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CHAPTER 5: EXPORT ENTRY MODES. 5.0 Introduction. Choice between direct and indirect exporting organizational forms involves: 1. cost of performing functions, 2. transaction costs of organizing activities or contracting with others.
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CHAPTER 5: EXPORT ENTRY MODES
5.0 Introduction • Choice between direct and indirect exporting organizational forms involves: 1. cost of performing functions, 2. transaction costs of organizing activities or contracting with others. • Figure 7.1 shows how a foreign manufacturer may use both direct and indirect forms of export.
5.1 INDIRECT EXPORT • Exporter/manufacturer uses independent organization (IO) located in the manufacturer’s country. • In some cases, exporters may works together with IO & coordinates the export activities. • In other words, exporter uses “middleman” in their home-country. • They do not export on their own but instead relies on the middleman/IO.
Cont.. • Two (2) alternatives: 1. International Marketing Organizations a. Merchants (3) b. Agents (6) 2. Cooperative Organization a. Piggyback Marketing b. Export Combinations.
5.1.1 INTERNATIONAL MARKETING ORGANIZATIONS • Merchant • Take ownership • Agent • Doesn’t take title.
ii) Home Country Based Merchants (i) Export Merchants • Domestic-based (home-country). • Are domestic wholesalers who do business in foreign markets. • Buys and sells on its own account. • Handled international marketing task (except: modification of products, packaging, etc.). • Export merchants often carry competing lines, which means they have little loyalty to suppliers. • Most export merchants specialize in particular industries and well known of certain localities or even nations. • Thus, not available in all markets.
(ii) Trading Companies • Usually large and do more functions. • Few types of TC (refer Table 7.1) • Large TC = heavily involved in domestic distribution. • Small TC = limited foreign trade activities. • Play central role in diverse areas as shipping, warehousing, finance, technology transfer, etc. • Things that differentiate GTC with others TC is GTC offers financial services.
(iii) Export Desk Jobber (EDJ) • Also known as export drop shipper/cable merchant. • Usually involved in international sales of raw materials. • EDJ never see/physically acquire the goods they sell & buy. • Goods are typically owned in very short time. • Exporter handle the physical movement of the goods to the EDJ customer. • Responsibility: negotiation of sales.
5.1.1.2 Home Country Based Agents (i) Export Commission House (ECH) • A representative of foreign buyers who resides in the exporter’s home country. • In other words, ECH is an overseas customer’s hired purchase agents. • Responsible on order made by importer & “indents” (purchase offer including price to be paid). • Received commissions from buyer (importer). • Scans the market for the merchandise that it has been requested to buy. • Sends out specifications to manufacturers.
(ii) Confirming House (CH) • Assists overseas buyers by confirming, as a principle. • Exporter will get payment from CH once good are shipped. • Alike commission house because performing some of the ECH functions. • Responsibility: - making arrangements for the shipper - all contract between buyer & exporter would go under CH.
(iii) Resident Buyer • Operation same like ECH. • Represent all types of foreign buyers and are domiciled in the exporter’s home market. • Represent foreign concerns that want to have close and continues contact with their overseas sources of supply. • Can be expatriate or local people. • E. g.: usually used by large retailers. • Foreign buyer responsible for the rest exporting process. • Advantages: Reduce language barriers, cultural & business customs.
(iv) Broker • Primarily finds buyers for sellers and vice versa. • Function: to “bring” buyer & seller together (contract/agreement). • “Specialist” in performing the contractual function. • Does not involve/handle the products sold/bought. • Received commission from principal. • Usually specializes in particular products. • Responsibility: - act as an agent for either exporter/ buyer. - negotiate price and handle quotation.
(v) Export Management Company (EMC) • Defined as international sales specialist who acts as exclusive export department for several allied but not competing exporters. • Act as domestic export sales agent for exporter. • EMC conduct business in the name of each exporter that it represents. • Business negotiated under exporter’s name and all quotation and order are subject to confirmation by the exporter. • EMC takes all risks and problems of export while the manufacturer/exporter only filling the orders.
Situation required the uses of EMCs - an important channel of foreign distribution for small companies just getting started in international trade or for those lacking the resources to assign their own people to foreign markets. • Most EMCs are merchant intermediaries, working on a buy-and-sell arrangement with non-competing domestic small companies. • Advantages: low-cost & efficient. • The greatest benefits EMCs offer small companies are ready access to global markets and an extensive knowledge base on foreign trade.
(vi) Manufacturer's Export Agent (MEA) • Act as international sales representatives in a • limited number of markets for various non- • competing domestic companies. • In contrast with EMC, MEA operates used its own • name. • MEA typically operates on a commission basis. • Does not engaged in buy-and-sell arrangements • with the manufacturers represents. • With these basic differences, MEA does not offer all • services than EMC does. • Especially advertising and financing assistance. • Conditions required the use of MEA: • - Small order from foreign buyer. • - Wants to enter new market. • - Sell product that relatively new to foreign costumer.
(i) Piggyback Marketing • Occurs when one manufacturer (called “carrier”) uses its foreign distribution facilities to sell another company’s (called “supplier”) products alongside its own. • Used for products from different companies, that are noncompetitive (but related), complementarily (allied) or unrelated. • Products use private labels – never their own. • Used by manufacturers to broadening the product lines that can offer to foreign market. • Also to bolster the decreasing export sales. • Government encouragement.
Advantages: • Easy, low-risks for beginner. • Well suited to small manufacturers which do not want to invest heavily in foreign market. • Transaction are domestic in nature. • For larger firm, they can provide export department to smaller firm. • But for smaller firm, piggybacking means that control over the marketing products is passed to the carrier.
(ii) Exporting Combinations • Associations to promote exports of member's products or to serve as export cartels. • Export cartels: A combination of independent business organizations formed to regulate production, pricing, and marketing of goods by the members. • Cartels may be for market domination, international commodity agreements to stabilize prices, or to promote exports (sometimes under special laws allowing cooperation).
