loading, ocean transportation, and insurance. FCA (free carrier) is given at a named place. This term replaces the former "FOB named inland port" to designate the seller's responsibility for handing over the goods to a named carrier at the named shipping point. It may also be used for multimodal transport, container stations, or any mode of transport, including air. FOB (free on board) at a named port of export where the seller quotes the buyer a price that covers all costs up to and including the loading of goods aboard a vessel.
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B. Essential export documents Air freight shipments are handled by air waybills, which can never be made in negotiable form. A bill of lading is a contract between the owner of the goods and the carrier, which, as in the case of domestic shipments, is assigned to export shipments. For vessel exporting shipments, there are actually two types of bills of lading; a straight bill of lading which is nonnegotiable and a negotiable or shipper's order bill of lading. A commercial invoice is a bill for the goods from the seller to the buyer. These invoices are often used by governments to determine the true value of goods when assessing customs duties. A consular invoice is a document certified by the consular official of the foreign country that is required in some countries. It describes the shipment of goods and shows information such as the consignor, consignee, and value of the shipment. A certificate of origin is a signed statement that names the origin of the export item. Certificate of origin are usually signed through a semi-official organisation, such as a local chamber of commerce. An inspection certification is required by some purchasers and countries to attest to the specifications of the goods shipped. This is usually performed by a third party and often obtained from independent testing organisations. A dock receipt and a warehouse receipt are used to transfer accountability when the export item is moved by the domestic carrier to the port of embarkation and left with the ship line for export. A destination control statement appears on the commercial invoice, and ocean or air waybill of lading to notify the carrier and all foreign parties that the item can be exported only to certain destinations. An export license is a government document that authorises the export of specific goods in specific quantities to a particular destination. This document may be required for most or all exports to some countries or for other countries only under special circumstances (e.g., dual-use products). An export packing list is considerably more detailed and informative than a standard packing list. It itemises the material in each individual package and indicates the type of package, such as a box, crate, drum, or carton. An insurance certificate assures the consignee that insurance will cover the loss of, or damage to, the cargo during transit.
Note: The number and kind of documents with which the exporter must deal varies depending on the destination of the shipment
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C. Support from Luxembourg public institutions Luxembourg benefits from a wide range of institutions that help companies to internationalise and provide full information service such as seminars, support on the trade shows and fairs, as well as practical details on international cooperation or even the search for partnerships and targeted public markets. For further information please visit: • • • • • • • •
COPEL Luxembourg (Committee for the Promotion of Luxembourg Exports): www.ducroire.lu Europe Enterprise Network : www.een.lu Luxembourg for Business : www.luxembourgforbusiness.lu Ministry of the Economy and Foreign Trade : www.eco.public.lu Office Ducroire: www.ducroire.lu SNCI : www.snci.lu The Chamber of Commerce of the Grand Duchy of Luxembourg: www.cc.lu The Chamber of Crafts : www.cdm.lu
D. References •
BUTLER, David (2001), Business Development: a guide to small business strategy, BH edition, United Kingdom.
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DAVID, Pierre A. and STEWART, Richard D. (2006), International Logistics: The management of International Trade Operations, Atomic Dog, USA.
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FLEISHER, Craig S. and BENSOUSSAN, Babette E. (2007), Business and Competitive Analysis: Effective Application of New and Classic Methods, FT Press, New Jersey.
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KOTLER, PhD, Philip (2002), Marketing Professional Services, 2nd edition, Prentice Hall Press, USA.
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NELSON, Carl A. (2008), Import/Export: How to Take Your Business Across Borders, the McGraw Hill Companies, USA.
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PORTER, Michael E. (1985), Competitive Advantage: Creating and Sustaining Superior Performance, Free Press, USA.
•
STROH, Michael B. (2006), A Practical Guide to Transportation and Logistics, 2nd edition, The Logistic Network, USA.
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E. Disclaimer The Ministry of the Economy and Foreign Trade declines all responsibility regarding the use of information featured in this document. The contents are provided for information purposes only. They contain information which is not necessarily complete, exhaustive, precise or up to date. In the event of discrepancies between the texts of this publication and the original documents, the original documents as officially published shall apply. This publication may refer to external sites over which the Ministry of the Economy and Foreign Trade has no control and for which it declines all responsibility.
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OCTOBER 2009
Luxembourg for Business 19-21 Boulevard Royal L-2914 Luxembourg Grand Duchy of Luxembourg
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