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Chapter 11 Export Pricing

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  1. 0 Chapter 11 Export Pricing Chapter 11 Export Pricing

  2. 0 Price Dynamics • The alternatives strategies for first-time pricing are: • Skimming- Achieve the highest possible contribution in a short initial time period, and then gradually lower the price as more segments are targeted and more products are available. • Market pricing – Determined based on competitive prices; production and marketing is adjusted to the price. • Penetration pricing – Offer products at a low price to generate volume sales and achieve high market share, to compensate for lower per unit return.

  3. 0 The Setting of Export Prices • Export pricing strategy • The standard worldwide price may be the same regardless of the buyer or may be based on average unit costs of fixed, variable, and export-related costs. • Dual pricing differentiates between domestic and export prices.

  4. 0 The Setting of Export Prices • Export pricing strategy • The two approaches to pricing products for exports are • Cost plus method – Fully allocates domestic and foreign costs to the product; ensures profit margins; however, the firm’s competitiveness is compromised. • Marginal cost method - Considers the direct costs of producing and selling products for export as the floor beneath which prices cannot be set.

  5. 0 The Setting of Export Prices • Market-differentiated pricing • Is based on the dynamic conditions of the marketplace. • Prices change frequently due to changes in competition, exchange rate, or environment.

  6. 0 The Setting of Export Prices • Export-related costs • Unique export-related costs include: • Cost of modifying a product for a foreign market. • Operational costs of exporting. • Cost incurred in entering the foreign market. • Price escalation • A combined effect of clear-cut and hidden costs. • Results in an increase in export prices over and above the domestic prices.

  7. Price Escalation Thru Exporting(see Exhibit 11-4 in your text) Domestic: - Shipping and insurance - wholesaler margin - retailer margin Exported: - higher shipping & insurance costs - Tariff - Importer, wholesaler and jobber’s margins - VAT at each value-added level If manufacturer’s price is $6.00 then domestic customer’s price may be $12.00 to $14.00 and foreign customer’s price may be anywhere from $20.00 to $45.00

  8. 0 The Setting of Export Prices • Mitigating export-related costs • Reorganize the channel of distribution. • Product adaptation. • Use new or more economical tariff or tax classifications. • Assemble or produce overseas.

  9. 0 Terms of Sale • Incoterms– The internationally accepted standard definitions for terms of sale set by the International Chamber of Commerce (ICC) since 1936. • They are grouped into four categories: • E-terms - Seller delivers the goods to the buyer only at the former’s own premises. • F-terms - Seller delivers the goods to a carrier appointed by the buyer. • C-terms - Seller contracts for carriage without assuming the risk of loss or damage to the goods. • D-terms - Seller bears all costs and risks to deliver goods to the destination determined by the buyer.

  10. Incoterms (First issued by ICC in 1936, revised 6 times since then) • EXW (…named place) • FCA FREE CARRIAGE (…named place) • FAS (…named port of shipment) • FOB (…named port of shipment) • CFR OR C&F (…named port of destination) • CIF (…named port of destination) • CPT CARRIAGE PAID TO (…named place of destination) • CIP CARRIAGE AND INSURANCE PAID TO (…named place of destination) • DAF DELIVERED AT FRONTIER (…named place) • DES DELIVERED EX SHIP (…named port of destination) • DEQ DELIVERED EX QUAY (…named port of destination) • DDU DELIVERED DUTY UNPAID (…named place of destination) • DDP DELIVERED DUTY PAID (…named place of destination)

  11. 0 Terms of Payment • Cash in advance • Relieves the exporter of all risks and allows for immediate use of the money. • Used for first time transactions or situations where the exporter doubts the importer’s solvency. • Also used for customized, high price, high technology items, e.g., fighter jets, satellites…

  12. 0 Terms of Payment • Letter of credit (lc) (Opener, Issuer, Beneficiary) • An instrument issued by the bank at the request of the buyer. • The bank promises to pay money on presentation of specified documents like the bill of lading, consular invoice, and description of the goods. • Classified as irrevocableversus revocable, confirmed versus unconfirmed, and revolving versus non-revolving.

  13. 0 Terms of Payment • Drafts (Drawer, Drawee, Payee) • Similar to personal check; an order by one party to pay another. • Buyer must obtain shipping documents before obtaining possession of the goods involved in the transaction. • Documentary collection • The seller ships the goods; shipping documents and the draft are presented to the importer through banks acting as the seller’s agent; the importer accepts or pays the draft • The draft , also known as the bill of exchange, may be either a sight draft, time draft or an arrival draft.

  14. 0 Terms of Payment • Banker’s acceptance - A time draft drawn on and accepted by a bank; it is sold in the short-term money market. • Discounting - Selling a draft to the bank at a discount from face value; it can be with recourse or without recourse. • Open account - The normal manner of doing business in the domestic market; also known as open terms. • Consignment selling – Allows the importer to defer payment until goods are actually sold.

  15. 0 Non-payment Risks • Commercial risk • Refers to the insolvency of, or protracted payment default by, an overseas buyer. • Results from deterioration of conditions in the buyer’s market, fluctuations in demand, unanticipated competition, or technological changes. • Political risk • Can neither be controlled by the buyer nor the seller.

  16. 0 Complications in Assessing the Buyer’s Creditworthiness: • Credit reports may not be reliable. • Audited reports may not be available. • Financial reports may have been prepared according to a different format. • Many governments require that assets be annually re-evaluated upward, which can distort results. • Statements are in local currency. • The buyer may have the financial resources in local currency but may be precluded from converting to dollars because of exchange controls and other government actions.

  17. 0 Managing Foreign Exchange Risk • To prevent currency related risks, the exporter can: • Shift the risk through foreign currency contractual hedging. • Modify the risk by manipulating prices and other elements of a marketing strategy. • Forward exchange market • The exporter gets the bank to agree to a rate at which it will buy the foreign currency the exporter receives when the importer makes payment. • The rate is either a premium or a discount on the current spot rate.

  18. 0 Foreign Exchange Risk & Price Adjustments • Pass through – If your import cost increases because of changes in currency value, you add the additional cost to what you charge your customers. The higher price charged to your customers will most likely lower your sales. • Absorption– You (the importer) absorb the additional cost and do not raise the price you charge your customers. You may absorb some of the additional cost and pass the rest through to your customers. • Pricing-to-market - Destination-specific adjustment of mark-ups in response to exchange-rate changes.

  19. 0 Sources of Export Financing • Commercial banks • Provide assistance to only first rate credit risks. • Provide enhanced services which help exporters monitor and expedite their international transactions. • Marketers should assess the overseas reach of banks to avail greater market coverage.

  20. 0 Sources of Export Financing • Forfaiting • Forfaiter provides the exporter with cash at the time of shipment. • The importer uses bills of exchange or promissory notes to pay the exporter at the time of shipment. • The exporter sells them to a third party at a discount from their face value for immediate cash.

  21. 0 Sources of Export Financing • Benefits accrued by the exporter through forfaiting: • Reduction of risk. • Simplicity of documentation. • Cent percent coverage. • Helps to avoid content or country restrictions. • Major issues: availability and cost.

  22. 0 Sources of Export Financing • Factoring houses • May purchase an exporter’s receivables for a discounted price. • Provide the exporter with a complete financial package that combines credit protection, accounts-receivable bookkeeping, and collection services.

  23. 0 Sources of Export Financing • Differences between forfaiting and factoring: • Factors usually want a large percentage of the exporter’s business, while most forfaiters work on a one-shot basis. • Factors usually do not have strong capabilities in the developing countries, forfaiters do. • Forfaiters work with capital goods, factors typically with consumer goods. • Forfaiterswork with medium-term receivables, while factors work with short-term receivables.

  24. 0 Sources of Export Financing • Export credit agencies (ECAs) • The Export-Import Bank of the United States and other countries (Ex-Im Banks) • The Overseas Private Investment Corporation (OPIC) • The Agency for International Development (AID) • The U.S. Department of Agriculture’s Commodity Credit Corporation (CCC) • The Small Business Administration (SBA)

  25. 0 Leasing • Allows market penetration for the firm’s products, which is not possible through outright sale. • Total net income from leasing is often higher than it would be if the unit was sold.

  26. 0 Dumping • Selling goods overseas at a price lower than in the exporter’s home market or below the cost of production, or both. • Types of dumping • Predatory dumping – Intentionally selling at a loss in another country in order to increase its market share at the expense of domestic producers. • Unintentional dumping - Result of time lags between the dates of sales transaction, shipment, and arrival.

  27. 0 Dumping • Remedies for dumping • Antidumping duty - Levied on imported goods sold at less than fair market value. • Countervailing duties - Imposed on imports which are subsidized in the exporter’s home country. • To minimize the risk of being accused of dumping, the marketer can focus on value-added products and increase differentiation by including services in the product offering.

  28. Chapter 17 Global Pricing 0 Chapter 17 Global Pricing

  29. Transfer Pricing Transfer price is the price at which one affiliate of a company sells products and services to another affiliate of the same company. If affects: Competitiveness in the international marketplace Reduction of taxes and tariffs Management of cash flows Minimization of foreign exchange risks Avoidance of conflicts with home and host governments Internal concerns such as goal congruence and motivation of subsidiary managers 0

  30. The three philosophies of transfer pricing: cost-based, market-based, and arm’s-length price. The rationale for transferring at cost is to increase the profits of affiliates. Deriving transfer prices from the market is the most marketing-oriented method because it takes local conditions into account. Arm’s-length pricing is favored by many constituents, such as governments, to ensure proper intracompany pricing. Transfer Pricing 0

  31. Six methods of determining an arm’s-length price: Comparable uncontrolled price method Resale price method Cost-plus method Comparable profits method Profit split method Any other reasonable method Arm’s Length Transfer Pricing 0

  32. Pricing Within Individual Country Markets Determined by: Corporate objectives Costs Customer behavior and market conditions Market structure Environmental constraints 0

  33. Corporate objectives: to undersell a major competitor. to improve their efficiency and/or shift production bases. Costs:Easily measured, Varying inflation rates When prices cannot be changed, try value pricing, stripping down products, introducing innovative products at a modest premium, and getting close to customers by using new technologies. Demand and market factors: Price elasticity, customer perception of the product Market structure and competition Environmental constraints: Government policies. Try non-price measures, emphasize other marketing mix elements Pricing Within Individual Markets 0

  34. The Euro and Marketing Strategy The potential advantages of a single-currency Europe include a more competitive market both internally and externally. The euro pushes national markets closer together. The single currency has made prices completely transparent for all buyers. Marketers can enhance the value of product and service offerings selectively, and thereby maintain price differentials across Europe. 0

  35. Countertrade Foreign purchases that are paid for by other goods, services, or ideas or a combination of these with some money. Conditions that support countertrade are lack of money, lack of value of money, lack of acceptability of money as an exchange medium, or greater ease of transaction by using goods. 0

  36. Forms of Countertrade. - Straight barter - Counterpurchase agreement (typically with the government; smaller deals) • Offset (with the government, larger, longer-term deals) - Buyback (from plant output) - Triangular Compensation {A (goods) →B (goods) → C (cash) → A} - Clearing agreements (Accounts cleared periodically) - Switch trading(one company sells to another its obligation to make a purchase in a given country) • Blocked currencies (Typically soft currencies)

  37. Merits: Permits the covert reduction of prices and therefore allows firms and governments to circumvent price and exchange controls. An excellent mechanism to gain entry into new markets. Provides stability for long-term sales. Limitations: Requires that accounts be settled on a country-by-country or even transaction-by-transaction basis.. Countertrade 0

  38. 0 Chapter 16 Global Logistics and Materials Management Chapter 16 Global Logistics and Materials Management

  39. A Definition of International Logistics International logistics - The design and management of a system that controls the flow of materials into, through, and out of the international corporation. The systems approach helps the firm explicitly recognize the linkages among the traditionally separate logistics components within and outside of the corporation. Interaction with outside organizations, suppliers, and customers helps build on commonality of purpose in the areas of performance, quality, and timing. 0

  40. A Definition of International Logistics The systems approach also ensures JIT - Just-in-time. EDI - Electronic data interchange. ESI - Early supplier involvement. ECR - Efficient customer response systems. 0

  41. Phases of international logistics Materials management - Timely movement of raw materials, parts, and supplies into and through the firm’s production facilities. Physical distribution - Movement of the firm’s product to its customers. 0

  42. Logistics: major concepts Systems concept - The extensive and complex materials-flow activities within and outside the firm must be considered in the context of their interaction. Total-cost concept - Minimize overall logistics cost by identifying activity-based costs that impact after-tax profits. Trade-off concept - Recognizes the linkages within logistics systems that result from the interaction of their components. 0

  43. Supply Chain Management Supply chain management An integration of the three system concepts. Encompasses the planning and management of all activities involved in sourcing and procurement, conversion, and logistics. Includes coordination and collaboration with channel partners. Integrates supply and demand management within and across companies. 0

  44. Basic differences between domestic and international logistics Distance – Greater for international shipments Currency variations and exchange rate differences. Transportation modes - Reliability on carriers may be different; computation of freight rates may be different. 0

  45. International Transportation Issues International transportation is important because it determines how and when goods will be received. Transportation issue can be divided into three components: Transportation infrastructure Availability of modes Choice of modes. 0

  46. International Shipping Transportation modes - 1 1. Air:(wide body jets) 2. Truck: Truck trains 3. Rail: Gauges, technology, unit trains 4. Inland Waterways: Barges (motorized, non-motorized) 5. Ocean:Container ships, Ro-Ro ships, Lighter aboard ships, Supertankers, Ore carriers, LNG carriers (Trades, Conferences, Lines, Liner/Tramp, rates, flags, Insurance: General/Particular average) 6. Pipelines: Liquid, gas, domestic, transnational 7. Intermodal IK

  47. World’s Busiest Container PortsTEUs, 2007 1. Singapore, Singapore 27,9322,000 2. Shanghai, People's Republic of China 26,1503,000 3. Hong Kong, Hong Kong 2 3,8814,000 4. Shenzhen, People's Republic of China 21,0995,000 5. Busan, South Korea 13,2706,000 6. Rotterdam, Netherlands 10,7917,000 7. Dubai, United Arab Emirates 10,6538,000 8. Kaohsiung, Taiwan10,2579,000, 9. Hamburg, Germany 9,89010,000 10. Qingdao, People's Republic of China 9,46211,000 13. Los Angeles, United States of America 8,35514,000 15. Long Beach, United States of America 7,31616,000

  48. Choice of Transportation Modes Choice is influenced by: Transit time Predictability (Air is more predictable than ocean) Cost Noneconomic factors (government involvement) 0

  49. Exhibit 16.5 - Comparing Transportation Choices 0

  50. Exhibit 16.6 - Documentation for an International Shipment 0