Establishing a presenceabroad Session 1: Indirect Trade CHINA BUSINESS DEVELOPMENT VUB-BICCS 2014-2015 email@example.com
… probably the most difficult decision in a company’s lifetime • Going international requires continuity structure; • Long term relationship >< sale bill is presented much later; • Decision prior to market knowledge / experience … and its return; • What’s possible? • International trade = extra costs (logistics (distance), customs, packaging, labelling, marketing, technical standards & certification, …) • To maintain competitive prices • the profit margin will usually be lower than in domestic trade • To safeguard profits • turnover must increase • a higher spread is required
Can I afford a full time employee / sales organisation from the expected profit of the market? Am I prepared to invest in my presence on the market before turn-over? How to structure my presence on a foreign market? Direct trade Indirect trade Y N Am I prepared to invoice in local currency, pay taxes locally, invoice with VAT, …? Is local financing available? Is it a stable, permanent presence? Does the size of the customer justify a separate debt administration, credit policy, ligistics,, …? Is direct contact / negotiations with the (final) customer required? Are we dealing with tailor made products? Is the customer a better credit risk than the middleman? Y N Sales Rep Rep Office Do I want a separate legal entity with a separate capital, separate accounts, separate liability …? Y N Can I or my intended customer/buyer fulfill the import formanities (customs VAT, …) Distributor N Y Branch Subsidiary Y N Commercial agent Commission agent Agent-reseller
Distributorship Combined sale and logistics – standard goods – risk Customer Sale Distribution contract Invoice + Profit margin Invoice Principal (manufacturer) Order Distributor Customer Payment Order Payment Contract of sale Stock Order Service No mandatory legal protection (Belgium!) use contractual freedom to fill in the void Customer
Commercial agency Individual invoice – risk – logistics – debt administration, … … Payment Principal (manufacturer) Contract of sale Customer Invoice Order confirmation Order Mandate Mediation Commission Mandatory legal protection use contract to contain legal protection Agent Invoice – VAT
Commission agent Import formalities, VAT, registration, … Legal relation Contract of sale liability Invoice commission Invoice Principal (Manufacturer) Commission agent Customer Payment Payment Administrative relation
How long may the ‘Channel’ be? Rep office ‘Channel distribution’
Length of the channel depends of: • Nature of Product: product features, size, weight, shape, durability, perishability, value etc. Perishable items, odd sizes, difficult are often found to have shorter channels. • Customer Characteristics: huge and geographically dispersed customer base buying in small quantities longer channels. Industrial products technological and functional customer preferences shorter channels. • Nature of Market: dense market spread across in length and breath long channel; niche market short. • Cost Consideration: channels with many middlemen raise the price of the product. The shorter the chain, the lower the cost.
Length of the channel depends of: • Time: Longer channel are often found to take shorter time to make the product available to the consumer because the channel goes deeper into the market. Keeping a channel short means that the customers have to first look for distributor and place his orders. • Competition: If competition is intense (eg. consumer goods), the channel is longer; if competition is (eg. industrial equipment) less the channel is shorter. • Availability of Middlemen: Products that are customer oriented and regularly/daily consumed use longer channels as middleman are very easily available. For high tech products and industrial equipment middleman are not easy to come by and may need to be trained.
Length of the channel depends of: • Technological Factors: Simple products can have longer channels (no need to be explained). Technical products need explaining, training shorter direct channel. • Consumption Pattern: If the product is consumed regularly or periodic longer channels as consumers want such product to be easily accessible and don’t want to run around for them. • Other Factors: infrastructure in the foreign market, political context, legal regulations, social attitude, culture, values etc.
Indirect trade Producer Market Who do you want to pay? Who do you want as a supplier? Standard product – Taylor made Competition Legalrequirements Supplychain … Intermediary
Which distribution structure do you prefer – why? • Seller of fine artisanal chocolates • to delicatessen shops in Northern France; • to supermarket chain in France; • Shipping line prospecting Indian market; • Manufacturer selling high tech equipment for the aviation industry; • Manufacturer of consumer goods (design furniture) prospecting • the Russian market; • the German market; • the US market; • Engineering company World cup Football • Manufacturer of health care equipment public hospitals in France
Commercial agency - definition • Independent – self-employed (VAT, Commercial Registry, ...) • Continuing authority • Primary – secondary activity • Fixed term – customer – project • Negotiation – power of representation • prospection vs. negotiation • Remuneration (commission) • On behalf, in the name of the principal • Free of formalities • exceptions - clauses - proof • 1 invoice • Legal protection
Distributor - definition • Self-employed, continuing authority … • Represents the product vs. the principal • 2 sales • 2 invoices • Profit vs. commission • Own name – own account - commercial risk • Combination – agency • Contractual freedom
Commission agency - definition • Independent – self-employed • No continuing authority (freight forwarders, customs agents, …) • On behalf of the principal liability (payment, conformity, …), legal relationship • In his own name 2 invoices, administrative formalities • Contractual commission rate to be added to invoice • Free of formalities • exceptions - clauses – proof • Contractual freedom
Sales rep Rep Office • Employee • Natural person • Authority • Salary • Social security – labor law • Professional expenses • Goodwill • VRP - representante de comercio … • salarié non statutaire - sales rep
A mariage of necessity Rights and obligations management
Risk management in international trade order (confirmation) Contract framework contract general conditions If you know the applicable law, you can judge which clauses to smuggle into the contract Customs Lex Mercatoria parties port, trade, … International law National law
Model contracts? • Federations (CDH, VNT, FNAC, LANIAC …)
Model contracts • Models for specificusers • Agents, distributors, vendors, … • Industryspecificmodels • Orgalime (http://www.orgalime.org/) …. • GAFTA, NOFOTA, …. • National model contracts • ACLA (All China Lawyers Association); Standard Business Contracts (Larcier 2013); … • International models • http://www.intracen.org/; http://www.intracen.org/contrats-types-destines-aux-petites-entreprises/; • CCI (http://www.iccwbo.org) 29
Your contract Contract = manual = specific for every user but Draft your own model Negotiations Advantages of scale Avoid competition in your own network Uniformity Applicable law Dispute settlement … law – … courts 34
Write your own contract Agency Principal >< Agent • Export of children’sclothingto France • Export of chemicalsfor the pharmaindustry in the US • … (yoursuggestion?) Distributorship Supplier >< Distributor • Export of electricalconsumer tools to Germany • Export of chocolatesto Brazil • … (yoursuggestion?)
What are your first impressions? Where did it (almost) go wrong?
Mandate of the agent/distributor • What & where ? • Territory (geographical - sectoral - …) • exclusivity – sole agency – no exclusivity • criterion (invoicing address, delivery, …) • Goods or services • Trademark – new products – … • Representative authority • Permanent establishment – production – collection • Claim management • Written – additionnal fee
EU commercial agency commission - provision • During agreement • orders procured by the agent • + repeat orders • + indirect • BE - LU - NL - GB: exclusivity required • DE - FR : no exclusivity required • expenses … • After termination of the contract • Order procured before termination • Reasonable delay – real effort
10 % + 10 %
Commission • Fixed remuneration - % - combination • Starting period – advance – exceptional expenses ... • Existing customers – new customers • Method of calculation • Gross/net invoice price • Upon execution delivery or prepayment • Ultimately upon payment (reasonable advance) • disputes digressive - progressive
Distributor – profit margin Recommended resale prices Maximum resale prices Minimum resale prices Quota Indirect commission … Discount on the recommended retail/consumer price
Obligations of the representative • Product regulations – documents – registration • “Grow the business”– develop sales to distribute to maximum potential in the territory - Minimum turnover – criteria – sanctions • Stay within the territory • Advertisements – publicity – trade fairs • Harmonization conditions of sale – prices • Keep manufacturer/seller apprised of market developments - Reporting • Confidentiality – industrial property • Stock obligations – title – consignment • Trade mark use – sub distributors/agents • Service – training staff …