Chapter 15 Outline

Artais Weather Check

Introduction

The Promise and Pitfalls of Exporting

Improving Export Performance

An International Comparison

Some Information Sources

Utilizing Export Management Companies

Exporting Strategy

Export and Import Financing

Lack of Trust

Letter of Credit

Draft

Bill of Lading

A Typical International Trade Transaction

Export Assistance

Export-Import Bank

Export Credit Insurance

Countertrade

The Growth of Countertrade

Types of Countertrade

The Pros and Cons of Countertrade

Chapter Summary

Critical Discussion Questions

Downey's Soup

Artais Weather Check

Artais Weather Check, Inc., is a small Ohio-based company that manufactures an automated weather observation system, or AWOS, for small airports. Artais's AWOS system records runway conditions such as wind speed, direction, and temperature and converts the data into a voice message for pilots. Only three other companies besides Artais have been certified by the US Federal Aviation Administration (FAA) to produce the equipment, and Artais dominates the market in the United States with a share of over 80 percent.

Despite its dominant market share in the United States, Artais gets the majority of its $8 million in annual revenues from foreign markets. Within the United States, the market for automated weather observation systems is small. Although there are 18,000 public and private airports in the country, the largest have round-the-clock human weather watchers, while most of the smaller airports cannot afford the $45,000 to $60,000 required to install an AWOS. Thus, the prospects for growth in the United States seem to be limited to sales of about 75 systems per year nationwide.

To continue to grow the company's revenues, Artais has increasingly looked toward export sales. From slow beginnings in the late 1980s, exports have surged to account for close to two-thirds of the company's total revenues. However, to get foreign orders, Artais has had to deal with frustrations it never encountered at home. The first problem it came up against was one of name recognition. Although Artais is well known within the United States, the company found that its name recognition was close to zero overseas. Another problem involves subsidized competition; according to Artais, its main competitors in some foreign markets are subsidized by their governments to protect jobs. Artais has also found that it needs to customize its products for foreign markets. To sell in Egypt, for example, its system had to be reprogrammed to relay weather information in Arabic as well as English. International customers also require that spare parts be located close by and that Artais employees install the equipment and provide on-site training, all of which raises the costs of doing business.

Political factors have also had a major impact on the outcome of some deals. For example, after working hard to secure a deal in Romania, Artais unexpectedly saw the deal fall through at the last moment. Instead, the deal went to a German competitor. According to some locals, the Romanian government, eager to improve trading relations with the European Union, gave the job to Artais's German competitor in an attempt to curry favor with the trading bloc's most powerful member.

Despite problems such as these, Artais has sold systems to airports in Taiwan, China, Ecuador, Saudi Arabia, and Egypt. Artais has found that such overseas contracts can be more lucrative than its domestic sales because of all the extras, such as spare parts, installation fees, and training. For the basic AWOS, the value of the foreign contracts has ranged from $200,000 to $2 million, compared with $45,000 to $60,000 in the United States. Building on this success, Artais in 1995 introduced a new system designed to detect low-level wind shears. The new system, which costs $350,000 per unit, was designed for the market outside the United States. According to company representatives, Artais is disregarding the US market because of the cost and time involved in meeting specifications established by the FAA. Systems built to FAA specifications can cost $1 million a unit, which is beyond the reach of many foreign buyers. The first two sales of the new system were to Saudi Arabia in 1995. The company believes that in time 20 percent of its annual sales will come from the wind-shear system, all of which will be generated overseas. In addition, the company believes that the bulk of revenues for its basic AWOS will continue to be generated overseas.

http://www.faa.gov

Source: S. N. Mehta, "Enterprise: Artais Find That Smallness Isn't a Handicap in Global Market," The Wall Street Journal, June 23, 1994, p. B2, and R. Carter, "Artais' New System to Help Airlines Harness the Wind," Columbus Dispatch, August 28, 1995, p. 8.

Introduction

In the previous chapter, we reviewed exporting from a strategic perspective. We considered exporting as just one of a range of strategic options for profiting from international expansion. In this chapter, we are more concerned with the "nuts and bolts" of exporting (and importing). We take the choice of strategy as a given and look instead at how to export.

As we can see from the opening case, exporting is not an activity just for large multinational enterprises; many small firms such as Artais have benefited significantly from the moneymaking opportunities of exporting. In the United States, for example, small firms with less than 500 employees sold $186 billion to customers in other countries in 1997. Although small firms account for only 30 percent of the value of the nation's exports, they represent 96 percent of all firms involved in exporting.¹ The situation is similar in several other nations. In Germany, for example, companies with less than 500 employees account for about 30 percent of that nation's exports.²

Evidence suggests that the volume of export activity in the world economy, by firms of all sizes, is likely to increase in the near future. One reason is that exporting has become easier. The gradual decline in trade barriers under the umbrella of GATT and now the WTO (see Chapter 5) along with regional economic agreements such as the European Union and the North American Free Trade Agreement (see Chapter 8) have significantly increased export opportunities. At the same time, the advent of modern communications and transportation technologies has alleviated the logistical problems associated with exporting. Firms are increasingly using fax machines, the World Wide Web, international 800 numbers, and international air express services to reduce the costs of exporting. Consequently, it is no longer unusual to find small companies such as Artais that are thriving as exporters.

Nevertheless, exporting remains a challenge for many firms. While large multinational enterprises have long been conversant with the steps that must be taken to export successfully, smaller enterprises can find the process intimidating. The firm wishing to export must identify foreign market opportunities, avoid a host of unanticipated problems that are often associated with doing business in a foreign market, familiarize itself with the mechanics of export and import financing, learn where it can get financing and export credit insurance, and learn how it should deal with foreign exchange risk. The whole process is made more problematic by the fact that many countries' currencies are not freely convertible. As a result, there is the problem of arranging payment for exports to countries with weak currencies. This brings us to the complex topic of countertrade, by which payment for exports is received in goods and services rather than money. In this chapter, we will discuss all these issues with the exception of foreign exchange risk, which was covered in Chapter 9. We open the chapter by considering the promise and pitfalls of exporting.

The Promise and Pitfalls of Exporting

The great promise of exporting is that huge revenue and profit opportunities are to be found in foreign markets for most firms in most industries. Artais had a very solid competitive position in the United States, including an 80 percent share of the US market for automated weather observing systems, but that was insufficient to guarantee continued strong growth in revenues and profits. The company found that the opportunities for growth in foreign markets can more than make up for any lack of opportunities in the United States. What is true for Artais is also true for a large number of other enterprises of all sizes based in many other countries. The international market is normally so much larger than the firm's domestic market, that exporting is nearly always a way of increasing the revenue and profit base of a company.  Despite the obvious opportunities associated with exporting, studies have shown that while many large firms tends to be proactive about seeking opportunities for profitable exporting, systematically scanning foreign markets to see where the opportunities lie for leveraging their technology, products, and marketing skills in foreign countries, many medium sized and small firms are very reactive.³ Typically, such reactive firms do not even consider exporting until their domestic market is saturated and the emergence of excess productive capacity at home forces them to look for growth opportunities in foreign markets. Also, many small and medium-sized firms tend to wait for the world to come to them, rather than going out into the world to seek opportunities. Even when the world does comes to them, they may not respond. An example is MMO Music Group, which makes sing-along tapes for karaoke machines. Foreign sales accounted for about 15 percent of MMO's revenues of $8 million in the mid-1990s, but the firm's CEO admits that this figure would probably have been much higher had he paid attention to building international sales during the 1980s and early 1990s. At that time, unanswered faxes and phone messages from Asia and Europe piled up while he was trying to manage the burgeoning domestic side of the business. By the time MMO did turn its attention to foreign markets, other competitors had stepped into the breach and MMO found it tough going to build export volume.⁴

MMO's experience is common, and it suggests a need for firms to become more proactive about seeking export opportunities. One reason more firms are not proactive is that they are unfamiliar with foreign market opportunities; they simply do not know how big the opportunities actually are or where they might lie. Simple ignorance of the potential opportunities is a huge barrier to exporting.⁵ Also, many would-be exporters are often intimidated by the complexities and mechanics of exporting to countries where business practices, language, culture, legal systems, and currency are all very different from the home market. This combination of unfamiliarity and intimidation probably explains why exporters still account for only a tiny percentage of US firms, less than 2 percent according to the Small Business Administration.⁶

To make matters worse, many neophyte exporters have run into significant problems when first trying to do business abroad and this has soured them on future exporting ventures. Common pitfalls include poor market analysis, a poor understanding of competitive conditions in the foreign market, a failure to customize the product offering to the needs of foreign customers, lack of an effective distribution program, and a poorly executed promotional campaign in the foreign market.⁷ Neophyte exporters tend to underestimate the time and expertise needed to cultivate business in foreign countries.⁸ Few realize the amount of management resources that have to be dedicated to this activity. Many foreign customers require face-to-face negotiations on their home turf. An exporter may have to spend months learning about a country's trade regulations, business practices, and mores before a deal can be closed.

Exporters often face voluminous paperwork, complex formalities, and many potential delays and errors. According to a UN report on trade and development, a typical international trade transaction may involve 30 different parties, 60 original documents, and 360 document copies, all of which have to be checked, transmitted, reentered into various information systems, processed, and filed. The United Nations has calculated that the time involved in preparing documentation, along with the costs of common errors in paperwork, often amounts to 10 percent of the final value of goods exported.⁹