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2. Agenda. // ImportsPrice EscalationDumpingGlobal PricingExport Pricing: Exchange Rate IssuesManaging Currency RisksCountertradeTransfer Pricing. 3. Pricing Considerations. Generic Issues are identical. ConsiderMarketing ObjectivesSkim vs. penetration pricingTarget markets, cost structures, competitionDistribution Control over international channelLength of channelBusiness practices and norms.
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1. 1 Pricing for International Markets International Marketing
Kirti S. Celly
2. 2 Agenda // Imports
Price Escalation
Dumping
Global Pricing
Export Pricing: Exchange Rate Issues
Managing Currency Risks
Countertrade
Transfer Pricing
3. 3 Pricing Considerations Generic Issues are identical. Consider
Marketing Objectives
Skim vs. penetration pricing
Target markets, cost structures, competition
Distribution
Control over international channel
Length of channel
Business practices and norms
4. 4 // Imports Potential is greatest when price differentials exceed transportation costs
High price differentials (because of demand)
Exchange rate differences
Import restrictions�quotas and tariffs
Differing taxes
Differing trade margins and channel lengths
Restrictions on distribution �authorized importer�
Diversion
Strategies: Price harmonization across markets
5. 5 Price Escalation: A Critical Factor in International Pricing Strategically, it is important to determine desired end-user price
Exporters myopically focus on export price
Add shipment, insurance, documentation, handling, warehousing, clearing, import duties, importer�s margins, local wholesaler�s margins, retail margins�.
6. 6
7. 7
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9. 9 Managing Price Escalation: Strategies
Lower Cost of Goods
Lower Manufacturing Costs (Use FTZs)
Eliminate Functional Features
Lower Quality
Lower Tariffs
Tariff Reclassification
Product Modification
Partial Assembly
Repack aging
Lower Distribution Costs
Shorten Channels of Distribution
Lower Shipping Costs
Reduce Margins
10. 10 How FTZ Help Manage Costs (and therefore price escalation) Lower Tariffs
Duties typically assessed at lower rates for unassembled goods.
Substantial Labor Cost Savings
Labor costs are generally lower in the importing country FTZ
Lower Transportation Costs
Rates are affected by weight and volume; unassembled goods may qualify for lower freight rates.
Local Content Savings
Typically tariffs are based on imported content, so if local packaging or component parts can be used in the final assembly, there may be further reduction of tariffs.
11. 11 Tariff Classification: An Example US Customs Service reclassified MPVs (passenger vehicles with duties @ 2.5%) as trucks (cargo vehicles charged customs duties @ 25%)
Nissan Pathfinder (2 door)
Justice Dept. Same design as a pick up truck
Court: Use of vehicle counts; it shouts at consumers �I�m a car, not a truck�
12. 12 Managing Price Escalation: Strategies
Pricing Policy
Absorb cost differences
Penetration pricing
Non-cost based pricing
13. 13 �Dumping� Selling below �normal value� (GATT, WTO)
Normal value benchmark price in country of origin
Selling below long term average total costs
Including overhead and marketing cost allocations
Consequences (where dumping + injury )
Countervailing duties (WTO)
Minimum access volumes
14. 14 �Dumping� Motivations Market Penetration Strategy
Predatory Pricing
Build scale and experience-based entry barriers
Utilize excess capacity
Marginal cost pricing is especially useful in countries where demand is price elastic
Competitive parity
15. 15 Anti-dumping Investigations USDOC�whether dumping is occurring
ITC�Given dumping, is domestic industry materially injured (US Antidumping Act)
Dumping Cases
16. 16 Avoid Anti-Dumping Charges: Strategies Government Export Subsidies
Production, VAT, income tax exemptions, FTZs, preferential financing
Model year changes (�old technology� is exported less expensively)
Local assembly/Screwdriver technology
17. 17 Global Pricing Strategies Uniform WW Prices-HQ determined
Includes assessment of variations in FX rates, regulatory differences and sales taxes
Pros
Simple
Reduces arbitrage opportunities
Best use: Standardize product class price
Cons
Pricing is not an active marketing tool
18. 18 Global Pricing Strategies Market differentiated pricing�customized by market (e.g., dichotomous)
Includes assessment of variations in FX rates, VAT, and sales taxes
Pros
Factors in contextual factors in pricing (e.g., exchange rate differences, stage of PLC, price and income elasticities)
Pricing is a proactive marketing tool
Advantages of price uniformity are relatively small
Arbitrage can be anticipated & managed
Cons
Emergence of international gray markets esp. when
value to weight/volume ratio is high
barriers to trade are low
19. 19 Export Pricing�Key Considerations Knowledge of and experience with export markets
Degree of control over export channels
Cost-plus approach: �take the domestic price, add insurance and freight, put in a hefty cushion for contingencies, and slap on a profit mark-up�
Pros: Cost data critical to managing escalation or dumping charges
Cons: Signals opportunism, limited commitment to growing exports
20. 20 Terms of Sale
Codification of International Trade Terms
International Chamber of Commerce Incoterms
Currency of Settlement or Quote
Prices often set in domestic currency�importer carries risk Export Pricing�Key Considerations
21. 21 Terms of Sale (______ order of exporter obligation)
Delivered duty paid
C.I.F. or C & F
F.O.B.
F.A.S.
Ex-works Export Pricing�Key Considerations
22. 22 Exchange Rates and Pricing You are a U.S. exporter of air safety equipment to Mexico City
Generally, how would you quote prices to the importer? Why?
What are your options to manage exchange fluctuations?
What are the importer�s options?
When might you see price changes?
23. 23 Anatomy of a Transaction: Exchange Rates and Pricing
24. 24 Anatomy of a Transaction: Exchange Rates and Pricing
25. 25 Anatomy of a Transaction: Exchange Rates and Pricing
26. 26 Anatomy of a Transaction: Exchange Rates and Pricing Quote is USD
Comfort level
Relatively stable currency
USD useful for you
USD tradable
Exporter�s Options
Reduce (Increase) USD price so that importer is unaffected by deteriorating (Improving) rates
Motivation is to preserve demand, maintain trading partnership
Do nothing�let importer bear the risk of deteriorating exchange rate with the USD
27. 27 Anatomy of a Transaction: Exchange Rates and Pricing Importer�s Options
Increase End-User Prices�let customers bear the burden of deteriorating rates
Motivation�preserve margins
Implications�Possible reduction in demand, especially if:
Currency weakening relative to USD is linked to domestic inflation
Product category allows postponement (non-essentials, durables)
Competition does not play same game
Do nothing�accept lower margins
Motivation�preserve demand, retain customers
Implications�likely where price elasticity of demand is high
28. 28 Strategies for Managing Currency Risks Risk Modifying (Transfer risk to buyers)
Charge higher prices
Incur local debt�get paid in local currency and use it locally
Risk Shifting
Hedge forward (fixes amount of currency to be received, date and cost)
Buy options (flexible, since right but not obligation to buy currency at certain X rate within a period or on a date
Self Insuring
Adjust credit terms to account for expected FX changes (build an interest factor into transaction)
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30. 30
31. 31 �Let�s Do a Deal�--Countertrade Seller provides products and promises in return to buy products�
Increased incidence in world trade
Facilitates trade
Preserved FX for buyers under controlled FX regimes
Improves BOT for importing country
Allows importing country to gain market access for their products
Facilitates upgradation of local manufacturing capabilities
32. 32 Types of Countertrade Product Swaps (Goods for goods)
Simple Barter
Compensation deals Include some cash payment
Reciprocal Contracts
Buyback: seller promises to buy back goods as payment for technology or FDI
Counterpurchase: seller buys unrelated goods
Offset�local sourcing, subcontracting, export development in return for technology of FDI
33. 33 Countertrade Challeges Contract negotiation and enforcement
Valuation
Locating and developing markets for countertraded products
Emergence of specialized countertrade organizations
34. 34 International Transfer Pricing Transfer price is the price charged for intra-company transfer of goods across country borders
Growing importance as companies seek to
Maximize WW profits
Facilitate parent control of subsidiaries
Motivate managers at all level to �think global�
35. 35 International Transfer Pricing: Motivations Minimize global tax liabilities
Max profit in low-tax locations
High prices for transfer from low-tax to high-tax locations, and vice versa
Reduce FX Risks
Adjust transfer prices to siphon funds from countries where currency devaluation is forecast
36. 36 International Transfer Pricing: Motivations Avoid/Circumvent export quotas and other governmental regulations
Undercharging for products sold to subsidiaries
Reducing Tariff Liabilities
Shipping goods into high-tariff countries at minimal transfer prices to reduce duty base
37. 37 International Transfer Pricing: Motivations Concealing Subsidiary Profitability
Reducing income taxes in high-tax countries by overpricing goods transferred to units in such countries; profits are eliminated and shifted to low-tax countries
Charging high prices for products sold out of countries with dividend repatriation restrictions, thus generating invisible income
Reduce negative consumer and governmental reaction to foreign companies
38. 38 Transfer Pricing Caveats Regulatory Scrutiny (e.g., Sec 482 of U.S. Internal Revenue Code)
Prove equivalence to arms-length deals
Sensitive anti-MNC issue
Countervailing forces
E.g., higher transfer prices to importing country to reduce local income tax results in higher import duty liabilities
39. 39 Transfer Pricing: Good Practice Local mfg costs + Std markup
Sales at most efficient producer �s cost + Std markup
Sales at negotiated prices
Sales at same price as arm�s length transactions