Export Operations

It is beyond the scope of this text to describe export operations in any detail. Instead, this section highlights three key aspects of the export trans­action: (1) documentary requirements, (2) price quotations, and (3) pay­ments arrangements. The section closes with some observations on organizing for export.

1. Documentary Requirements

The documentary requirements of international commercial transactions have been described as a major nontariff trade barrier. It is estimated that nearly one-half of all shipments are delayed by documents that arrive late. A study undertaken in 1972 by The National Committee on International Trade Documentation jointly with the U.S. Department of Transportation fully revealed for the first time the formidable paperwork required to make an international shipment. Among its findings were that (1) an average shipment required 46 documents and more than 360 copies, (2) the average per-shipment documentation cost ran about $375 for exports, and (3) the total cost of paperwork was between 7^lh percent and 10 percent of the value of shipments.⁸ Some progress has been made in recent years in simpli­fying, eliminating, and standardizing documents in the United States and abroad. Moreover, computerized documentation is being adopted by ocean and air carriers. Nonetheless, documentation requirements will continue to burden export/import operations for the indefinite future.

Fortunately, manufacturers can use specialists to prepare most docu­ments: international freight forwarders to handle documents on the physi­cal shipment side and banks to handle them on the payments side. However, manufacturers must still prepare certain documents (notably, the pro forma invoice), and they must understand and check the accuracy of other documents even when they are prepared by others. Other than from forwarders and banks, information on documentation may be obtained from the U.S. government, foreign embassies and consuls, the International Chamber of Commerce, carriers, accounting firms, professional associa­ tions, and trade publications. Taken singly, the preparation and function of export documents can be learned by export managers and their assistants in a short time.

Here is a list of the principal documents used in exporting, followed by a brief description of each.

1. Required by Foreign Customer
   1. Pro forma invoice.
   2. Acceptance of purchase order.
   3. Ocean (airway) bill of lading.
   4. Certificate (or policy) of insurance.
   5. Packing list.
2. Required by Exporting Manufacturer
   1. Purchase order.
   2. Letter of credit or draft (trade) acceptance.
3. Required by Freight Forwarder
   1. Shipper’s letter of instructions.
   2. Domestic (inland) bill of lading.
   3. Packing list.
   4. Commercial invoice (incomplete).
   5. Letter of credit (original copy).
4. Required by U.S. Government
   1. Export declaration.
   2. Export license (strategic goods and shipments to Communist coun­tries).
5. Required by Foreign Governments
   1. Certificate of origin.
   2. Customs invoice.
   3. Consular invoice.
6. Required by Exporter’s Bank
   1. Exporter’s draft.
   2. Commercial invoice.
   3. Consular invoice.
   4. Insurance certificate.
   5. Ocean (airway) bill of lading.

Several documents are needed by the foreign customer. The pro forma invoice is the manufacturer’s response to a sales inquiry; it is his proposed terms of sale expressed in invoice form. The manufacturer’s acceptance of a purchase order sent to the foreign customer evidences the manufacturer’s obligation to make the shipment and claim to receive payment as specified in the purchase order, possibly with later modifications. The commercial invoice, addressed to the customer, indicates the quantities and prices of the goods sold, freight and insurance costs, the country of origin, identifying marks, packing, weight, and any other information relevant to the ship­ment. The ocean (or airway) bill of lading, issued by the international carrier, is a very important document serving three functions: (1) it is a receipt for goods delivered to the carrier, (2) it is a contract for services to be rendered by the carrier, and (3) when made out to the exporter’s own order, it is a document of title necessary to possess the goods at the point of destination. Most exporters carry an open insurance policy covering marine and war risks that allows them to insure a specific shipment by issuing a certificate of insurance against the policy. As the name indicates, a packing list shows the quantity and type of merchandise shipped to the importer; it enables him to locate a particular item when there are several packages with different contents.

The manufacturer himself needs documents evidencing the export order and the means of payment. The purchase order received from the foreign customer specifies the items, quantity, price, shipping date, packing, ship­ping marks, export routing, insurance, and payment terms. One form of payment is the letter of credit issued by the importer’s bank, which obli­gates that bank to pay the exporter upon his presentation of documents as specified in the letter. A second form of payment is the documentary draft drawn by the exporter on the importer. When the exporter extends credit, the importer must “accept” the draft to obtain the bill of lading, which is needed to gain possession of the merchandise. The resulting draft (trade) acceptance evidences the exporter’s claim for payment.

When employed by a manufacturer, the freight forwarder requires sev­eral documents. The shipper’s letter of instruction, sent by the manufac­turer to the forwarder once the shipment has left the factory for the exit port, asks the forwarder to arrange international shipment and to submit the necessary documents to a named bank. Accompanying the letter are the. commercial invoice (to be completed by the forwarder), packing list, origi­nal letter of credit, domestic (inland) bill of lading, and a power of attorney allowing the forwarder to complete the export declaration and present documents to the exporter’s bank.

For most export shipments, the U.S. government requires only an ex­port declaration listing the consignee, destination, carrier, merchandise, and other features of the shipment. However, for exports of strategic goods or exports to most Communist countries, the exporter must also obtain a validated export license from the U.S. Department of Commerce.

Foreign governments require certain documents before allowing entry of the merchandise. The certificate of origin, prepared by the exporter, certifies the country of origin of the merchandise in the shipment. The customs invoice is a copy of the commercial invoice (with some modifica­tions) used to clear the merchandise through customs. The consular invoice is essentially the commercial invoice certified by a consul of the destination country. Not all governments require these documents, but some govern­ments require additional documents, such as an inspection certificate.

The exporter’s bank needs several documents to arrange payment by letter of credit or draft, including the exporter’s draft on a bank or on the importer.

2. Export Price Quotations

Before he can receive an export order, the manufacturer must determine his terms of sale: the price quotation and payment terms.

Standard price quotations are widely used in exporting, and when they are incorporated in the pro forma invoice (the offer to sell), the purchase order, and the order acceptance, they define the legal relationship between the exporter and the importer.⁹ In particular, a standard price quotation specifies when ownership passes from the exporter to the importer and which party pays the shipment costs (transportation, port charges, docu­mentation, import tariffs, and so on).

The two most widely recognized codifications of export price quota­tions are International Commercial Terms (Incoterms) adopted by the In­ternational Chamber of Commerce and Revised American Foreign Trade Definitions—1941 adopted by the Chamber of Commerce of the United States and other commercial organizations. Exporters should specify one of these codes in making a price quotation and a contract of sale.¹⁰

The most common export price quotations are Ex factory, F.A.S. (Free Along Side), and C.I.F. (Cost, Insurance, Freight). Under Ex factory, the exporter quotes a price that applies only at his factory location. The im­porter pays all the costs and assumes all the responsibilities to move the goods to the foreign destination. Very similar is the quotation F.O.B. (Free on Board), named inland carrier at named inland point of departure, where the price applies only at an inland shipping point but the exporter arranges for loading on a specified carrier.

Under F.A.S., the exporter quotes a price including delivery of the goods alongside a designated overseas vessel and within reach of its loading tackle. The importer handles all subsequent movement of the goods. Under C.I.F., the exporter quotes a price that includes the cost of goods, the marine insurance, and all transportation charges to a foreign port of entry. The importer is responsible for taking delivery of the goods from the vessel and paying all costs at the point of destination, such as landing costs and customs duties.

Ex factory (or F.O.B. at an inland point) is the easiest quotation for the manufacturer to prepare, but it places a burden on the importer, who must calculate all the subsequent shipment and documentation costs to arrive at his landed cost. For that reason, importers prefer a C.I.F. quotation. A good compromise is the F.A.S. quotation, because it is comparatively easy for the exporter to prepare and for the importer to calculate his landed cost. Manufacturers should be flexible in their price quotations and respond in some measure to the interests of importers. It is inexcusable for a manu­facturer to lose an export sale because he refuses to quote F.A.S. or C.I.F. terms. The form of the export price quotation is a technical, procedural question that need not affect profits or risk.

3. Arranging for Payment

Two risks are involved in international payments: (1) nonpayment, and (2) variations in the foreign exchange rate. The risk of nonpayment is actually two risks: default by the importer, and the imposition of exchange controls by the target country’s government, prohibiting the importer from buying foreign exchange. The foreign exchange risk is assumed by the exporter when payment is specified in a foreign currency, the importer’s currency or a third-country currency. For then, a depreciation of the foreign currency in terms of the exporter’s currency between the time of the order and the time of payment will result in a smaller home-currency payment to the exporter. Because the dollar is the principal international currency, U.S. manufactur­ers are usually able to quote in dollars and thereby pass on the exchange risk to the importer. When a manufacturer is compelled to quote in a foreign currency to obtain a sale, then he can hedge on the forward ex­change market if he does not want to assume the exchange risk. In general, exporters should avoid speculating on the foreign exchange rate by assum­ing the exchange risk—it is not their metier.

Ranked by an ascending risk of nonpayment, the alternative methods of payment for an export shipment are: (1) cash in advance, (2) irrevocable,, confirmed letter of credit, (3) documentary draft, (4) open account, and (5) consignment.

Cash in advance requires the importer to finance the entire export transaction with little or no risk to the exporter. But insistence on cash in advance may lose sales for an exporter in a competitive target market.

An irrevocable, confirmed letter of credit, issued by the importer’s bank and confirmed by a bank in the exporter’s country, allows the exporter to get paid on the presentation of the required documents to the domestic, confirming bank. Thus the exporter does not rely on the importer for payment, and payment is not jeopardized by foreign exchange restrictions.

Letter-of-credit payment is very favorable to the exporter because it amounts to payment at the time of shipment. But, once again, insistence on this payment term may cost the exporter sales if competitors are willing to offer easier terms.

A common method of export payment is for the exporter to draw a draft (bill of exchange) on the importer and send it for collection through his bank, accompanied by the negotiable bill of lading and other documents that control the shipment. Documentary drafts may be sight or time drafts. With a sight draft, the documents are delivered to the buyer only against his payment. The exporter is subject to the risks of nonacceptance of the shipment by the importer, and to foreign exchange restrictions. With a time draft payable a certain number of days after sight (the date of presentation) or on a certain date, the exporter extends credit to the importer. The importer gets the documents against his “acceptance” of the draft, by which he promises to pay on the draft’s maturity date. Thus, in addition to taking the risks of a sight draft, the exporter assumes the risk of default by the importer. But in that event, the exporter does have clear documentary proof of his claim on the importer, namely, the draft (or trade) acceptance.

An exporter may also bill his export sales on an open-account basis, usually offering more generous terms than he offers domestic customers. With this method, the exporter provides complete financing of the transac­tion, and in the event of default or foreign exchange restrictions, he has only weak evidence of his claim for payment. Because of its risky nature, open-account payment should be confined to the exporter’s own branches or subsidiaries or to importers in convertible-currency countries whom the exporter fully trusts.

By far the riskiest method of payment is consignment: the importer is not obligated to pay until he has sold the exporter’s merchandise. Under­standably, consignment should be restricted to branches, subsidiaries, and trusted foreign representatives.

As with price quotations, the manufacturer should be flexible in his payments arrangements. Export credit is often necessary for sales in com­petitive markets and for capital-equipment sales in all target markets. When extending credit through documentary time drafts, the exporter can lower the risk of nonpayment by making credit checks on importers and exchange control checks on target countries. U.S. exporters can obtain export credit insurance (protecting against the risks of nonpayment for both commercial and political reasons) from the Foreign Credit Insurance Association (FCIA), an association of 50 leading insurance companies. Credit insurance allows the exporter to extend more liberal credit terms to importers, and to obtain, in turn, more liberal financing from his own bank with the insured export receivables offered as collateral.

4. Organizing for Export

Organizing for export starts with a consideration of the target markets that a company presently serves and expects to serve in the future. The goal should be an export organization that can conceive and carry out aggressive foreign market entry strategies and, at the same time, fully meet the press­ing demands of day-to-day operations.

Companies newly entering into direct export are likely to establish an export department staffed by only an export manager and a few assistants. This department is usually subordinate to the domestic sales department and depends on other departments for order filling, accounting, credit ap­proval, and the like. Known as a “built-in export department,” this ar­rangement is a good way to gain export experience with only a limited commitment of the company’s resources. But it does place the export man­ager in a weak position unless he or she is demonstrably supported by higher management. Once successful experience is gained in export mar­kets, therefore, the built-in department should be transformed into a full- function department, division, or subsidiary that has the authority and resources to plan, operate, and control export marketing activities. It is unwise to postpone this transformation until the built-in department be­comes obviously inadequate to do the export job. Export sales may be small today, but organization should point to the future. Too often, com­pany organizations—shaped by long experience in domestic markets—fail to adjust, or adjust too slowly, to market opportunities opening up abroad.

Export managers should have the authority to formulate, execute, and control export strategy. In specific terms, they should be authorized to select international target markets and design the international marketing plan, as well as manage export operations. It is most unfair for higher management to demand export success and, at the same time, deny export executives any voice in, say, export pricing. At the very least, export man­agers should be allowed to participate in decisions that have a direct bear­ing on the export effort. Not to give them that authority is to ignore foreign markets that may become as important to a company’s future as markets at’ home. Manufacturers that want to go after international markets cannot afford to hamstring export managers by keeping them subordinate to do­mestic sales or any other domestic function.

Source: Root Franklin R. (1998), Entry Strategies for International Markets, Jossey-Bass; 2nd edition.