Export – Import Marketing Notes

1. Export – Import Marketing Notes Section G: Pricing

2. Price Escalation Lower prices are in the U.S.A. New York Paris Tokyo Mexico City Aspirin $ 0.99 $ 7.08 $ 6.53 $ 1.78 Cup of coffee 1.25 2.10 2.80 0.91 Movie 7.50 7.89 17.29 4.55 Compact disk 12.99 23.16 22.09 13.91 Levi 501 jeans 39.99 75.40 79.73 54.54 Ray-Ban sunglasses 45.00 81.23 134.49 89.39 Sony Walkman 59.95 86.00 211.34 110.00 Nike Air Jordans 125.00 157.71 172.91 154.24 Gucci men’s loafers 275.00 271.99 605.19 157.27 Nikon camera 629.95 691.00 768.49 1,054.42 SOURCE: Fortune Magazine, Historical price comparison examples.

3. Foreign pricing is generally higher than U.S. pricing ● The U.S. prices reflect a retail sales tax whereas most foreign markets employ a value added tax system. ● Most of U.S. federal government is funded by individual and corporate income tax compared to larger funding via value added tax in foreign markets.

4. Export Price Escalation FOREIGN SAME WITH DOMESTICFOREIGNIMPORTER 15% VAT EX FACTORY 5.00 5.00 5.00 5.00 + TRANSPORT, C.I.F. 5.75 5.75 5.75 20% TARIFF ON C.I.F. 1.15 1.15 1.15 LANDED COST 6.90 6.90 6.90 V.A.T. TAX (15%) 1.04 IMPORTER COST 6.90 7.94 IMPORTER MARGIN (25%) 1.73 1.99 V.A.T. INCREASE .30 WHOLESALER COST 5.00 6.90 8.63 10.23 WHOLESALER MARGIN (20%) 1.00 1.38 1.73 2.05 V.A.T. INCREASE .31 RETAILER COST 6.00 8.28 10.36 12.59 RETAILER MARGIN (35%) 2.10 2.93 3.76 4.41 V.A.T. INCREASE .66 PRICE TO CONSUMER 8.10 11.21 14.12 17.66 RETAIL SALES TAX (8%) .65 .90 1.13 N.A. CONSUMER PAYS 8.75 12.11 15.25 17.66

5. Value Added Taxes • Apply each time goods are sold • Multiply the value added tax rate to the sellers gross profit margin and add this to the sellers price • For imported products the first value added tax applied is usually on the landed cost after customs duties are paid

6. Export Pricing Strategy Pricing Objectives Sales oriented Profit oriented Status quo Pricing Methods Cost oriented Incremental cost pricing Break even point Fixed costs Variable costs Profit Method Return on Investment (R.O.I) Percentage of Sales Price Pricing Policies Penetration pricing Skimming pricing Market oriented Demand-oriented pricing (called “Demand Backward or “Target Pricing”) Customary pricing

7. Export Pricing Aggressive Incremental Pricing 1. Establish fixed and variable unit costs 2. Remove all domestic overhead unit costs 3. Add cost of product modification if applicable 4. Add direct export cost increments 5. Determine profit objective 6. Establish resulting price Risk Factors • Lower export prices than domestic prices can risk Dumping allegations • Lower domestic prices in one market can encourage “Gray Marketing” through unauthorized channels of distribution

8. Parallel Imports (“Gray Market”) • Goods sold outside the regular distribution channels • Grey markets develop when there is a price difference between countries • Entrepreneurs buy the product in the country with a lower price and resell it at a competitive price in the country where it is normally priced higher • Perfectly legal–after a company sells a product, it can no longer control it.

9. Other methods to lessen price escalation ● Lower Manufacturing Costs ● Shorten Channels of Distribution ● Eliminate Functional Features ● Lower Quality ● Tariff Reclassification ● Product Modification ● Lower Shipping Costs

10. Export Break Even Analysis Fixed costs Break-even point = ---------------------------------- units Unit contribution Cost of Export Promotion, Salaries and other annual fixed costs BEP = ----------------------------------------------------- Unit Price less unit cost of manufacturing, shipping handling, duty, insurance, commission, etc.

11. Export Strategies Under Varying Currency Conditions When Domestic Currency is WEAK… When Domestic Currency is STRONG… _______________________________________________________________________ Stress, price benefits Engage in non-price competition by improving quality, delivery, and after- sale service Shift sourcing and manufacturing to Shift sourcing and manufacturing domestic market overseas Use full-costing approach, but use Trim profit margins and use marginal-cost pricing to penetrate marginal-cost pricing new/competitive markets Speed repatriation of foreign-earned Keep the foreign-earned income in income and collections host country, slow collections Minimize expenditures in local, host Maximize expenditures in local, host country currency country currency Buy needed services (advertising, Buy needed services abroad and pay insurance, transportation, etc.) in for them in local currencies domestic market Bill foreign customers in domestic Bill foreign customers in their own currency currency

12. Dumping GATT Definition: Export product priced at less than value of the product in the exporting country Point of Comparison:Ex Factory, same timing Countervailing Duty: The importing country imposes duties up to, but not more than full margin of dumping. Not retroactive. Application ● Local laws will also determine if ● Industrialized countries more the courts can award damages. likely to be involved in antidumping actions.

13. Countertrades ●Barter - Compensation Deals (technology equipment and buyback of produced product at an agreed price) - Counterpurchase (parallel barter, sometimes includes some cash) - Offset (usually military purchase requiring investment in non- related industries) - Debt for equity or Debt for product swaps ● Proactive vs. Reactive Strategies

14. Countertrade? • For Buyers • To preserve hard currency • To improve balance of trade 2. For Sellers To gain access to new markets To upgrade manufacturing capabilities To maintain prices of export goods

15. Terms of Sale $ International Chamber of Commerce (I.C.C.) most widely accepted definitions. Sellers must: • Sell for timely delivery • Obtain documentation on request • Provide packaging Buyers must: • Take delivery upon availability • Pay local charges up to final destination • Designate point of delivery

16. Selected INCO Trade Terms EXW FCA FCA FAS F.O.B. VESSEL CFR CIF DDU / DDP (Named Inland (Named Inland (Named (named (Named (Named Place Carrier at Named Carrier at Named Port of Port of Port of of Destination) Inland Point of Port of Exportation) Shipment) Shipment) Destination) Departure Warehouse Truck Truck Export Import Buyers or or or Dock Customs Warehouse Factory Train Train Ship Ship Origin Inland Carrier Dock at Port Vessel Vessel Dock at Port Inland Destination (Factory, Mine, of Shipment of Destination Carrier Farm, Warehouse) United States Country of Destination See pages 112 – 133 International Logistics, 3rd Edition

17. Incoterms ●Incoterm determined by ▪ Type of product ▪ Method of shipment ▪ Ability of both parties to perform tasks in shipment ▪ Trust parties have toward one another Exporter always initiates the Incoterm

18. Incoterms: EXW ●“Ex-Works” –Used with any merchandise of form of transportation –Easiest Incoterm for exporter, most difficult for importer –Basically, exporter says: “Here is product. Come get it.”

19. Incoterms: FCA ● “Free Carrier” – For goods shipped multi-modal without handling – Oriented toward containerization – Exporter delivers goods to carrier that importer selects – Responsibility shifts from exporter when goods are delivered to carrier’s vehicle, either at exporter’s plant or carriers premises

20. Ocean Incoterms ●FAS: “Free Along Ship” ▪ Exporter brings goods to port ▪ At port, importer takes responsibility for goods ●FOB: “Free on Board” Port of Departure ▪ Exporter responsible for goods until they are on the ship, then importer is responsible ▪ Dividing point is ship’s rail

21. Ocean and Corresponding Non-Ocean Incoterms OCEAN TERM: NON-OCEAN TERM: ▪ CFR “Cost and Freight” ▪ CPT “Carriage Paid To” - Exporter responsible for - Exporter responsible for goods until on ship goods until on carrier ▪ CIF “Cost, Insurance and ▪ CIP “Carriage and Freight” Insurance Paid to” - Same as CFR except - Same as CIF except it’s exporter pays marine a non-ocean shipment insurance

22. Ocean and Corresponding Non Ocean Incoterms OCEAN TERM: NON-OCEAN TERM: ▪ DES “Delivered ex Ship” ▪ DDU “Delivered Duty - Exporter responsible for Unpaid” goods (usually bulk - Exporter performs most commodities) until tasks in shipment except importer gets them at unloading costs port of destination ▪ DDP “Delivered Duty ▪ DEQ “Delivered ex Quay” Paid” - Usually bulk commodities - Exporter pays for for which exporter pays for everything in the ship unloading shipment

23. Land Incoterm: DAF ● “Delivered at Frontier” – For any merchandise, but specifically refers to land transportation – Transfer of responsibility from exporter to importer is at city named in Incoterm – Usually goods remain on vehicle to final destination

24. Incoterms by Transport Mode Mode E F F F C C C C D D D D D X C A O F I P I E E A D D W A S B R F T P S Q F U P Ocean cargo X X X X X X X X X RORO/FCL or LCL X X X X X X X Rail/Road/Air X X X X X X X

25. Who’s responsible for costs under various terms? FCA FCA FAS CIF (Named Inland (Named Inland (Named (Named Carrier at Named Carrier at Named Port of Port of Inland Point Port of Exportation) Shipment Destination) of Departure Export packing Buyer Seller Seller Seller Inland freight Buyer Seller Seller Seller Forwarder’s fee Buyer Buyer Buyer Seller Loading on vessel or plane Buyer Buyer Buyer Seller Ocean freight Buyer Buyer Buyer Seller Cargo insurance Buyer Buyer Buyer Seller Customs duties Buyer Buyer Buyer Buyer Ownership of on board an unloaded alongside on board goods passes: inland carrier inland carrier carrier carrier at port of shipment

26. Practice Test – Questions on INCO Terms 1. Buyer in Veracruz, Mexico; Seller in Atlanta, GA; Sales Terms: FOB Allied (truck) Freight Lines Tampa, FL. Who pays for charges? BuyerSeller _________ ________ Customs duties _________ ________ Cargo Insurance (Tampa-Veracruz) _________ ________ Forwarder’s fee ( “ “ ) _________ ________ U.S. Inland Freight 2. Buyer in Tokyo, Japan; Seller in Dallas, TX; Sales Terms CIF Yokohama, Japan. Who pays for charges? BuyerSeller _________ ________ Customs duties _________ ________ Cargo Insurance (Dallas - Yokohama) _________ ________ Forwarder’s fee ( “ “ ) _________ ________ Inland Freight (Yokohama - Tokyo) 3. Buyer in Buenos Aires, Argentina; Seller in Philadelphia, Penn. USA; Sales Terms FCA or FOB Seaboard Ship in Port of New York, NY USA. Who pays for charges? BuyerSeller _________ ________ Customs duties _________ ________ Ocean Freight _________ ________ Handling & loading in New York _________ ________ Domestic freight Philadelphia to New York

27. The Export Flow Order receipt Credit check Pro-forma invoice Negotiate the sales contract Order confirmation Import license / Foreign exchange permits

28. Proforma Invoice ● An offer to sell ● Can be used as a negotiating tool ● Required when Importer must get permits/exchange ● Should always be done with a new customer ● Will include price, timing, consignee, terms, goods description, weight and volume, number of packages

29. Export – Import Sales Contract Description of the goods or services Terms of the contract Payment details (currency, time, place) Choice of law Arbitration Inspection and Acceptance

30. Export – Import Contracts An enforceable contract exists when the buyer and seller agree on the terms of the sale Notes: 1. The agreement can be oral or written. 2. It frequently does not coincide with actual payment. 3. Title passes when buyer and seller agree it will pass.

31. Filling the Order 1. When Importer has license/exchange 2. When financial arrangements are complete