Philippine Export

Experience
CHAPTER 5

McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
CHAPTER 5

Exporting,
Importing, and
Countertrade
 Introduction

EXPORT MARKETING (source: Department of

Trade and Industry)

 To set up an exporting business, one has to

register with the Department of Trade and
Industry (DTI) if it is a sole proprietorship.
Partnership and Corporations have to be
registered with the Securities and Exchange
Commission (SEC). You also need to register
with the city or the municipality where you
intend to operate the business as well as with
the Bureau of Internal Revenue.

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Before operating the business, make sure first
that the basic elements of a viable export
enterprise are present. These are:

Organization Readiness -
Management is willing to commit
resources of the enterprise.
Product Readiness - Product meets
foreign buyers' requirements in both
quality and price.

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General Export Procedures

1. Upon receipt of a purchase order

from a foreign buyer, immediately
send him a proforma invoice for
confirmation. An order is confirmed
when the proforma invoice is signed
and returned to you by the buyer.

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General Export Procedures

2. Payment for exports is normally

made through the banks. The
foreign buyer's interest in the
Philippines is represented by a local
authorized agent bank, which is
designated by the foreign buyer's
bank. The local Authorized Agent
Bank (AAB) will assist you in
negotiating the collection of the
payment for your exports.
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General Export Procedures

3. The AAB will explain to you all the

instructions concerning your shipment
to ensure its acceptability for payment.
Make sure that you understand all the
instructions provided by the bank. If the
instructions are written in a foreign
language, ask the bank to give you an
official translation in English or ask the
bank to officially recognize a translation
of the instructions, if the translation was
made by someone other than the bank. 13-7
General Export Procedures

4. Exporters may be paid through

banks by means of letters of credit
(L/C), documents against payment
(D/P), documents against
acceptance (D/A), open account
(O/A), cash against documents
(CAD), prepayment/export advance,
inter-company open account, offset
arrangement, consignment, or
telegraphic transfer.
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General Export Procedures

5. You may or may not need outside

financing to produce export products
ordered by the buyer. Should you,
however, find the need for outside
financing, you can either tap the
assistance of government or non-
government financial institutions.

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Export Documentation

1. When you are ready to ship, fill

up an Export Declaration (ED) form.
Sample ED forms are available at
BETP, DTI Provincial offices,
Bureau of Customs (BOC)
Processing Units, OSEDCs and
PHILEXPORT offices.

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Export Documentation
Secure an export commodity
clearance/export permit from the
proper government commodity office,
if your product is included in the list of
regulated products for exportation or
if the buyer requires.
3. With the required supporting
documents, submit the accomplished
ED form to the BOC Processing Unit
for the approval of the Authority to
Load (AL). 13-11
Question: What do firms that want
to export need to do?
Firms wishing to export must
identify export opportunities
avoid a host of unanticipated
problems associated with doing
business in a foreign market
become familiar with the
mechanics of export and import
financing
learn where to get financing and
export credit insurance
learn how to deal with foreign
exchange risk 13-12
 The Promise and Pitfalls
of Exporting

Question: What are the benefits of exporting?

 The benefits from exporting can be great--the rest

of the world is a much larger market than the
domestic market
 Larger firms may be proactive in seeking out new
export opportunities, but many smaller firms take a
reactive approach to exporting
 Many novice exporters have run into significant
problems when first trying to do business abroad,
souring them on following up on subsequent
opportunities
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 The Promise and Pitfalls
of Exporting

Question: What are the pitfalls facing exporters?

Common pitfalls for exporters include

 poor market analysis
 poor understanding of competitive conditions
 a lack of customization for local markets, poor
distribution arrangements, bad promotional
campaigns
 a general underestimation of the differences
and expertise required for foreign market
penetration
 difficulty dealing with the tremendous
paperwork and formalities involved
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Improving Export Performance

Question: How can exporters improve

their performance?

To improve their success, exporters

should
acquire more knowledge of foreign
market opportunities
consider using an export management
company
adopt a successful export strategy
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How will the firm know if it is
export-ready?
 Exporting offers numerous advantages for
the company. However, many firms do not
take advantage of the incredible
opportunities that exist in the worldwide
marketplace. The massive restructuring of
political boundaries, the opening of new
consumer markets, the signing of new
trade agreements resulting in the
emergence of trade blocs, and the new
World Trade Organization (WTO) have
created unprecedented opportunities for
business to export.
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How will the firm know if it is
export-ready?
Ours is a global economy, influenced by
the worldwide access to manufacturing
technology, which has led competitive
manufacturers to produce cheaper,
faster, and better. Many developing
countries have become serious rivals to
established economies because of their
links to global communication systems
and the development of television, print,
and electronic access to information.

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There has never been a more opportune time for the
Philippines to capitalize on these market shifts and to
export for the following reasons:

 Increase in sales and profits. If the firm is

performing well locally, expansion into foreign
markets is likely to improve profitability.
 Gain global market share. By exporting, the
firm will learn from its competitors, their
strategies and what they have done to gain a
share in foreign markets.
 Reduce dependence on existing domestic
markets. By expanding into foreign markets,
the firm will increase its marketing base and
reduce dependence on local customers.

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There has never been a more opportune time for the
Philippines to capitalize on these market shifts and to
export for the following reasons:

 Stabilize market fluctuations. By tapping

global markets, firms are no longer held
captive to economic changes, varying
consumer demand and seasonal fluctuations
in the domestic economy.
 Make use of excess production capacity.
Exporting could increase the utilization of
production capacity and length of production
runs, thereby reducing average unit costs and
raising economies of scale

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There has never been a more opportune time for the
Philippines to capitalize on these market shifts and to
export for the following reasons:

 Enhance competitiveness. Exporting

enhances the firm's and a country's
competitive advantage. While the firm will
benefit from exposure to new technologies,
methods and processes, the country will
benefit from improved balance of trade.
 Create domestic jobs. Investing for exports
create new jobs for many people.
 Help to reduce the trade deficit. What the
Philippines earn from exports reduces the
trade gap arising from import payments.

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What are the advantages and
risks in exporting?

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Direct Advantages to the
exporting firm

Increase opportunity to expand

market share
Increases production if
underutilized in the domestic market
Decreases dependence on
domestic sales or compensate for
stagnating domestic market

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Direct Advantages to the
exporting firm
Diffuses domestic competition by
expanding into less competitive foreign
markets
Stimulates exporters to adopt their
products to the needs of the market vis-à-
vis competition, leading to an improvement
in their level of technological know-how
It is important to note that many of the
risks of exporting are similar to those faced
in the domestic market.
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Risks of expanding into
domestic or foreign markets
Sales may not meet projections

Competition may be greater than

anticipated

Customers may be slow to pay, or

not pay at all .

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Risks unique to exporting

Repatriation of profits from the target

country may be constrained or forbidden
Fluctuations in exchange rates may
decrease or eliminate profits, or may even
result in losses
In case of non-payment or other
contractual problems, there may be a
question of jurisdiction (i.e., Philippine
courts may not be able to enforce
contracts between parties in different
countries) .
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Risks unique to exporting

Political instability in the target

country like war or civil strife, or
nationalization by the foreign
government can lead to losses.

The product may not be accepted in

foreign markets.

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An International Comparison

Many firms fail to consider export

opportunities simply because they lack
knowledge of the opportunities available
Both Germany and Japan have
developed extensive institutional
structures or promoting exports
Japanese exporters can also take
advantage of the knowledge and
contacts of sogo shosha, the country’s
great trading houses

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 Utilizing Export Management
Companies
Question: What assistance can exporters get
from export management companies?

 Export management companies are export

specialists that act as the export marketing
department or international department for
client firms
 EMCs
1. start exporting operations for a firm with the
understanding that the firm will take over
operations after they are well established

2. start services with the understanding that the

EMC will have continuing responsibility for
selling the firm’s products
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 Export Strategy

Question: What steps should exporters take to

increase their chances of success?

 Exporters
can hire an EMC to help identify
opportunities and navigate paperwork and
regulations
start by focusing initially on just one or a few
markets
enter a foreign market on a fairly small scale
in order to reduce the costs of any
subsequent failures
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 Export Strategy

Exporters should also

recognize the time and managerial
commitment involved in building
export sales
devote attention to building strong and
enduring relationships with local
distributors and customers
hire local personnel to help the firm
establish itself in a foreign market
keep the option of local production
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Export and Import Financing

Question: How can firms deal with the

lack of trust that exists in export
transactions?

Various mechanisms for financing

exports and imports have evolved over
the centuries in response to lack of trust
that exists in export transactions

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 Lack of Trust
 Exporters and importers have to trust
someone who may be very difficult to track
down if they default on an obligation
 Each party has a different set of
preferences regarding the configuration of
the transaction
Exporters prefer to be paid in advance,
while importers prefer to pay after
shipment arrives
 Problems arising from the lack of trust can
be solved by using a third party who is
trusted by both - normally a reputable bank

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 Letter of Credit

A letter of credit is issued by a bank at

the request of an importer and states the
bank will pay a specified sum of money
to a beneficiary, normally the exporter,
on presentation of particular, specified
documents
This system is attractive because both
parties are likely to trust a reputable
bank even if they do not trust each other

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 Draft

Question: How is payment actually made in an

export transaction?

 Most export transactions involve a draft, also

called a bill of exchange
 A draft is an order written by an exporter
instructing an importer, or an importer's agent,
to pay a specified amount of money at a
specified time
 A sight draft is payable on presentation to the
drawee while a time draft allows for a delay in
payment - normally 30, 60, 90, or 120 days
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 Bill of Lading

The bill of lading is issued to the exporter

by the common carrier transporting the
merchandise
It serves three purposes
it is a receipt
it is a contract
it is a document of title

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 Export Assistance
Question: Where can exporters get
financing help?

 U.S. exporters can draw on two forms of

government-backed assistance to help
their export programs
1. they can get financing aid from the
Export-Import Bank
2. they can get export credit insurance
from the Foreign Credit Insurance
Association
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 Export-Import Bank

1. The Export Import Bank

The Export-Import Bank (Eximbank) is

an independent agency of the U.S.
government
 Its mission is to provide financing aid
that will facilitate exports, imports, and
the exchange of commodities between
the U.S. and other countries

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 Export Credit Insurance

2. Export Credit Insurance

In the U.S., export credit insurance is

provided by the Foreign Credit Insurance
Association (FICA)
 FICA provides coverage against
commercial risks and political risks

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 Countertrade

Question: What alternatives do exporters

have when conventional methods of
payment are not an option?

Exporters can use countertrade when

conventional means of payment are
difficult, costly, or nonexistent
Countertrade refers to a range of barter-
like agreements that facilitate the trade
of goods and services for other goods
and services when they cannot be traded
for money
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 Types of Countertrade

 There are five types of countertrade

1. barter
2. counterpurchase
3. offset
4. switch trading
5. compensation or buyback

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 Types of Countertrade
1. Barter
 Barter, the most restrictive countertrade
arrangement, is a direct exchange of goods
and/or services between two parties without a
cash transaction
 It is used primarily for one-time-only deals in
transactions with trading partners who are not
creditworthy or trustworthy
2. Counterpurchase
 Counterpurchase is a reciprocal buying
agreement
 It occurs when a firm agrees to purchase a
certain amount of materials back from a
country to which a sale is made

13-41
 Types of Countertrade

3. Offset
 Offset is similar to counter purchase
insofar as one party agrees to purchase
goods and services with a specified
percentage of the proceeds from the
original sale
The difference is that this party can fulfill
the obligation with any firm in the country
to which the sale is being made

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 Types of Countertrade

4. Compensation or Buybacks

 A buyback occurs when a firm builds a

plant in a country—or supplies
technology, equipment, training, or other
services to the country—and agrees to
take a certain percentage of the plant’s
output as a partial payment for the
contract

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The Pros and Cons of Countertrade
Question: What are the advantages and
disadvantages of countertrade?

 Countertrade is a way for firms to finance

an export deal when other means are not
available
 Firms that are unwilling to enter a
countertrade agreement may lose an
export opportunity to a competitor that is
willing to make a countertrade agreement
 A countertrade arrangement may be
required by the government of a country to
which a firm is exporting goods or services
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The Pros and Cons of Countertrade

 Countertrade is unattractive because

most firms prefer to be paid in hard
currency
it may involve the exchange of unusable
or poor-quality goods that the firm cannot
dispose of profitably
 Countertrade is most attractive to large,
diverse multinational enterprises that can
use their worldwide network of contacts to
dispose of goods acquired in countertrading
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Critical Discussion Question

1. A firm based in Washington State

wants to export a shipload of finished
lumber to the Philippines. The would-be
importer cannot get sufficient credit from
domestic sources to pay for the
shipment but insists that the finished
lumber can be quickly resold in the
Philippines for a profit. Outline the steps
the exporter should take to effect this
export to the Philippines.
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Critical Discussion Question

2. You are the assistant to the CEO of

a small textile firm that manufactures
high-quality, premium-priced, stylish
clothing. The CEO has decided to
see what the opportunities are for
exporting and has asked you for
advice as to the steps the company
should take. What advice would you
give the CEO?
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Critical Discussion Question

3. An alternative to using a letter of

credit is export credit insurance.
What are the advantages and
disadvantages of using export credit
insurance rather than a letter of credit
for exporting (a) a luxury yacht from
California to Canada, and (b)
machine tools from New York to
Ukraine?
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Critical Discussion Question

4. How do you explain the popularity

of countertrade? Under what
scenarios might its popularity
increase still further by the year
2019? Under what scenarios might
its popularity decline?

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Critical Discussion Question

5. How might a company make

strategic use of countertrade
schemes as a marketing weapon to
generate export sales revenues?
What are the risks associated with
pursuing such a strategy?

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The End…

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