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Breaking Into The Trade Game: A Small Business Guide
This publication is the product of a private/public sector
initiative between the U.S. Small Business Administration and
AT&T. SBA's participation in this co-sponsorship activity does
not constitute an expressed or implied endorsement of the
co-sponsors' or participants' opinions, products or services (SBA
Authorization Code #93-13-4924710-1). For more information on
SBA's programs, call 1-800-U-ASK-SBA.
Co-sponsored by the U.S. SMALL BUSINESS ADMINISTRATION AND AT&T
Breaking Into The Trade Game: A Small Business Guide to
Exporting was produced under the guidance of G. A. Chiaruttini,
Deputy Director, Office of International Trade, U.S. Small
Business Administration. Special recognition is given to the
Editorial Staff of Colleen Allen, Catherine Funkhouser and
Patricia Lefevre, Export Development Specialists, Office of
International Trade. A special thanks to Sonja Katharina Satl
who provided meticulous editorial support for this project.
Kathy Parker and Sheldon Snook, Office of International Trade;
Ray Williams, Regional International Trade Officer, Kansas City,
Missouri; and Gene Brosterhous, International Trade Director,
National SCORE Office, also provided additional editorial
support. Developing Your International Business Plan was written
at the Lake Michigan College Small Business Development Center
(SBDC) and International Business Center. The materials and
worksheets were adapted from the Oregon SBDC publication, "Your
International Business Plan" at Portland Community College. The
Lake Michigan College SBDC is partially funded under Cooperative
Agreement No. SB-2M-00092-09 by the U.S. Small Business
Administration. Layout and cover design by Signal
Communications, Bethesda, Maryland.
Breaking Into The Trade Game: A Small Business Guide to
Exporting was produced by the U.S. Small Business Administration
with the assistance of The Global Source, Inc.
Introduction
The U.S. Small Business Administration"s (SBA) Office of
International Trade (OIT) developed this Trade Guide as an
information tool to assist American business develop
international markets. This Guide will help answer questions and
take the mystery out of exporting. The United States government
has committed enormous resources to help small businesses, like
yours, reach overseas markets. Did you know that:
. the U.S. Small Business Administration (SBA) employs 76
District International Trade Officers and 10 Regional
International Trade Officers throughout the United States as well
has a 10-person international trade staff in Washington, D.C.;
. the SBA, through its Service Corps of Retired Executives
(SCORE) program, oversees 850 volunteers with international trade
experience to provide one-on-one counseling to active and
new-to-export businesses;
. the SBA made 348 loans nationally to exporters for more than
$123 million in FY 1991 and 617 loans for more than $241 million
in FY 1992;
. the SBA supports over 900 Small Business Development Centers
(SBDCs). Some SBDCs have designated international trade centers;
all SBDCs provide export counseling, referral and/or training;
. the SBA coordinates the Export Legal Assistance Network
(ELAN), a nationwide group of international trade attorneys who
provide free initial consultations to small businesses on export
related matters;
. the U.S. Department of Commerce (DOC) International Trade
Administration (ITA) U.S. and Foreign Commercial Service (US&FCS)
has 68 offices throughout the United States and 120 overseas
posts, representing 95 percent of the world market for U.S.
products and services;
. the ITA in Washington, D.C. has industry-specific
specialists monitoring export opportunities for U.S. products and
services in every sector, from abrasive products to zippers;
. the DOC sponsors 51 District Export Councils (DECs),
comprised of nearly 1,700 business and trade experts available on
a volunteer basis to help U.S. firms develop export strategies;
. the DOC Minority Export Development Consultants Program
supports more than 107 Minority Business Development Centers
throughout the United States;
. the U.S. Department of Agriculture (USDA) Foreign
Agricultural Service (FAS) maintains a $30 million budget for
export promotion of U.S. commodities through trade fairs and
other activities;
. like DOC, USDA has a large group of country specialists
focusing on a range of products from oilseeds to poultry;
. the Export-Import Bank of the United States (Eximbank) has
trained specialists in 24 states and in Puerto Rico through its
City/State program to provide export financing assistance to
small businesses;
. the Eximbank has financed over $11.3 billion of U.S. exports
in 1991, with 18.4 percent of Eximbank's authorizations going to
support small business exports?
The SBA and a multitude of federal, state and local government
agencies are ready to assist you in opening new avenues of
opportunity in the international marketplace. With their help,
and with the information contained in this guide, you will find
that access to international markets is possible and profitable.
Overview
A SMALL BUSINESS EXPORT SUCCESS STORY
Small businesses throughout the United States have gained
international exposure and increased profits through exporting.
Consider the case of Novi, Inc., a California-based business.
Company President Michael Stoff tells his story:
"In November of 1986, when I began my business venture, Novi,
Inc., I knew that my Tune-Tote (a stereo system for bicycles) had
the potential to be successful in international markets.
Although I had no prior experience in this area, I began
researching and collecting information on international markets.
I was willing to learn, and by targeting key sources for
information and guidance, I was able to penetrate international
markets in a short period of time. One vital source I used from
the beginning was SBA. Through SBA I was directed to a program
that dealt specifically with business development -- the Service
Corps of Retired Executives (SCORE). I was assigned an advisor
who had run his own import/export business for 30 years. The
services of SCORE are provided on a continual basis and are free.
"As I began to pursue exporting, my first step was a thorough
marketing evaluation. I targeted trade shows with a good
presence of international buyers. I also went to DOC for
counseling and information about the rules and regulations of
exporting. I advertised my product in Commercial News USA,
distributed through United States embassies to buyers worldwide.
I utilized DOC's World Traders Data Reports to get background
information on potential foreign buyers. As a result, I received
60-70 inquiries about Tune-Tote from around the world. Once I
completed my research and evaluation of potential buyers, I
decided which ones would be most suitable to market my product
internationally. Then I decided to grant exclusive
distributorship. In order to effectively communicate with my
international customers, I invested in a fax. I chose a U.S.
bank to handle international transactions. The bank also
provided guidance on methods of payment and how best to receive
and transmit money. This is essential know-how for anyone
wanting to be successful in foreign markets."
Michael Stoff knows about success in foreign markets. In just
one year of exporting, sales topped $1 million and increased 40
percent in the second year of operations. Today, Novi, Inc. is a
large distributor of wireless intercom systems which exports to
over ten countries.
Breaking Into The Trade Game: A Small Business Guide to
Exporting can assist your company's international marketing
efforts. This Guide highlights the export success stories of
many small businesses. It is both a comprehensive how-to manual
and reference book providing you with the contacts and resources
to ease your entry into markets around the world.
Part I: Becoming an Export Success Story takes you through
the exporting process with stories of small businesses all around
the United States that have found exporting to be an exciting and
profitable way to expand their business.
Chapter 1: Making the Export Decision includes an
international business plan to assess your company's export
readiness, business goals and commitment;
Chapter 2: Identifying International Markets explains how
to conduct foreign market research and the resources available to
assist you;
Chapter 3: Foreign Market Entry discusses methods of
distributing your product abroad with an emphasis on exporting;
Chapter 4: The Export Transaction details the steps
involved in making trade happen, including setting prices,
negotiating the sale and determining legal aspects of exporting;
Chapter 5: Export Financing outlines government and private
sector financing resources and methods of payment;
Chapter 6: Transporting Goods Internationally focuses on
moving goods overseas, including packaging and labelling; and
Chapter 7: Strategic Alliances and Foreign Investment
Opportunities explores other methods of market entry beyond
exporting, such as joint ventures and off-shore manufacturing
facilities.
Part II: The Exporter's Directory is a comprehensive
directory of contacts and information sources to assist you as
you go global.
PART I: BECOMING AN EXPORT SUCCESS STORY
Chapter 1 Making the Export Decision
Exporting is crucial to America's economic health.
Increased exports mean business growth, and business growth means
more jobs. Yet, only a small percentage of potential exporters
take advantage of these opportunities. It is critical for U.S.
businesses to think globally. Your decision to read this book
indicates an interest in exporting. However, you may have
discovered your company is already competing internationally --
foreign-owned companies are competing with you in your "domestic"
markets. The division between domestic and international markets
is becoming increasingly blurred. Your business cannot ignore
international realities if you intend to maintain your market
share and keep pace with your competitors. Making the export
decision requires careful assessment of the advantages and
disadvantages of expanding into new markets. Once the decision
is made to export, an international business plan is essential.
This chapter presents the advantages and disadvantages of
exporting and offers a sample business plan.
ADVANTAGES AND DISADVANTAGES OF EXPORTING
Consider some of the specific advantages of
exporting.Exporting can help your business:
. enhance domestic competitiveness
. increase sales and profits
. gain global market share
. reduce dependence on existing markets
. exploit corporate technology and know-how
. extend the sales potential of existing products
. stabilize seasonal market fluctuations
. enhance potential for corporate expansion
. sell excess production capacity
. gain information about foreign competition
In comparison, there are certain disadvantages to
exporting.Your business may be required to:
. develop new promotional material
. subordinate short-term profits to long-term gains
. incur added administrative costs
. allocate personnel for travel
. wait longer for payments
. modify your product or packaging
. apply for additional financing
. obtain special export licenses
These disadvantages may justify a decision to forego exporting at
the present time. For example, if your company's financial
situation is weak, attempting to sell into foreign markets may be
ill-timed. On the other hand, some companies have been
successful selling abroad even before they have made any sales
domestically:
Landmark Systems of Vienna, Virginia, had virtually no domestic
sales before it entered the European market. Landmark had
developed a software program for IBM mainframe computers and
located an independent distributor in Europe to represent their
product. In their first year, 80 percent of their sales were
attributed to exporting. In their second year, sales jumped from
$100,000 to $1.4 million -- with 70 percent attributable to
exports.
As you can see, there are no hard-and-fast rules as to which
businesses should export, and which should not. In the case of
Landmark Systems mentioned above, a foreign distributor produced
results before any significant domestic sales occurred. Landmark
Systems' decision to export, like that of many other small
business exporters featured in this guide, was based on careful
planning.
THE NEED FOR AN INTERNATIONAL BUSINESS PLAN
Behind most export success stories is a plan. Whether
formally written down, or sketched out informally at a meeting of
your management team, an international business plan is an
essential tool to properly evaluate all the factors that would
affect your company's ability to go international.
An international business plan should define your company's:
. commitment to international trade;
. export pricing strategy;
. reason for exporting;
. potential export markets and customers;
. methods of foreign market entry;
. exporting costs and projected revenues;
. export financing alternatives;
. legal requirements;
. transportation method; and
. overseas partnership and foreign investment
capabilities.
Creating an international business plan is important for
defining your company's present status, internal goals and
commitment, but is also required if you plan to seek export
financing assistance. Preparing the plan in advance of making
export loan requests from your bank can save time and money.
Completing and analyzing an international business plan helps you
anticipate future goals, assemble facts, identify constraints and
create an action statement. It should also set forth specific
objectives, an implementation timetable and milestones to gauge
success.
International Business Plan
The purpose of the International Business Plan workbook is to
prepare your business to enter the international marketplace.
This workbook will serve as a step-by-step guide to lead you
through the process of exporting your product to an international
market. The workbook is divided into sections. Each section
must be completed before you start the next section. After you
have completed the entire workbook, you will be ready to develop
an international business plan to export your product. Once the
business plan is completed, an in-depth analysis of your
readiness to export can be completed.
PPRODUCTS/SERVICES
STEP 1: Select the most exportable products to be offered
internationally.
To identify products with export potential for distribution
internationally, you need to consider products that are
successfully distributed in the domestic market. The product
needs to fill a targeted need for the purchaser in export markets
according to price, value to customer/country and market demand.
What are the major products your business sells?
1.
2.
3.
What products have the best potential for international trade?
1.
2.
3.
STEP 2: Evaluate the products to be offered internationally.
What makes your products unique for an overseas market?
1.
2.
3.
Why will international buyers purchase the products from your
company?
1.
2.
3.
How much inventory will be necessary to sell overseas?
1.
2.
3.
Exercise:
IDENTIFYING PRODUCTS WITH EXPORT POTENTIAL
List below the products you believe have export potential.
Indicate the reasons you believe each product will be successful
in the international marketplace.
Products/Services Reasons for Export Success
1.
1.
2.
2.
3.
3.
4.
4.
5.
5.
6.
6.
7.
7.
8.
8.
9.
9.
10.
10.
11.
11.
12.
12.
13.
13.
14.
14.
Decision Point: These products have export potential.
YES NO
PLANNING
What is the purpose of completing this workbook?
You know that you want to see your company grow through
exporting.
Five reasons it will be worth your time and effort:
1. Careful completion of this workbook will help evaluate
your level of commitment to exporting.
2. The completed workbook can help you evaluate your
product's potential for the international trade market.
3. The workbook gives you a tool to help you better manage
your international business operations successfully.
4. The completed workbook will help you communicate your
business ideas to persons outside your business and can be an
excellent starting point for developing an international
financing proposal.
5. Businesses managed are more successful when working
from a business plan.
Can't I hire someone to do this for me?
No! Nobody will do your thinking or make decisions for you.
This is your business. If the business plan is to be useful, it
must reflect your ideas and efforts -- not those of an outsider.
Why is planning so important?
The planning process forces you to look at your future
business operations and anticipate what will happen. This
process better prepares you for the future and makes you more
knowledgeable about your business. Planning is vital for
marketing your product in an international marketplace.
Any firm considering entering into international business
transactions must understand that doing business internationally
is not a simple task nor one for the faint of heart. It is
stimulating and potentially profitable in the long-term but
requires much preparation and research prior to the first
transaction.
In considering products for the international market, a business
needs to be:
1. Successful in its present domestic operation.
2. Willing to commit its resources of time, people and
capital to the program. Entry into the international market may
take as long as two years to generate profit with cash outflow
during that period.
3. Sensitive and aware of the cultural implications of
doing business internationally.
Developing a business plan helps you assess your present
market situation, business goals, and commitment which will
increase your opportunities for success.
What's the bottom line for me if I do the plan?
Research shows that small business failure rates among new
businesses are significantly lower for new businesses that have
developed a business plan.
Isn't planning just for the big companies?
Planning is important for any organization that wants to
approach the future with a plan of action. The future comes
whether you are prepared for it or not. A business plan helps
you anticipate the future and make well-informed decisions
because you have thought about the alternatives you will be
facing.
How often do I have to do this?
A plan must be revised as needed, at least once a year.
Planning is a continuous process. You will be surprised how much
easier it is to develop a business plan after the first time.
Plus, after a revision or two you will know more about your
international business market opportunities to export products.
GOAL SETTING
Determining your business goals can be a very exciting and
often challenging process. It is, however, a very important step
in planning your entry into the international marketplace. The
following exercise is intended to help you clarify your short and
long-term business goals.
STEP 1: Define long-term goals.
A) What are your long-term goals for this business in the next 5
years? Examples: increase export sales by ___% annually;
develop country cultural profiles.
B) How will the international trade market help you reach your
long-term goals?
STEP 2: Define short-term goals.
A) For your international business, what are your first year
goals? Examples: attend export seminars, select a freight
forwarder.
B) What are your two-year goals for your international business
products/services?
STEP 3: Develop an action plan to reach your short-term goals
by using international trade.
INDUSTRY ANALYSIS
STEP 1: Determine your industry's growth for the next 3 years.
Talk to people in the same business or industry, research
industry-specific magazines, attend trade fairs and seminars.
STEP 2: Research how competitive your industry is in the global
markets.
Utilize the National Trade Data Bank (NTDB), obtain
import/export statistics from the Bureau of the Census, and
contact the U.S. Small Business Administration (SBA) or the U.S.
Department of Commerce (DOC) district office in your area.
STEP 3: Find out your industry's future growth in the
international market.
Contact the SBA or the U.S. Foreign & Commercial Service (US
& FCS) district office and contact a DOC country or industry desk
in Washington, D.C.
STEP 4: Research federal or state government market studies
that have been conducted on your industry's potential
international markets.
Contact SBA, your state international trade office, a DOC
country or industry desk in Washington, D.C.
STEP 5: Find export data available on your industry.
Contact your SBA or DOC district office.
YOUR BUSINESS/COMPANY ANALYSIS
STEP 1: Why is your business successful in the domestic market?
What's your growth rate?
STEP 2: What products do you feel have export potential?
STEP 3: What are the competitive advantages of your products or
business over other domestic and international businesses?
PROS AND CONS OF MARKET EXPANSION
Brainstorm a list of pros and cons for expanding your market
internationally. Based on your product and market knowledge,
determine your probability of success in the international
market.
Industry/Product:
Pros Cons
1.
1.
2.
2.
3.
3.
4.
4.
5.
5.
6.
6.
7.
7.
8.
8.
9.
9.
10.
10.
11.
11.
12.
12.
PROBABILITY OF SUCCESS
0% 25% 50% 75% 100%
MARKETING YOUR PRODUCT
Given the market potential for your products in
international markets, how is your product unique?
1. What are your product's advantages?
2. What are your product's disadvantages?
3. What are the competitive product's advantages?
4. What are the competitive product's disadvantages?
What are the needs that will be filled by your product in a
foreign market?
What competitive products are sold abroad and to whom?
How complex is your product? What skills or special training are
required to:
1. Install your product?
2. Use your product?
3. Maintain your product?
4. Service your product?
What options and accessories are available?
1. Has an aftermarket been developed for your product?
2. What other equipment does the buyer need to use your product?
3. What complementary goods does your product require?
If your product is an industrial good:
1. What firms are likely to use it?
2. What is the useful life of your product?
3. Is use or life affected by climate? If so, how?
4. Will geography affect product purchase, for example
transportation problems?
5. Will the product be restricted abroad, for example tariffs,
quotas or non-tariff barriers?
If the product is a consumer good:
1. Who will consume it? How frequently will the product be
bought?
2. Is consumption affected by climate?
3. Is consumption affected by geography, for example
transportation problems?
4. Will the product be restricted abroad for example tariffs,
quotas or non-tariff barriers?
5. Does your product conflict with traditions, habits or beliefs
of customers abroad?
STEP 1:
Select the best countries to market your product.
The U.S. Small Business Administration and the United States
and Foreign Commercial Service may be of assistance in providing
product market analysis.
Since the number of world markets to be considered by a
company is very large, it is neither possible nor advisable to
research them all. Thus, your firm's time and money are spent
most efficiently by using a sequential screening process.
The first step in this sequential screening process for the
company is to select the more attractive countries for your
product. Preliminary screening involves defining the physical,
political, economic and cultural environment. Rate the following
market factors in each category.
(1) Select 2 countries you think have the best
marketpotential for your product;
(2) Review the market factors for each country;
(3) Research data/information for each country;
(4) Rate each factor on a scale of 1-5 with 5 being thebest;
and
(5) Select a target market country based on your ratings
MARKET FACTOR ASSESSMENT COUNTRY/RATING COUNTRY/RATING
Demographic/Physical Environment:
. Population size, growth, density
. Urban and rural distribution
. Climate and weather variations
. Shipping distance
. Product-significant demographics
. Physical distribution and
communication network
. Natural resources
Political Environment:
. System of government
. Political stability and continuity
. Ideological orientation
. Government involvement in
business
. Attitudes toward foreign business
(trade restrictions, tariffs,
non-tariff barriers, bilateral
trade agreements)
. National economic and
developmental priorities
MARKET FACTOR ASSESSMENT COUNTRY/RATING COUNTRY/RATING
Economic Environment:
. Overall level of development
. Economic growth:
GNP, industrial sector
. Role of foreign trade in the
economy
. Currency: inflation rate,
availability, controls, stability
of exchange rate
. Balance of payments
. Per capita income and distribution
. Disposable income and
expenditure patterns
Social/Cultural Environment:
. Literacy rate, educational level
. Existence of middle class
. Similarities and differences in
relation to home market
. Language and other cultural
considerations
Market Access:
. Limitations on trade:
high tariff levels, quotas
. Documentation and
import regulations
. Local standards, practices, and
other non-tariff barriers
. Patents and trademark protection
. Preferential treaties
. Legal considerations for
investment, taxation, repatriation,
employment, code of laws
Product Potential:
. Customer needs and desires
. Local production, imports,
consumption
. Exposure to and acceptance
of product
. Availability of linking products
. Industry-specific key indicators
of demand
. Attitudes toward products of
foreign origin
. Competitive offerings
MARKET FACTOR ASSESSMENT COUNTRY/RATING COUNTRY/RATING
Local Distribution and Production:
. Availability of intermediaries
. Regional and local transportation
facilities
. Availability of manpower
. Conditions for local manufacture
Indicators of population, income levels and consumption
patterns should be considered. In addition, statistics on local
production trends, along with imports and exports of the product
category, are helpful for assessing industry market potential.
Often, an industry will have a few key indicators or measures
that will help them determine the industry strength and demand
within an international market. A manufacturer of medical
equipment, for example, may use the number of hospital beds, the
number of surgeries and public expenditures for health care as
indicators to assess the potential for its products.
What are the projected growth rates for the two countries
selected over the next 3-5 years?
STEP 2:
Determine Projected Sales Levels
What is your present U.S. market percentage?
What are the projected sales for similar products in your chosen
international markets for the coming year?
What sales volume will you project for your products in these
international markets for the coming year?
What is the projected growth in these international markets over
the next five years?
STEP 3:
Identify Customers Within Your Chosen Markets
What companies, agents or distributors have purchased similar
products?
What companies, agents or distributors have made recent requests
for information on similar products?
What companies, agents or distributors would most likely be
prospective customers for your export products?
STEP 4:
Determine Method Of Exporting
How do other U.S. firms sell in the markets you have chosen?
Will you sell direct to the customer?
1. Who will represent your firm?
2. Who will service the customers needs?
STEP 5: Building A Distributor or Agent Relationship
Will you appoint an agent or distributor to handle your export
market?
1. What facilities does the agent or distributor need to service
the market?
2. What type of client should your agent or distributor be
familiar with in order to sell your product?
3. What territory should the agent or distributor cover?
4. What financial strength should the agent or distributor have?
5. What other competitive or non-competitive lines are acceptable
or not acceptable for the agent or distributor to carry?
6. How many sales representatives does the agent or distributor
need and how often will they cover the territory?
Will you use an export management company to do your marketing
and distribution for you?
YES NO
If yes, have you developed an acceptable sales and marketing plan
with realistic goals you can agree to?
YES NO
Comments:
SUPPORT FUNCTIONS
To achieve efficient sales offerings to buyers in the
targeted markets, several concerns regarding products, literature
and customer relations should be addressed.
STEP 1:
Identify product concerns.
Can the potential buyer see a functioning model or sample of your
product that is substantially the same as would be received from
production?
YES NO
Comments:
What product labeling requirements must be met? (Metric
measurements, AC or DC electrical, voltage, etc.) Keep in mind
that the European Community now requires 3 languages on all new
packaging.
When and how can product conversion requirements be obtained?
Can product be delivered on time as ordered?
YES NO
Comments:
STEP 2:
Identify literature concerns.
If required, will you have literature in language other than
English?
YES NO
Do you need a product literature translator to handle the
technical language?
YES NO
What special concerns should be addressed in sales literature to
ensure quality and informative representation of your product?
STEP 3:
Identify customer relations concerns.
What is delivery time and method of shipment?
What are payment terms?
What are the warranty terms?
Who will service the product when needed?
How will you communicate with your customer? . . . through a
local agent, telex or fax?
Are you prepared to give the same order and delivery preference
to your international customers that you give to your domestic
customers?
YES NO
MARKETING STRATEGY
In international sales, the chosen "terms of sale" are most
important. Where should you make the product available at your
plant: at the port of exit, landed at the port of importation or
delivered free and clear to the customer's door? The answer to
this question involves determining what the market requires, and
how much risk you are willing to take.
Pricing strategy depends on "terms of sale" and also
considers value-added services of bringing the product to the
international market.
STEP 1:
Define International Pricing Strategy.
How do you calculate the price for each product?
What factors have you considered in setting prices?
Which products' sales are very sensitive to price changes?
How important is pricing in your overall marketing strategy?
What are your discount policies?
What terms of sales are best for your export product?
STEP 2:
Define promotional strategy
What advertising materials will you use?
What trade shows or trade missions will you participate in, if
any?
What time of year and how often will foreign travel be made to
customer markets?
STEP 3:
Define customer services
What special customer services do you offer?
What types of payment options do you offer?
How do you handle merchandise that customers return?
SALES FORECAST
Forecasting sales of your product is the starting point for
your financial projections. The sales forecast is extremely
important, so it is important you use realistic estimates.
Remember that sales forecasts show the expected time the sale is
made. Actual cash flow will be impacted by delivery date and
payment terms.
Step 1:
Fill in the units-sold line for markets 1, 2, and 3 for each year
on the following worksheet.
Step 2:
Fill in the sales price per unit for products sold in markets 1,
2 and 3.
Step 3:
Calculate the total sales for each of the different markets
(units sold x sales price per unit).
Step 4:
Calculate the sales (all markets) for each year - add down the
columns.
Step 5:
Calculate the five year total sales for each market - add across
the rows.
SALES FORECASTS - FIRST FIVE YEARS
1 2 3 4 5
Market 1
Units Sold
Sale Price/Unit
Total Sales
Market 2
Units Sold
Sale Price/Unit
Total Sales
Market 3
Units Sold
Sale Price/Unit
Total Sales
Total Sales
All Markets
COST OF GOODS SOLD
The cost of goods sold internationally is partially
determined by pricing strategies and terms of sale. To ascertain
the costs associated with the different terms of sale, it will be
necessary to consult an international freight forwarder. For
example, a typical term of sale offered by a U.S. exporter is
cost, insurance and freight (CIF) port of destination. Your
price includes all the costs to move product to the port of
destination. A typical cost work sheet will include some of the
following factors. These costs are in addition to the material
and labor used in the manufacture of your product.
export packing forwarding
container loading documentation
inland freight consular legalization
truck/rail unloading bank documentation
wharfage dispatch
handling bank collection fees
terminal charges cargo insurance
ocean freight other misc.
bunker surcharge telex
courier mail
To complete this worksheet, you will need to use data from
the sales forecast. Certain costs related to your terms of sale
may also have to be considered.
Step 1:
Fill in the units-sold line for market 1, 2, and 3 for each year.
Step 2:
Fill in the cost per unit for products sold in markets 1, 2, and
3.
Step 3:
Calculate the total cost for each of the products - (units sold x
cost per unit).
Step 4:
Calculate the cost of goods sold - all products for each year -
add down the columns.
Step 5:
Calculate the five-year cost of goods for each market - add
across the rows.
COST OF GOODS SOLD - FIRST FIVE YEARS
1 2 3 4 5
Market 1
Units Sold
Sale Price/Unit
Total Cost
Market 2
Units Sold
Sale Price/Unit
Total Cost
Market 3
Units Sold
Sale Price/Unit
Total Cost
Cost of Goods Sold
All Markets
INTERNATIONAL OVERHEAD EXPENSES
To determine overhead costs for your export products, you
should be certain to include costs that pertain only to
international marketing efforts. For example, costs for domestic
advertising of service that do not pertain to the international
market should not be included. Examples of most typical expense
categories for an export business are listed on the next page.
Some of these expenses will be first year start-up expenses, and
others will occur every year.
Step 1:
Review the expenses listed on the next page. These are expenses
that will be incurred because of your international business.
There may be other expense categories not listed -- list them
under "other expenses."
Step 2:
Estimate your cost for each expense category.
Step 3:
Estimate any domestic marketing expense included that is not
applicable to international sales.
Step 4:
Calculate the total for your international overhead expenses.
EXPENSE COST
Market 1 Market 2 Market 3 Total Yr 1
Legal Fees
Accounting Fees
Promotional Material
Travel
Communication
Equip/Telex
Advertising Allowances
Promotional Expenses
(e.g., trade shows, etc.)
Other Expenses
Total Expenses
Less Domestic Expenses
Included Above, if any
Total International
Start-up Expenses
PROJECTED INCOME STATEMENT - YEAR 1 to 5, ALL MARKETS
You are now ready to assemble the data for your projected
income statement. This statement will calculate your net profit
or net loss (before income taxes) for each year.
Step 1:
Fill in the sales for each year. You already estimated these
figures; just recopy them on the work sheet.
Step 2:
Fill in the cost of goods sold for each year. You already
estimated these figures, just recopy on the work sheet.
Step 3:
Calculate the Gross Margin for each year (Sales minus Cost of
Goods Sold).
Step 4:
Calculate the Total Operating Expenses for each year.
Step 5:
Calculate the Net Profit or Net Loss (Before Income Taxes) for
each year (Gross Margin minus Total Operating Expenses).
PROJECTED INCOME STATEMENT - YEAR 1 to 5, ALL MARKETS
1 2 3 4 5
International Sales
Cost of Goods Sold
Gross Margin
International Operating Expenses:
Legal
Accounting
Advertising
Travel
Trade shows
Promotional Material
Supplies
Communication Equipment
Interest
Insurance
Other
Total International Operating Expenses
BREAK-EVEN ANALYSIS
The break-even is the level of sales at which your total
sales exactly covers your total costs and operating expenses.
This level of sales is called the Break-Even Point Sales Level
(BEP sales).
In other words, at the BEP sales level, you will make a zero
profit. If you sell more than the BEP sales level, you will make
a net profit. If you sell less than the BEP sales level, you
will have a net loss.
The worksheet will calculate your BEP sales level for any
year of operations. The steps listed below will assume that you
are calculating the BEP sales level for Year 1.
Step 1:
Fill in your Total Sales, Total Cost of Goods Sold, and Total
Gross Margin for Year 1 on the following page.
Step 2:
Calculate the Gross Margin percent using the formula which is
given on the work sheet. The Gross Margin percent tells you what
percentage of each dollar of sales results in Gross Margin.
Step 3:
Fill in the Total Operating Expenses for Year 1.
Step 4:
Calculate the BEP sales level using the formula which is given.
Your need to reach this level of sales just to break even.
Note: In addition to a break-even analysis, it is highly
recommended that a profit and loss statement be generated for the
first few actual international transactions. Since there are a
great number of variables relating to costs of goods, real
transactions are required to establish actual profitability and
minimize the risk of losses.
STEP 1:
Total Sales $
Total Cost of Goods Sold $
Total Gross Margin $
STEP 2:
Total Gross Margin $
Gross Margin % $
Total Sales $
Gross Margin % = 0.
(Leave the Gross Margin $ in a decimal format. The format
is 0.347 - not 34.7%).
STEP 3:
Total Operating Expenses $
STEP 4:
Total Operating Expenses $
BEP Sales Level $
Gross Margin % $
BEP Sales Level $
TIMETABLE
This is a worksheet that you will need to work on
periodically as you progress in the workbook. The purpose is to
ensure that key tasks are identified and completed to increase
the success of your international business.
STEP 1:
Identify key activities
By reviewing other portions of your business plan, compile a
list of tasks that are vital to the successful operation of your
business. Be sure to include travel to your chosen market as
applicable.
STEP 2:
Assign responsibility for each activity
For each identified activity, assign one person primary
responsibility for the completion of that activity.
STEP 3:
Determine scheduled start date
For each activity determine the date when work will begin.
You should consider how the activity fits into your overall plan
as well as the availability of the person responsible.
STEP 4:
Determine scheduled finish date
For each activity determine when the activity must be
completed.
ACTION PLAN
PROJECT/TASK PERSON START DATE/FINISH DATE
SUMMARY
STEP 1:
Verify completion of previous pages.
You should have finished all the other sections in the
workbook before continuing any further.
STEP 2:
Identify your business plan audience.
What type of person are you intending to satisfy with this
business plan? The summary should briefly address all the major
issues that are important to this person. Keep in mind that this
page will probably be the first read by this person. It is
extremely important the summary be brief yet contain the
information most important to the reader. This section should
make the reader want to read the rest of your plan.
STEP 3:
Write a one-page summary.
You will now need to write no more than a page summarizing
all the previous work sheets you have completed.
Determine which sections are going to be most interesting to
your reader. Write one to three sentences that summarize each of
the important sections.
These sentences should appear in the order of the sections
of your business plan. The sentences must fit together to form a
summary and not appear to be a group of loosely related thoughts.
You may want to have several different summaries, depending
on who will read the business plan.
INTERNATIONAL BUSINESS PLAN SUMMARY:
PREPARING AN EXPORT PRICE QUOTATION
Setting proper export prices is crucial to a successful
international sales program; prices must be high enough to
generate a reasonable profit, yet low enough to be competitive in
overseas markets. Basic pricing criteria - costs, market demand,
and competition - are the same for domestic and foreign sales.
However, a thorough analysis of all cost factors going into a
cost, insurance and freight (CIF) quotation may result in prices
that are different from domestic ones.
"Marginal cost" pricing is the most realistic and frequently
used pricing method. Based on a calculation of incremental
costs, this method considers the direct out-of-pocket expenses of
producing and selling products for export as a floor beneath
which prices cannot be set without incurring a loss. There are
important principles that should be followed when pricing a
product for export, summarized below.
COST FACTORS
In calculating an export price, be sure to take into account
all the cost factors for which you, the exporter, are liable.
1. Calculate direct materials and labor costs involved in
producing the goods for export.
2. Calculate your factory overhead costs, prorating the
amount of overhead chargeable to your proposed export order.
3. Deduct any charges not attributable to the export
operation (i.e., domestic marketing costs, domestic legal
expenses), especially if export sales represent only a small part
of total sales.
4. Add in the other out-of-pocket expenses directly tied to
the export sales, such as:
travel expenses
catalogs, slide shows, video presentations
promotional material
export advertising
commissions
transportation expenses
packing materials
legal expenses
*
office supplies
*
patent and trademark fees
*
communications
*
taxes
*
rent
*
insurance
*
interest
*
provision for bad debts
market research
credit checks
translation costs
product modification
consultant fees
freight forwarder fees
*These items will typically represent the cost of the total
operation, so be sure to prorate these to reflect only the cost
of producing the goods for export.
5. Allow yourself a realistic price margin for unforeseen
costs, unavoidable risks, and simple mistakes that are common in
any new undertaking.
6. Also allow yourself a realistic profit or mark-up.
OTHER FACTORS TO CONSIDER
Market Demand - As in the domestic market, product demand is
the key to setting prices in a foreign market. What will the
market bear for a specific product or service? What will the
estimated consumer price for your product be in each foreign
market? If your prices seem out of line, try some simple product
modifications to reduce the selling price, such as simplification
of technology or alteration of product size to conform to local
market norms. Also keep in mind that currency valuations alter
the affordability of goods. A good pricing strategy should
accommodate fluctuations in currency.
Competition - As in the domestic market, few exporters are
free to set prices without carefully evaluating their
competitor's pricing policies. The situation is further
complicated by the need to evaluate the competition's prices in
each foreign market an exporter intends to enter. In a foreign
market that is serviced by many competitors, an exporter may have
little choice but to match the going price or even go below it to
establish a market share. If, however, the exporter's product or
service is new to a particular foreign market, it may be possible
to set a higher price than normally charged domestically.
QUOTE PREPARATION
An Export Costing Worksheet that may guide you in preparing
export price quotations follows.
EXPORT COSTING WORKSHEET
Reference Information
1. Our Reference
2. Customer Reference
Customer Information:
3. Name
5. Cable Address
4. Address
6. Telex No.
7. Fax No.
Product Information: SIC Code:
8. Product
9. No. of Units
10. Net Weight (unit)
11. Gross Weight
12. Dimensions ___ x___ x___
13. Cubic Measure ____(sq.in.)
14. Total Measure
15. H.S. No.
Product Charges:
16. Price (or cost) per unit ______ x units _____Total__________
17. Profit (or markup)
18. Sales Commissions
19. FOB FACTORY PRICE
Fees-Packing, Marking, Inland Freight:
20. Freight Forwarder
2
1. Financing Costs
2
2. Other charges
2
3. Export Packing
2
4. Labeling/Marking
2
5. Inland Freight to
2
6. Other charges (identify)
2
7. FOB, PORT CITY PRICE (EXPORT PACKED)
Port Charges/Document
2
8. Unloading (heavy lift)
2
9. Terminal
30. Other (identify)
3
1. Consular Document (if required)
3
2. Certificate of Origin (if required)
3
3. Export License (if required)
3
4. FAS VESSEL (OR AIRPLANE) PRICE
Freight
3
5. Based on ________ weight _________ measure
3
6. Ocean ___________ Air ____________
3
7. On Deck _________ Under Deck _____
3
8. Rate ____________ Minimum ________ Amount _________
Insurance
3
9. Coverage required _________________
40. Basis ___________ Rate____________ Amount _________
4
1. CIF, PORT OF DESTINATION PRICE
WORKSHEET
EXPORT PROGRAMS & SERVICES
This worksheet helps you identify organizational resources
that can provide programs and services to assist you in
developing your international business plan and increase your
export sales.
ORGANIZATIONS
_________________________________________________________________
SERVICES SBA USDOC SBDC Trade University World
Office Office Assoc CommCollege Trade
Ctr
_________________________________________________________________
Readiness to
Export
Assessment
_________________________________________________________________
Market Research
Studies
_________________________________________________________________
Counseling
_________________________________________________________________
Training Seminars
_________________________________________________________________
Education Programs
_________________________________________________________________
Publications
_________________________________________________________________
Export Guides
_________________________________________________________________
DataBanks
_________________________________________________________________
Trade Shows
_________________________________________________________________
Financing
_________________________________________________________________
Chapter 2
Identifying International Markets
To succeed in exporting, you must first identify the most
profitable international markets for your products or services.
Without proper guidance and assistance, however, this process can
be time consuming and costly -- particularly for a small
business.
The U.S. federal government, state governments, trade
associations, exporters' associations and foreign governments
offer low-cost and easily accessible resources to simplify and
speed your foreign market research. This chapter describes those
resources and how to use them.
FEDERAL GOVERNMENT RESOURCES
Many government programs and staff are dedicated to helping
you, the small business owner, assess whether your product or
service is ready to compete in a foreign market.
The U.S. Small Business Administration
Many new-to-export small firms have found the counseling
services provided by the SBA's Service Corps of Retired
Executives (SCORE) particularly helpful. Through your local SBA
District office, you can gain access to more than 850 SCORE
volunteers with experience in international trade.
"Our SCORE counselor is really like a big brother to us and
our company," says Jim Hadzicki, Vice-President of San
Diego-based Revolution Kites, a recreational kite manufacturer.
Exports now account for 24 percent of their sales in just three
years. "I recently went on a trip to Tokyo to line up a
distributorship. Our SCORE counselor helped me list our
objectives, what I was to do and ask about and even told me what
gift I should take to the Japanese representative," says
Hadzicki.
Two other SBA-sponsored programs are available to small
businesses needing management and export advice: Small Business
Development Centers and Small Business Institutes affiliated with
colleges and universities throughout the United States:
Small Business Development Centers (SBDCs) offer counseling,
training and research assistance on all aspects of small business
management.
The Small Business Institute (SBI) program provides small
business owners with intensive management counselling from
qualified business students who are supervised by faculty. SBIs
provide advice on a wide range of management challenges facing
small businesses -- including finding the best foreign markets
for particular products or services.
The U.S. Department of Commerce
The U.S. Department of Commerce's (DOC) International Trade
Administration (ITA) is a valuable source of advice and
information. In ITA offices throughout the country international
trade specialists can help you locate the best foreign markets
for your products. Oklahoma exporter OK-1 Manufacturing Co. has
found the foreign market research available through the ITA
extremely useful:
"The Oklahoma District ITA office prepared a market research
study to determine whether we should export our fitness accessory
items to Japan," says Sherry Teigen, OK-1 Manufacturing Co.
export manager. Today, the company exports to Japan in addition
to 20 other countries. Since it began exporting, the company
staff has grown by 75 and Sherry's husband, OK-1's President,
Roger Teigen, won the 1991 SBA Exporter of the Year award.
District Export Councils (DECs) are another useful
ITA-sponsored resource. The 51 District Export Councils located
around the United States are comprised of 1,800 executives with
experience in international trade who volunteer to help small
businesses export. Council members come from banks,
manufacturing companies, law offices, trade associations, state
and local agencies and educational institutions. They draw upon
their experience to encourage, educate, counsel and guide
potential, new and seasoned exporters in their individual
marketing needs.
The United States and Foreign Commercial Service (US&FCS)
helps U.S. firms compete more effectively in the global
marketplace with trade specialists in 69 United States cities and
70 countries worldwide. US&FCS offices provide information on
foreign markets, agent/distributor location services, trade leads
and counseling on business opportunities, trade barriers and
prospects abroad.
The United States Department of Agriculture
If you have an agricultural product, you should investigate
the U.S. Department of Agriculture's (USDA) Foreign Agricultural
Service (FAS). With posts in 80 embassies and consulates
worldwide, the FAS can obtain specific overseas market
information for your product. The FAS also maintains sector
specialists in the United States to monitor foreign markets for
specific U.S. agricultural products.
Most state commerce and economic development offices have
international trade specialists to assist you. Many states have
trade offices in overseas markets. Dial Tool and Manufacturing
of Franklin Park, Illinois, found the Illinois State office in
Hong Kong very helpful:
After visiting the Illinois State office in Hong Kong, Dial
Tool and Manufacturing President Steve Pagliuzza reports that he
was able to sign on sales reps for his company's metal stamping
equipment: "My state office in Hong Kong gave me several names of
potential reps. We eventually signed them on and are now
successfully exporting to Asia, in addition to Europe, Canada and
Mexico. In four years, 15-20 percent of our sales now come from
exporting."
Port Authorities are a wealth of export information.
Although traditionally associated with transportation services,
many port authorities around the country have expanded their
services to provide export training programs and
foreign-marketing research assistance. For example, the New
York-New Jersey Port Authority provides extensive services to
exporters including XPORT, a full-service export trading company.
PRIVATE SECTOR RESOURCES
In addition to government-supported resources, private
sector organizations can also provide invaluable assistance.
Exporters' Associations
World Trade Centers, import-export clubs and organizations
such as the American Association of Exporters and Importers and
the Small Business Exporter's Association can aid in your foreign
market research.
Trade Associations
The National Federation of International Trade Associations
lists over 150 organizations in the U.S. to help new-to-export
small businesses enter international markets. Many of these
associations maintain libraries, databanks and established
relationships with foreign governments to assist in your
exporting efforts.
More than 5,000 trade and professional associations
currently operate in the United States; many actively promote
international trade activities for their members.
The Telecommunications Industry Association is just one
association which leads frequent overseas trade missions and
monitors the pulse of foreign market conditions around the globe.
Whatever your product or service, a trade association probably
exists that can help you obtain information on domestic and
foreign markets.
Chambers of Commerce, particularly state chambers, or
chambers located in major industrial areas, often employ
international trade specialists who gather information on markets
abroad.
HOW TO GATHER FOREIGN MARKET RESEARCH
Now that you know where to begin your research, you should
next identify the most profitable foreign markets for your
products or services. You will need to:
. classify your product;
. find countries with the largest and fastest growing
markets for your product;
. determine which foreign markets will be the most
penetrable;
. define and narrow those export markets you intend to
pursue;
. talk to U.S. customers doing business internationally;
. research export efforts of U.S. competitors.
Classifying your product
The Standard Industrial Classification (SIC) code is the
system by which the United States government classifies its goods
and services. Knowing the proper code for your product or
service can be useful in collecting and analyzing data available
in the United States.
Data originating from outside the United States -- or
information available from international organizations -- are
organized under the Standard International Trade Classification
(SITC) system, which may assign a different code to your product
or service.
Another method of classifying products for export is the
Harmonized System (HS). Knowing the HS classification number,
the SIC and the SITC codes for your product is essential to
obtaining domestic and international trade and tariff
information. DOC and USDA trade specialists can assist in
identifying the codes for your products. The United States
Bureau of the Census (USBC) can help identify the HS number for
your product.
Finding countries with the largest and fastest growing markets
for your product
At this stage of your research, you should consider where
your domestic competitors are exporting. Trade associations can
often provide data on where companies in a particular industry
sector are exporting their products. The three largest markets
for U.S. products are Canada, Japan and Mexico. Yet these
countries may not be the largest markets for your product.
Three key United States government databases can identify
those countries which represent significant export potential for
your product: SBA's Automated Trade Locator Assistance System
(SBAtlas), Foreign Trade Report FT925 and the U.S. Department of
Commerce's National Trade Data Bank (NTDB).
SBA's Automated Trade Locator Assistance System (SBAtlas) is
offered only by the U.S. Small Business Administration and
provides current market information to SBA clients on world
markets suitable for their products and services. This valuable
research tool supplies small business exporters with information
about where their products are being bought and sold and which
countries offer the largest markets. The Country Reports detail
products imported and exported by various foreign nations. Data
are supplied by the DOC's USBC and member nations of the United
Nations. This information can be obtained through a SCORE
counselor at the SBA District and Regional Offices and at SBDCs
and SBIs. This service is free to requesting small businesses.
Foreign Trade Report FT925 gives a monthly country-specific
breakdown of imports and exports by SITC number. Available by
subscription from the Government Printing Office, the FT925 can
also be obtained through DOC ITA offices.
The National Trade Data Bank (NTDB) contains more than
100,000 U.S. government documents on export promotion and
international economic information. With the NTDB, you can
conduct databank searches on country and product information.
NTDB can be purchased by subscription and used with a CD-ROM
reader, or can be used at Federal libraries throughout the United
States. DOC ITA offices will also conduct specific NTDB searches
to meet your foreign market research needs.
Once you learn which are the largest markets for your
products, determine which are the fastest growing markets. Find
out what demographic patterns and cultural considerations will
affect your market penetration.
Several publications provide geographic and demographic
statistical information pertinent to your product: The World
Factbook, produced by the Central Intelligence Agency; World
Population, published by DOC's USBC; The World Bank Atlas,
available from the World Bank; and the International Trade
Statistics Yearbook of the United Nations. Volume Two of this
U.N. publication (available at many libraries) lists
international demand for commodities over a five-year period.
DETERMINING THE MOST PENETRABLE MARKETS
Once you have defined and narrowed a few prospective foreign
markets for your product, you will need to examine them in
detail. At this stage you should ask the following questions:
. how does the quality of your product or service compare
with that of goods already available in your target foreign
markets?
. is your price competitive in the markets you are
considering?
. who are your major customers?
Answering these questions may seem overwhelming at first,
but many resources are available to help you select which foreign
markets are most conducive to selling your product.
The DOC's ITA can link you with specific foreign markets.
ITA offices are part of the US&FCS and communicate directly with
FCS officers working in United States Embassies worldwide.
FCS staff and in-country market research firms produce
in-depth reports on selected products and industries that can
answer many of your questions regarding foreign market
penetration.
One small business exporter who regularly uses foreign
market information obtained through the DOC's US&FCS is
Fabri-Quilt Inc. of North Kansas City, Missouri.
According to Fabri-Quilt President Lionel Kunst, "When I
decide to enter a foreign market, the Commerce Department ITA
office in Missouri sends information on my company to the Foreign
Commercial Service Officer in the country where I want to export.
They send me back information on that particular country and even
make appointments for me when I decide to visit the market
myself." Of the product line Fabri-Quilt exports, 25 percent of
their sales can be attributed to exporting.
You can also order a comparison shopping service report
through ITA district offices. The report is a low-cost way to
conduct research without having to leave the United States.
SBA's and DOC's Export Legal Assistance Network (ELAN)
provides new exporters with answers to their initial legal
questions. Local attorneys volunteer, on a one-time basis, to
counsel small businesses to address their export-related legal
questions. These attorneys can address questions pertaining to
contract negotiations, licensing, credit collections procedures
and documentation. There is no charge for this one-time service,
available through SBA or DOC district offices.
Trade Opportunities Program (TOPs) of the DOC can furnish
U.S. small businesses with trade leads from foreign companies
that want to buy or represent their products or services. These
trade leads are available in both electronic or printed form from
the DOC. Participating companies must pay a modest fee to gain
access to this service.
Other important issues about the target foreign markets you
should explore are:
. political risk considerations,
. the cultural environment, and
. whether any product modifications, such as packaging or
labelling, will make the product more "exportable."
One U.S. poultry producer discovered it had to modify its
product to make it more palatable to Japanese consumers:
Atlanta-based Gold Kist Inc. found that, to be successful in
Japan, they needed to cut and package their chicken parts to meet
Japanese consumer preferences. That change required substantial
modification in Gold Kist's operations. The alteration paid off:
Gold Kist's Don Sands reports, "In 1988, we shipped 5.3 million
pounds of poultry to Japan, 9 million in 1989 and 12 million in
1990."
Identifying market-specific issues is easily accomplished by
contacting foreign government representatives in the United
States. Commercial posts of foreign governments located within
embassies and consulates can assist you in obtaining specific
market and product information.
American Chambers of Commerce (AmChams) abroad can also be
an invaluable resource. As affiliates of the United States
Chamber of Commerce, 61 AmChams, located in 55 countries, collect
and disseminate extensive information on foreign markets. While
membership fees are usually required, the small investment can be
worth it for the information received.
Another fundamental question to ask country-specific experts
is what market barriers, such as tariffs or import restrictions
(sometimes referred to as non-tariff barriers), exist for your
product? Specialists at U.S. Trade Representative (USTR) should
be consulted on trade barriers.
Tariffs are taxes imposed on imported goods. In many cases,
tariffs raise the price of imported goods to the level of
domestic goods. Often tariffs become barriers to imported
products because the amount of tax imposed makes it impossible
for exporters to profitably sell their products in foreign
markets.
Non-tariff barriers are laws or regulations that a country
enacts to protect domestic industries against foreign
competition. Such non-tariff barriers may include subsidies for
domestic goods, import quotas or regulations on import quality.
To determine the rate of duty, you will need to identify the
Harmonized Tariff section which corresponds to the product you
wish to export. Each country has its own schedule of duty rates
corresponding to the section of the Harmonized System of Tariff
Nomenclature, I-XXII.
DEFINING WHICH MARKETS TO PURSUE
Once you know the largest, fastest growing and most
penetrable markets for your product or service, you must then
define your export strategy.
Do not choose too many markets. For most small businesses,
three foreign markets will be more than enough, initially. You
may want to test one market and then move on to secondary markets
as your "exportise" develops. Focusing on regional, geographic
clusters of countries can also be more cost effective than
choosing markets scattered around the globe.
After you have identified the best export markets, your next
step will be to determine the best way to distribute your product
abroad. Chapter 3, "Market Entry," discusses distribution
methods.
Chapter 3
Foreign Market Entry Having determined the best international
markets for your products, you now need to evaluate the most
profitable way to get your products to potential customers in
these markets.
There are several methods of foreign market entry including
exporting, licensing, joint venture and off-shore production.
The method you choose will depend on a variety of factors
including the nature of your particular product or service and
the conditions for market penetration which exist in the foreign
target market.
Exporting can be accomplished by selling your product or
service directly to a foreign firm, or indirectly, through the
use of an export intermediary, such as a commissioned agent, an
export management or trading company.
International joint ventures can be a very effective means
of market entry. Joint ventures overseas are often accomplished
by licensing or off-shore production. Licensing involves a
contractual agreement whereby you assign the rights to distribute
or manufacture your product or service to a foreign company.
Off-shore production requires either setting up your own facility
or sub-contracting the manufacturing of your product to an
assembly operator.
Licensing and off-shore production are discussed in Chapter
7, "Strategic Alliances and Foreign Investment Opportunities."
EXPORTING
Of the various methods of foreign market entry, exporting is
most commonly used by small businesses. Start-up costs and risks
are limited, and profits can be realized early on.
There are two basic ways to export: direct or indirect. The
direct method requires your company to find a foreign buyer and
then make all arrangements for shipping your products overseas.
If this method seems beyond the scope of your business' in-house
capabilities at this time, do not abandon the idea of exporting.
Consider using an export intermediary:
American Cedar, Inc., a Hot Springs, Arkansas, producer of
cedar products reports that 30 percent of its product sales now
comes from exporting: "We displayed our products at a trade show,
and an export management company found us. They helped alleviate
the hassles of exporting directly. Our products are now being
distributed throughout the European Community from a distribution
point in France," says American Cedar President Julian McKinney.
INDIRECT EXPORTING
Many small businesses like American Cedar have been
exporting indirectly by using an export intermediary. There are
several kinds of export intermediaries you should consider.
Commissioned agents
Commissioned agents act as "brokers," linking your product
or service with a specific foreign buyer. Generally, the agent
or broker will not fulfill the orders, but rather will pass them
to you for your acceptance. However, they may assist, in some
cases, with export logistics such as packing, shipping and export
documentation.
Export Management Companies (EMCs)
EMCs act as your "off-site" export department, representing
your product -- along with the products of other companies -- to
prospective overseas purchasers. The management company looks
for business on behalf of your company and takes care of all
aspects of the export transaction. Hiring an EMC is often a
viable option for smaller companies that lack the time and
expertise to break into international markets on their own.
EMCs will often use the letterhead of your company,
negotiate export contracts and then provide after-sales support.
EMCs may assist in arranging export financing for the exporters
but they do not generally assure payment to the manufacturers.
Some of the specific functions an EMC will perform include:
. conducting market research to determine the best
foreign markets for your products;
. attending trade shows and promoting your
productsoverseas;
. assessing proper distribution channels;
. locating foreign representatives and/or distributors;
. arranging export financing;
. handling export logistics, such as preparing
invoices,arranging insurance, customs documentation, etc.; and
. advising on the legal aspects of exporting and
othercompliance matters dealing with domestic and foreign trade
regulations.
EMCs usually operate on a commission basis, although some
work on a retainer basis and some take title to the goods they
sell, making a profit on the markup. It is becoming increasingly
common for EMCs to take title to goods.
Export Trading Companies (ETCs)
ETCs perform many of the functions of EMCs. However, they
tend to be demand-driven and transaction-oriented, acting as an
agent between the buyer and seller. Most trading companies
source U.S. products for their overseas buyers. If you offer a
product that is competitive and popular with the ETC buyers, you
are likely to get repeat business. Most ETCs will take title to
your goods for export and will pay your company directly. This
arrangement practically eliminates the risks associated with
exporting for the manufacturer.
ETC Cooperatives
ETC cooperatives are United States government-sanctioned
co-ops of companies with similar products who seek to export and
gain greater foreign market share. Many agricultural concerns
have benefited from ETC cooperative exporting, and many
associations have sponsored ETC cooperatives for their member
companies. The National Machine Tool Builders' Association, the
Outdoor Power Equipment Institute and the National Association of
Energy Service Companies are a few examples of associations with
ETC co-ops. Check with your particular trade association for
further information.
The Export Trading Company Act of 1982
This legislation encourages the use and formation of
EMCs/ETCs by changing the antitrust and banking environments
under which these companies operate. The Act increases access to
export financing by permitting bank holding companies to invest
in ETCs and reduces restrictions on trade finance provided by
financial institutions. Under the Act, banks are allowed to make
equity investments in qualified ETCs.
Foreign Trading Companies
Some of the world's largest trading companies are located
outside the United States. They can often be a source of export
opportunity. U.S. & Foreign Commercial Service (US&FCS)
representatives in embassies around the world can tell you more
about trading companies located in a given foreign market.
Exporting through an Intermediary -- Factors to Consider
Working with an EMC/ETC makes sense for many small
businesses. The right relationship, if structured properly, can
bring enormous benefits to the manufacturer, but no business
relationship is without its potential drawbacks. The
manufacturer should carefully weigh the pros and cons before
entering into a contract with an EMC/ETC. Some advantages
include:
. Your product gains exposure in international markets
--with little or no commitment of staff and resources from your
company.
. The EMC/ETC's years of experience and
well-establishednetwork of contacts may help you to gain faster
access to international markets than you could through
establishing a relationship with a foreign-based partner.
. Using an intermediary lowers or eliminates your
exportstart-up costs, and, therefore, the risks associated with
exporting. You can negotiate your contract with an EMC so that
you pay nothing until the first order is received.
. Your intermediary will guide you through the
exportprocess step-by-step. Over time, you will develop your own
export skills.
Some disadvantages of exporting through an intermediary include:
. You lose some control over the way in which yourproduct
is marketed and serviced. Your company's image and name are at
stake. You will want to incorporate any concerns you may have
into your contract, and you will want to monitor closely the
activities and progress of your intermediary.
. You may lose part of your export-sales profit margin
bydiscounting your price to an intermediary. However, you may
find that the economies of scale realized through increased
production offset this loss.
. Using an intermediary can result in a higher pricebeing
passed on to the overseas buyer or end-user. This may or may not
affect your competitive position in the market. The issue of
pricing should be addressed at the outset.
Export Merchants/Export Agents
Export merchants and agents will purchase and then
re-package products for export, assuming all risks and selling to
their own customers. This export intermediary option should be
considered carefully, as your company could run the risk of
losing control over your product's pricing and marketing in
overseas markets.
Piggyback Exporting
Allowing another company, which already has an export
distribution system in place, to sell your company's product in
addition to its own is called "piggyback" exporting.
Piggyback exporting has several advantages. This
arrangement can help you gain immediate foreign market access.
Also, all the requisite logistics associated with selling abroad
are borne by the exporting company. Oklahoma-based DP
Manufacturing's winches were attached to another product and sold
abroad by another company. DP Manufacturing now handles its own
exports and reports that 15 percent of its sales comes from
international markets.
How to Find Export Intermediaries
Small businesses often report that intermediaries find them
-- at trade fairs and through trade journals where their products
have been advertised -- so it can often pay to get the word out
that you are interested in exporting.
One way to begin your search for a U.S.-based export
intermediary is in the Yellow Pages of your local phone
directory. In just a few initial phone calls, you should be able
to determine whether indirect exporting is an option you want to
pursue further.
The National Association of Export Companies (NEXCO) and the
National Federation of Export Associations (NFEA) are two
associations that can assist in your efforts to find export
intermediaries. The Directory of Leading Export Management
Companies is another useful source (see Part II, The ExporterÕs
Directory).
DOC's Office of Export Trading Company Affairs (OETCA) can
also assist in providing information on how to locate ETCs and
EMCs, as well as ETC cooperatives in the U.S. The office, under
a joint public/private partnership, compiles the Export Yellow
Pages, which provides the names and addresses of EMCs/ETCs, as
well as other export service companies, such as banks and freight
forwarders. Manufacturers, or producers, can also be listed in
the guide free of charge; 50,000 copies are distributed worldwide
annually. Contact your local U.S. Department of Commerce
district office for information on being listed or for a free
copy of the directory.
Locating the best export intermediary to represent you
overseas is important. Do your homework before signing an
agreement.
DIRECT EXPORTING
While indirect exporting offers many advantages, direct
exporting also has its rewards: although initial outlays and the
associated risks are greater, so too can be the profits.
California exporter Bayley Suit, Inc. reports that 80
percent of its sales come from exporting. The company president
says that "40 percent of sales come from the Pacific Rim and 40
percent from the UK and Europe. In just a few years, exports
have pushed our gross sales from $1 million to $4 million."
Direct exporting signals a commitment on the part of company
management to fully engage in international trade. It may
require that you dedicate a staff person or even several
personnel to support your export efforts, and company management
may have to travel abroad frequently.
Selling directly to an international buyer means that you
will have to handle the logistics of moving the goods overseas.
But, as the case of Ekegard, Inc. reveals, the extra efforts can
pay off:
Using agents based in Pakistan and Thailand, Iowa-based
Ekegard, Inc. states that 80 percent of its sales now come from
exporting -- quite an achievement in just three years. According
to Ekegard President Janne Ekstam, "Exporting helps to offset
fluctuations in the United States economy."
Different Approaches to Direct Exporting
Sales Representatives/Agents
Like manufacturers' representatives in the United States,
foreign-based representatives or "agents" work on a commission
basis to locate buyers for your product. Your representative
most likely will handle several complementary, but non-competing
product lines. An agent is, generally, a representative with
authority to make commitments on behalf of your firm. Be
careful, therefore, about using the terms interchangeably. Your
agreement should specify whether the agent/rep. has legal
authority to obligate the firm.
Distributors
Foreign distributors, in comparison, purchase merchandise
from the U.S. company and re-sell it at a profit. They maintain
an inventory of your product, which allows the buyer to receive
the goods quickly. Distributors often provide after-sales
service to the buyer.
Your agreement with any overseas business partner -- whether
a representative, agent or distributor -- should address whether
the arrangement is exclusive or non-exclusive, the territory to
be covered, the length of the association, and other issues.
(See Chapter Four, The Export Transaction, for additional
information on negotiating agent/distributor agreements.)
Kansas-based Airparts Companies has been extremely
successful using overseas distributors:
"We employ 1,200 distributors worldwide," says Marta E.
Maxwell, president of Airparts Companies, Inc. of Wichita,
Kansas. With over $13 million in sales and 38 employees, Maxwell
attributes 70 percent of her sales to exporting.
Finding overseas buyers for your products need not be more
difficult than locating a representative here in the United
States. It may require, however, an investment of time and
resources to travel to your target market to meet face-to-face
with prospective partners. One way to identify those interested
in your product is to tap the DOC's Agent/Distributor Service.
This program provides a customized search to identify agents,
distributors and representatives for United States products based
on the foreign companies' examination of the United States
product literature.
"The Commerce Department Agent/Distributor Search located a
distributor for us in India, and we've had a good working
relationship for three years," says Shirley Wright, a
representative of the Wisconsin biotechnology firm Promega.
Promega derives more than 30 percent of its sales from
exporting.]
Other sources of leads to find foreign agents and
distributors are trade associations, foreign chambers of commerce
in the United States and American chambers of commerce located in
foreign countries.
Many publications can be useful. The Standard Handbook of
Industrial Distributors lists agents and distributors in more
than 90 countries. The Manufacturers' Agents National
Association also has a roster of agents in Europe (see Part II,
The Exporter's Directory).
Foreign government buying agents
Foreign government agencies or quasi-governmental agencies
are often responsible for procurement. In some instances,
countries require an in-country agent to access these procurement
opportunities. This can often represent significant export
potential for U.S. companies, particularly in markets where U.S.
technology and know-how are valued. Foreign country commercial
attaches in the United States can provide you with the
appropriate in-country procurement office.
Retail Sales
If you produce consumer goods, you may be able to sell
directly to a foreign retailer. You can either hire a sales
representative to travel to your target market with your product
literature and samples and call on retailers, or you can
introduce your products to retailers through direct-mail
campaigns. The direct-marketing approach will save commission
fees and travel expenses. You may want to combine trips to your
target markets with exploratory visits to retailers. Such
face-to-face meetings will reinforce your direct marketing.
Direct Sales to End-User
Your product line will determine whether direct sales to the
end-user are a viable option for your company. A manufacturer of
medical equipment, for example, may be able to sell directly to
hospitals. Other major end-users include foreign governments,
schools, businesses and individual consumers.
HOW TO FIND BUYERS
Advertise in Trade Journals
Many small businesses report that foreign buyers often find
them. An ad placed in a trade journal or a listing in the DOC's
Commercial News USA can often yield innumerable inquiries from
abroad. Commercial News USA is a catalog-magazine featuring U.S.
products and distributed to 125,000 business readers in over 140
countries around the world and to over 650,000 Economic Bulletin
Board users in 18 countries. Fees vary with the size of the
listing. Many U.S. companies have had enormous success in
locating buyers through this vehicle:
"When overseas buyers contacted us we were thrilled," says
Maryland's Marine Enterprises Vice President Brenda Dandy,
discussing the results of a listing her company bought in
Commercial News USA. Exports now represent 20 percent of Marine
Enterprises' sales.
Participate in Catalog and Video/Catalog Exhibitions
Catalog and Video/Catalog exhibitions are another low-cost
means of advertising your product abroad. Your products are
introduced to potential partners at major international trade
shows -- and you never have to leave the United States. For a
small fee, the US&FCS officers in embassies show your catalogs or
videos to interested agents, distributors and other potential
buyers.
A number of private sector publications also offer U.S.
companies the opportunity to display their products in catalogs
sent abroad. A few include Johnston International's Export
Magazine, The Journal of Commerce and the Thomas Publishing
Company's American Literature Review.
Pursue Trade Leads
Rather than wait for potential foreign customers to contact
you, another option is to search out foreign companies looking
for the particular product you produce. Trade leads from
international companies seeking to buy or represent U.S. products
are gathered by US&FCS officers worldwide and are distributed
through the DOC's Economic Bulletin Board. There is a nominal
annual fee and a connect-time charge. The leads also are
published daily in The Journal of Commerce under the heading,
"Trade Opportunities Program" and in other commercial news
outlets.
Another source of trade leads is the World Trade Centers
(WTC) Network, where you can advertise your product or service on
an electronic bulletin board transmitted globally.
If your product is agricultural, the U.S. Department of
Agriculture (USDA) Foreign Agricultural Service (FAS)
disseminates trade leads collected by their 80 overseas offices.
These leads may be accessed through the AgExport FAX polling
system, the AgExport Trade Leads Bulletin, The Journal of
Commerce or on several electronic bulletin boards.
Exhibit at Trade Shows
Trade shows also are another means of locating foreign
buyers. DOC's Foreign Buyer Program certifies a certain number
of U.S. trade shows each year. Foreign buyers are actively
recruited by DOC commercial officers, and special services --
such as meeting areas and translators -- are provided to
encourage and facilitate private business discussions.
International trade shows are another excellent way to
market your product abroad. Many U.S. small businesses find that
going to a foreign trade show once just is not enough:
"You have to hang in there," said Allen-Edmonds Shoe
Corporation President John Stollenwerk. "In the beginning, in
many countries where we displayed our products at foreign trade
shows, we saw no results. But gradually people began to take our
product, American made shoes, seriously. We market our shoes as
`the world's finest.' That's one way American companies can
compete." Twelve percent of Wisconsin-based Allen-Edmonds sales
are derived from exporting.
Through a certification program DOC also supports about 80
international fairs and exhibitions held in markets worldwide.
U.S. exhibitors receive pre- and post-event assistance. The USDA
FAS sponsors about 15 major shows overseas each year.
Participate in Trade Missions
Participating in overseas trade missions is yet another way
to meet foreign buyers. Public/private trade missions are often
organized cooperatively by federal and state international trade
agencies and trade associations. Arrangements are handled for
you so that the process of meeting prospective partners or buyers
is simplified.
Matchmaker Trade Delegations are DOC-sponsored trade
missions to select foreign markets. Your company is matched
carefully with potential agents and distributors interested in
your product. Tennessee-based Shaffield Industries, a futon
manufacturer, reaped excellent returns as a result of a 1991
Matchmaker trade mission to Asia:
"I was especially surprised at the high-level of
appointments scheduled for us during the Matchmaker trade
mission. Each was a true prospect," stated David Goff,
comptroller for Shaffield Industries. As a result of the
mission, his company negotiated the sale of three containers of
his product to South Korea and two containers to Taipei.
Being properly prepared for the kinds of inquiries you might
encounter on overseas trade missions is important. The SBA
offers pre-mission training sessions through its district offices
and the SCORE program. Contact your local SBA office for a
schedule of upcoming "How to Participate Profitably in Trade
Missions" seminars.
Contact Multilateral Development Banks
In developing countries, large infrastructure projects are
often funded by multilateral development banks such as the World
Bank, the African, Asian, Inter-American Development Banks and
the European Bank for Reconstruction and Development.Multilateral
development bank (MDB) projects often represent extensive
opportunities for U.S. small businesses to compete for project
work. DOC estimates that MDB projects could amount to at least
$15 billion dollars in export contracts for United States
businesses.
One U.S. small business that successfully entered the
international marketplace by bidding on a World Bank project is
DSI of Poestenkill, New York:
"As a result of World Bank loans to the People's Republic of
China, DSI received over $1 million dollars in contracts for
laboratory equipment," reports DSI President Dave Ferguson.
Exports now account for 60-70 percent of DSI's business.
Development bank projects can be an excellent way to start
exporting. Many U.S. small business exporters have benefited
from large MDB projects through subcontracting awards from larger
corporations.
A list of MDBs is included in Part II, The Exporter's
Directory. From their Washington, D.C. headquarters, many MDBs
hold monthly seminars to acquaint businesses with the MDB
procurement process. Additionally, the DOC's Office of Major
Projects can be of assistance in identifying contracting and
subcontracting opportunities.
QUALIFYING POTENTIAL BUYERS OR REPRESENTATIVES
Once you locate a potential foreign buyer or representative,
the next step is to qualify them by reputation and financial
position. First, obtain as much information as possible from the
company itself. Here are a few sample questions you will want to
ask:
. What is the company's history and what are the
qualifications and backgrounds of the principal officers?
. Does the company have adequate trained personnel,
facilities, resources to devote to your business?
. What is their current sales volume?
. What is the size of their inventory?
. How will they market your product (retail, wholesale or
direct)?
. Which territories or areas of the country do they
cover?
. Do they have other U.S. or foreign clients? Are any of
these clients your competitors? It is important to obtain
references from several current clients.
. What types of customers do they serve?
. Do you publish a catalogue?
. What is their sales force?
When you have this background information and are
comfortable about proceeding, then obtain a credit report about
their financial position. DOC's World Trade Data Reports
(WTDRs), available from your local District ITA Office, are
compiled by US&FCS officers. A WTDR can usually provide an
in-depth profile of the prospective company you are
investigating.
There are also several commercial services for qualifying
potential partners, such as Dun & Bradstreet's Business
Identification Service and Graydon reports. U.S. banks and their
correspondent banks or branches overseas, and foreign banks
located in the United States can provide specific financial
information.
In this chapter we have discussed methods of market entry,
how to find potential foreign buyers and representatives and how
to qualify whom you will be doing business with overseas.
Advance market research and preparation is the best way for a
small business to define a potential export market.
The next question that needs to be explored involves how to
accomplish the business of exporting -- that is, how the deal
should be structured, the topic of Chapter 4, "The Export
Transaction."
Chapter 4
The Export Transaction
Pricing
Pricing products to be competitive in international markets
can be a challenge; pricing that works in one market may be
totally uncompetitive in another. Although there is no one
formula for establishing prices for exported products, there are
a number of strategic and technical considerations that you can
make in order to determine an appropriate pricing structure.
A pricing strategy is a key component of your export
marketing plan. The selected pricing structure should be an
integral part of your market penetration objectives. Your goals
will vary depending on the target overseas market. Are you
entering the market with a new or unique product? Are you
selling excess or obsolete products? Can your product demand a
higher price because of brand recognition or superior quality?
Maybe you are willing to reduce profits to gain market share for
long-term growth. Your pricing decisions will be affected by
your company's goals.
It is important to obtain as much information as possible on
local market prices as part of your market research. Pricing
information can be collected in several ways. One source is
overseas distributors and agents of similar products of
equivalent quality. When feasible, traveling to the country
where your products will be sold provides an excellent
opportunity to gather pricing information. U.S. Department of
Commerce (DOC) can also assist in determining appropriate prices
through its Customized Sales Survey.
Joseph S. Brown III, President of Bruce Foods Corp.,
obtained pricing information for food products sold in overseas
markets using the Commerce Department's Customized Sales Survey.
Although exporting since 1946, Brown is constantly on the
look-out for new markets for his products: "We now export to 75
countries," the Louisiana business owner says.
To compile the Customized Sales Survey, DOC's US&FCS
research specialists in the target country interview importers,
distributors, retailers, wholesalers, end-users and local
producers of comparable products. They also inspect similar
products on the market. Your customized report, available for a
fee, is usually completed within 45 days.
Marketing Your Product
To successfully market a product in a domestic market, the
manufacturer must take into consideration consumer preference,
industry standards, correct labelling and other consumer-driven
considerations.
When entering a foreign market, the manufacturer should
consider the tastes and preferences in each market as part of
marketing strategy. Frequently, only a small change may be
required to successfully market the product. The color of the
product, the design of the package, the size of the product all
may need adjustment.
Consideration should be given to the product name (it may
inadvertently have a negative connotation in the local language),
cultural and/or religious connotations, appearance of container,
compliance to standards (different electrical power, metric
dimensions and local product regulations).
Another consideration when planning market strategy is
understanding ISO 9000. The International Organization of
Standardization (ISO) was founded in 1946 by 25 national
standardization organizations including the American National
Standards Institute (ANSI). Ninety countries now hold membership
in ISO.
In 1987, the ISO issued ISO 9000, a series of five documents
(ISO 9000, 9001, 9002, 9003 and 9004) that provide guidance on
the selection and implementation of an appropriate quality
management program (system) for a supplier's operations. The
purpose of the ISO 9000 series is to document, implement and
demonstrate the quality assurance systems used by companies that
supply goods and services internationally. ISO standards are
required to be reviewed every five years. Revised versions are
expected to be published in early 199
4. Information on the
status of these revisions can be obtained from:
The American Society for Quality Control (ASQC)
611 East Wisconsin Avenue
Milwaukee, WI 53202
Phone: 414/272-8575 or 800/248-1946
FAX: 414/272-1734
There are three ways for a manufacturer to prove compliance
with the requirements of one of the ISO 9000 standards.
Manufacturers may evaluate their quality system and self-declare
the conformance of the system to one of the ISO 9000 quality
systems. Second-party evaluations occur when the buyer requires
and conducts quality system evaluations of suppliers. These
evaluations are mandatory only for companies wishing to become
suppliers to that buyer. Third-party quality systems and
evaluations and registrations may be voluntary or mandatory and
are conducted by persons or organizations independent of both the
supplier and the buyer. Interpretations of an ISO 9000 standard
may not be consistent from one registrar to another.
The supplier's quality system is registered, not an
individual product. Consequently, quality system registration
does not imply product conformity to any given set of
requirements. The demand for ISO 9000 registration in Europe and
elsewhere seems to be coming primarily from the marketplace as a
contractual rather than a regulatory requirement. As conformity
to the ISO 9000 standards becomes recognized and required by
foreign and domestic buyers and used by manufacturers as a
competitive marketing tool, the demand for ISO 9000 compliance is
expected to increase in non-regulated areas. It is therefore
critical for manufacturers to determine what are their buyers'
requirements regarding ISO 9000 compliance. Additional
information on U.S., foreign and international voluntary
standards, government regulations and rules of certification for
nonagricultural products is available from:
National Center for Standards and Certification
Information(NCSCI)
National Institute of Standards and Technology (NIST)
TRF Building, Room A163
Gaithersburg, MD 20899
Phone: 301/975-4040
FAX: 301/926-1559
For information on the EC 1992 Single Market program, copies
of Single Market regulations, background information on the EC or
assistance regarding specific EC trade opportunities or potential
problems, contact:
The Office of EC Affairs
International Trade Administration, Room 3036
14th and Constitution Avenue, N.W.
Washington, D.C. 20230
Phone: 202/482-5823
FAX: 202/482-2155
Methods of International Pricing
The cost-plus method of international pricing is based on
your domestic price plus exporting costs (documentation expenses,
freight charges, customs duties and international sales and
promotional costs). Any costs not applicable, such as domestic
marketing costs, are subtracted. The cost-plus method allows you
to maintain your domestic profit margin percentage, and thus to
set a suitable price. This method does not, however, take into
account local market conditions. Your price may be too high to
compete in a foreign market.
Different marketing costs and/or modifications to the
product could change the cost basis dramatically, making the
product either more or less costly for export. As a result,
using the "marginal-cost" method provides a more realistic means
of determining true cost of producing your product for export.
To use the marginal-cost method, first determine the fixed
costs of producing an additional unit for export. Fixed costs
include production cost, overhead, administration and research
and development. A cost saving may be realized if additional
units of the product can be produced without increasing the fixed
costs. There may also be instances where certain fixed costs are
covered by domestic production and do not need to be added to
export expenses.
Product modification expenses, dictated by the target
market, are then added to the production costs to establish a
"floor price." The floor price serves as a threshold for the
firm to know when it would incur a loss. Using the floor price
as a base, variable export costs for the product can be added.
Some of the variable costs will be one-time or start-up expenses
that should be discounted appropriately. Variable expenses
include:
Packaging
Local regulations and customs may require special labelling,
translated instructions or different packaging to appeal to local
tastes. The selected mode of distribution may also require a
particular kind of packaging.
Foreign Market Research
There may be fees for specialized services and publications
used to gather market information.
Advertising and Marketing
Firms selling directly into new markets will most likely be
responsible for the entire promotional effort. The firm can
incur high initial outlays to establish product recognition in
the new market. If an agent, distributor or trading company is
employed, they can handle advertising and marketing as part of
their contract.
Translation, Consulting and Legal Fees
Product instructions, sales agreements and other
documentation typically will need to be translated into the local
language. Expert translation of product labeling and
instructions will enhance local marketing. Although many sales
agreements are standard, it is advisable to have legal counsel
review binding documents.
Foreign Agent/Distributor Product Information and TrainingAgents
and distributors may require special training in order to
effectively market and service your products. This is true even
if the agent sells products similar to your firm's products.
Training will not only enable the agent to better represent your
company's interests but gain a better understanding of your
particular product.
After-Sales Service Costs
Product warranties and service contracts will enhance your
product's image as a quality item. An appropriate after sales
service guarantee can support your sales efforts in the new
market. Do not, however, promise service or warranties based on
U.S. standards that you cannot deliver.
After taking these expenses into account, insurance,
freight, duties and a profit margin can be added to arrive at a
customer price. Depending on the market, currency fluctuations
can affect significantly your locally based profit margin and the
final price offered to the customer. For new-to-export
companies, price products in U.S. dollars and request payment in
dollars. This is not an unusual request.
High-Price Option
This approach may be appropriate if your company is selling
a new product or if you are trying to position your product or
service at the upper-end of the market. Selecting this option
may attract competition and limit the market for your product
while, at the same time, produce big profit margins.
Moderate-Price Option
This is a lower risk approach as contrasted to the high- or
low-price option. Here you should be able to match competitors,
build a market position and produce reasonable profit margins.
Low-Price Option
This approach may be relevant if you are trying to reduce
inventory and do not have a long term commitment to the market.
You will, no doubt, impede competition but also produce low
profit margins.
There may be no single strategy that is ideal for every
company. Often companies draw upon a mix of options for each
market or product.
Setting Terms of Sale
Price Quotations
The pro-forma invoice is the most commonly used document to
give price quotations to potential customers. The quotation in a
pro-forma invoice is usually considered binding, although prices
may change prior to final sale. To prepare the invoice, you
should give a detailed description of the product, an itemized
list of charges and sale terms. Prices should be quoted in
United States dollars to reduce foreign exchange risks. The
invoice should also indicate the period during which the price
quotation is valid.
You should be familiar with the common terms of sale used in
international trade before preparing your pro-forma invoice.
International Commercial Terms (INCOTERMS) are the universally
recognized terms used in export and import contracts. These
terms refer to the rights and obligations of each party: who
pays what costs; when title to goods is transferred; and where
the goods should be delivered. A complete list of INCOTERMS
published in the book Incoterms 1990 can be obtained from the
International Chamber of Commerce and should be a permanent part
of your business library (see Part II, The Exporter's Directory).
PRO-FORMA INVOICE
*
SHIPPER: Reference No. RB20693
Smith and Jones Co. Date: July 18, 1993
5555 Railroad Ave.
New York, N.Y. 10001 Customer P.O. No.
212-555-1234
Terms of Payment:
Estimated Date of Shipment
SOLD TO: SHIP TO:
Grupo Estevez, S.A. de C.V. Juarez Industriale
Tamales No. 1 Piso 2 454 Blvd. Cortez
12345 Cd. Polanco Mexico 11115 Mexico D.F. Mexico
VIA: Aero Cortez
ITEM QUANTITY DESCRIPTION UNIT PRICE TOTAL PRICE
100 Computer US $50.00 US $5,000.00
motherboards
FOB factory 5,000.00
Inland
Freight
Forwarder
fees 100.00
Air freight 1,200.00
Five (5)
sealed cartons Insurance 20.00
Gross weight:
10 lbs. C.I.F. Mexico 6,320.00
Authorized signature/Title
The above offering is based on current prices and is valid
60 days from invoice date.
*NOTE: This pro-forma invoice is only a sample. It is
advisable to contact a freight forwarder in advance of shipping.
NEGOTIATING SALES AND DISTRIBUTOR AGREEMENTS
Sales Contracts
Knowing how to include INCOTERMS in a contract is important,
but this represents only one aspect of the sales agreement.
Legal rights and obligations of the parties should be spelled out
in a single document, which can be incorporated into the final
invoice. Frequently, the terms and conditions are contained on
the back of the invoice.
Some of the terms and conditions necessary in a written
sales agreement include:
Delivery Terms -- Risk of Loss
A force majeure clause is standard in most agreements. This
clause excuses the exporter from responsibility where a default
in performance is caused by events beyond the exporter's control,
such as war, acts of God or labor problems.
Payment and Finance Terms
In addition to defining the terms of payment, provisions
should be included for late payments, partial payments and
remedies for non-payment. The terms of payment should consider
the use of letters of credit.
Warranties
Sales contracts generally describe the goods and their
qualities, workmanship and durability. In some cases, the
exporter is obligated by the law in the country of import. The
importer will require the exporter to warrant that the goods meet
certain standards of construction and performance.
Acceptance of Goods
Frequently, the importer will insist upon the right to
inspect the goods upon delivery; if found defective, the importer
can reject them and refuse to pay. However, the importer is
still liable for country-of-importation duties and other taxes.
The export documents should reflect any such requirements.
Intellectual Property Rights
Protection of the exporter's patents, trademarks or
copyrights should be assured in the agreement. However,
protection under the laws of the foreign country are not
automatic, and you should not assume that your product is
protected.
Taxes
The obligations of the parties for payment of taxes other
than customs duties should be defined in writing.
Dispute settlement
It is advisable to specify how and where any disputes will
be resolved, as well as which nation's law would be applied.
Bear in mind that different countries have varying arbitration
laws and systems which may apply.
AGENT AND DISTRIBUTOR AGREEMENTS
If you choose to use an agent or distributor, it will be
necessary to develop a formal contractual agreement. Agent and
distributor agreements spell out in more detail the issues
mentioned above and define other aspects of the relationship
between the parties to the agreement.
In the contract it is important to:
. specify the goods and/or services covered;
. describe the agent or distributor's sales territory,
and whether they will have exclusive or non-exclusive sales
rights;
. set the length of the term for which the agreement is
applicable and agree upon specified minimum sales volumes and
objectives;
. outline protection of intellectual property;
. describe other types of obligations imposed on the
parties, violations of which would justify termination of the
contract; and
. list specific intellectual property rights granted to
the agent or distributor.
When negotiating and drafting contractual agreements, it is
recommended that you consult an attorney with experience in
international trade and exporting. Your company's business
lawyer may be able to handle your questions or refer you to an
"export-oriented" attorney. Your local bar association may
provide referral services, as well.
Under agreement with the Federal Bar Association and DOC,
SBA sponsors the Export Legal Assistance Network (ELAN). ELAN is
a network of attorneys located throughout the United States who
specialize in international trade. Your local SBA office can
assist in locating an ELAN attorney who will provide a free,
initial legal consultation to discuss your export-related
questions.
As an initial introduction, however, you may want to review
the information contained in International Business Practices,
which covers the legal aspects of doing business in over 100
countries. Copies are available from US&FCS offices or from the
Government Printing Office.
Terms for financing export sales should be discussed during
contract negotiations. While the U.S. seller will want to be
paid as soon as possible, the foreign buyer will want to delay
payment as long as possible, preferably until after the goods are
resold. These two conflicting objectives will factor into any
negotiations on export financing.
In addition to reaching a compromise on the method of
payment, the U.S. exporter must also be able to offer the foreign
buyer favorable financing terms -- otherwise the sale could be
lost to a foreign competitor with an equivalent product but
better payment terms.
The final step in completing the export transaction is
arranging for payment, the subject of Chapter 5, "Export
Financing."
Chapter 5
Export Financing
FINANCING EXPORT SALES
Few would disagree that small businesses must look overseas
for profit opportunities in the 1990s. However, to compete
successfully, small firms must offer financing arrangements that
are competitive with exporters of other nations. This chapter
will discuss three major influences on an exporter's ability to
arrange competitive financing:
. today's banking environment
. how to approach a lender
. methods of payment
UNDERSTANDING THE BANKING ENVIRONMENT
In the United States, most small firms turn first to their
local banks for export finance assistance. However, during the
past decade many banks have decided not to focus on export
financing.
The banks' reasons for doing so have varied -- many cut
their international operations due to the huge losses they
incurred on overseas debt; others may have chosen to concentrate
on more lucrative lines of business, such as home equity loans or
mergers and acquisitions.
Consequently, during the 1980s export finance expertise in
many U.S. banks deteriorated. Even today, most smaller banks do
not retain any staff with expertise in international trade. This
is not to say, however, that such help is unavailable -- only
that small businesses must be persistent and tenacious in their
efforts to find it. For example, if a small business loan
officer is unwilling to work with his or her bank's international
staff (or the bank is unwilling to work with a correspondent),
exporters should consider establishing a second banking
relationship or, if necessary, moving all their accounts to a
more aggressive lender. Don't be afraid to shop.
Given the difficulty most small business exporters face when
seeking financing, it is imperative that financial arrangements
be made in advance. Finding a lender willing to consider such a
request requires that the borrower ensure that the purpose of the
loan makes sense for the business, and that the request is a
reasonable amount. Prospective borrowers also should understand
some key distinctions before beginning discussions with a lender.
HOW TO APPROACH YOUR LENDER FOR EXPORT FINANCING
Venture Capitalists and Lenders
Before approaching a bank for financial assistance, small
exporters should understand the distinction between venture
capitalists and lenders. Venture capitalists invest in a
business with the expectation that as the business grows, their
equity in the business will grow exponentially. On the other
hand, lenders are not in the venture capital business -- they
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