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There are many risks involved in exporting and in this section we briefly cover the main risks you are likely to encounter. Follow the links below to learn more about the risks in question:
Credit risk Poor quality risk Transportation and logistics risks Legal risks Political risks Unforeseen risks Exchange rate risks Cultural and language risks Managing your risks
Companies need to develop a professional approach when entering the field of exporting. The company's management will have to be extremely committed and will need to devote time and money to starting up their export campaign. Companies will also face greater competition and more stringent rules and regulations pertaining to products and packaging. There are a number of risks facing exporters, while there is an element of risk in all commercial transactions, the complexity of the environments that exporters must operate in, multiplies these risks.
Credit risk
In most instances - mainly because of the large distances and alien environments involved - it is generally difficult for the exporter to verify the creditworthiness and reputation of an importer. If the creditworthiness of a foreign buyer is unknown there is the increased risk of non-payment, late payment or even straightforward fraud. It is essential, therefore, that the exporter should strive to determine the creditworthiness of the foreign buyer. There are many commercial firms that can provide assistance in credit-checking foreign companies. In addition, the exporter should insist (particularly if the foreign buyer is unknown) for a secure method of payment such as an irrevocable documentary credit. The exporter could approach his bank in South Africa for assistance regarding international payment procedures.
on arrival at the importer's premises due to the poor quality of the goods. Some unscrupulous importers may do this just to put pressure on an exporter and to try and negotiate a lower price - be careful! Experienced importers may request a pre-shipment inspection, to be conducted by an independent inspection company (this is commonly carried out for exports into other African countries). If they don't, then it may be worth suggesting to the importer during the negotiation stage that such an inspection be carried out as part of the contract. Such an inspection protects both the importer and the exporter. Alternatively, it may be a good idea to ship one or two samples of the goods being produced to the importer by an international courier company. This small task will ensure that if the importer accepts the quality of the sample goods and (this is important!) the main consignment is produced to the same standard, then it will be difficult for the importer to reject the consignment (unless something happened to the goods during shipping. Importers cannot always be present at the time of dispatch to physically inspect the goods for quality. Consequently, they often make use of the services of an independent inspection company. As it is usually at the request of the importer or his government that these inspections are conducted, the costs for the inspection are borne by the importer or it may be negotiated that they be included in the contract price.
Legal risks
International laws and regulations change frequently and/or may be applied differently from that of the exporter's own country. It is therefore important that the exporter drafts a contract in conjunction with a legal firm, thereby ensuring that the exporter's interests are taken care of. The exporter should draw up a checklist of basic legal questions aimed at the imported prior to signing any formal contract. In particular the exporter should be clear as to which law and dispute-settlement procedure will apply to the contract (known as the jurisdiction of the contract). The exporter may wish to impose choice of law and choice of forum clauses, which state that disputes will be settled under the exporter's own national law
and courts. What is more, the legal environment of a country is developed from, or through, the political environment. Great care must be taken in assessing the legal aspects of trade with a particular country. The law not only in South Africa but also in the country to which he is exporting influences the exporter when doing business internationally. By way of illustration, it is only necessary to refer to the strict product-liability situation in respect to goods sold into the United States of America and the disastrous impact that this could have on the exporter. Another aspect for consideration is when trading with Muslim governed countries, such as Saudi Arabia. Exporters should first approach legal organisations within these countries prior to any legal negotiations being determined, in order to ensure that the exporter's best interests are protected, as these countries do not operate their legal system based on Roman/Dutch law as we do in South Africa. When appointing a middleman or intermediary, such as a trading house, agent or distributor, exporters should be aware of many issues and responsibilities that influence the appointment of such intermediaries. A list clearly stating these issues must be included in the agreement, by specifying the rights and duties of the parties involved in the trade transaction, would prevent unpleasant legal conflicts that could arise at a later stage.
Political risk
The political stability of a foreign country into which a company is exporting is of the utmost importance. Exporters must be constantly aware of the policies of foreign governments in order that they can change their marketing tactics accordingly and take the necessary steps to prevent loss of business and investment. Instability in the target market could lead to losses resulting from war, civil strife and political instability. It is essential to warn exporters to be aware of government intervention in the target market. Most countries world-wide operate under a capitalist system within which the volumes and values of goods and services whether provided locally or by way of imports, are set by the forces of supply and demand. There are, however, still a number of countries in which the government plays an interventionist role. Examples of such economies include North Korea, Cuba and Vietnam. In certain other countries, partial liberalisation of trade has been achieved but the extent of this liberalisation still has to be investigated by any exporter wishing to enter these markets. Furthermore, while there are certain countries that appear to have advanced towards a more open market, there may be constraints upon their foreign currency reserves. In such countries the Reserve or Central bank of that country may not have enough foreign exchange to allow payments to progress thereby
Unforseen risks
A natural disaster or terrorist action in a particular country could completely destroy an export market for a company. Unexpected occurrences may also increase the cost of transport causing great loss to the exporter. It is therefore important that the exporter ensures that a force majeure clause be included in any international contract the exporter concludes.
more attention you will need to give to addressing the risk in qiestion. With some of the risks oultined above, you can obtain insurance to cover the risk. Three main types of risk cover include credit risk cover, country risk cover and transit risk cover - these are discussed below. In the case of exchange rate risks, you can cannot direct insure your exchange rate risk exposure, but you can take steps to minimise these risks through hedging your risk by using one of four financial instruments forward contracts, future contracts, swaps and options (these are discussed in the section on foreign exchange). For most exporters, the first two (forward contracts and future contracts) are likely to be the only two instruments you will consider. Larger exporters with many export and import contracts in place may try to pair their forex exposures (linking an export contract in, say, US dollars to an import contract also in US dollars) or by matching assets and liabilities held in foreign currencies in their books.
The small & medium enterprises (SMEs) in India contribute 40% to the total exports directly and a significant amount of exports indirectly through large trading houses or third parties. However, in spite of their sizeable contribution to exports, less than 0.5% of SMEs are actually engaged in exports. Why do majority of SMEs shy away from exports? There are several internal and external reasons. One of the major external barriers is the payment risk. The issue was studied in detail under the project Strategies and Preparedness for Trade and Globalisation in India, a ministry of commerce, Unctad and DFID initiative. The study suggested that SMEs may take the following steps to manage their payment risks and take remedial measures if bad debt does occur. The first step in the management of export payment risk is to get a credit assessment report for the buyer. There are many agencies in India that provide credit worthiness reports on companies internationally. There are also companies which specialise on specific countries. Further, an SME can also approach its bank to secure a report on the buyer through its banking channels. Similarly, insurance companies help their customers getting credit reports. However, the information provided by these agencies only acts as an added comfort; it cannot be taken as guarantee against payment default later by the buyer. Most credit assessment reports on international buyers are available for Rs 4,000-7,000 per report. The time taken for reports ranges from three to ten working days. The fees depends on the speed at which the report is required. The next step is getting insurance for exports. In simple terms, the purpose of export credit insurance is to insure against the payment default. Trade credit insurance or credit insurance is an insurance policy and a risk management product offered by export credit agencies (ECAs) to business entities wishing to protect their balance sheet asset accounts receivable from loss due to credit risks such as protracted default, insolvency andbankruptcy. The export credit insurance market in India is dominated by Export Credit Guarantee Corporation (ECGC). Having been a
monopoly until recently, it is believed to have 80-90% marketshare. After deregulation of the insurance sector, all three biggest global credit insurance companiesEuler Hermes, Atradius and Cofacehave consolidated their presence in India as re-insurers. Major players in the credit insurance market in India include ECGC, Bajaj Allianz, ICICI Lombard, Iffco-Tokio, New India Assurance and Tata AIG. The insurance cost varies from policy to policy and tend to cost between 0.3% and 1.0% of annual turnover, depending on previous bad debt history and current debt management practices. Indian SMEs should take a note that most of the credit insuring companies in India do not cover risks such as commercial disputes; causes inherent in the nature of goods; buyers failure to obtain import licence; insolvency/default of agents like banks (other than the stock holding agent); risks covered by other general insurers like transit loss; exchange rate fluctuations