Short course: profit-making export ideas
This blog traces trade history and development of Imports & Exports after the original NAFTA treaty, right up to the new U.S. - Mexican Trade Agreement…including key ideas for making profits as you export goods you already produce.
HISTORICAL Recap of FOREIGN TRADE
"Currently, there are hundreds of exportable products that entrepreneurs do not recognize, also many that require only small adaptations to make them eligible for export, as well as others that complement those products."
Alberto Romo Chavez, Jr.
Archaeological evidence shows that extensive trade between peoples and nations existed even in ancient times. Early trade often was the result of efforts by individual merchants who discovered items in distant cultures of special value for their homeland markets.
Shipping these items frequently required long sea-going trips, or extensive land and rail transport. Each mode of transportation exposed cargo to danger and corruption.
The means of communication, modes of transportation and mutually-agreed-upon rules of trade evolved through the ages, accelerating after World War II. Even so, it was not until 1956 that shipping containers were standardized. Over the next several decades they became the preferred intermodal method of shipping. Their adoption ended the ordinary risk of damage and frequent thievery at ports.
In the mid-90´s, the USA, Canada and México signed the North American Free Trade Agreement. Immediately business, government and universities heightened their interest in global trade. Nonetheless, at that time there was little practical information on how to take advantage of the opportunities offered by the pact.
One might find a textbook or two, but there were no practical business books available, nor anyone who could teach the practical and customary aspects of trade. Moreover, the standard Incoterms and nomenclature for global trade were little understood by businessmen.
Initially, entrepreneurs felt that buying was easier than selling, thus importing become more attractive than exporting. People may feel better when acting as a buyer rather than a seller, yet there are other factors to consider.
For example, when exporting, the country of origin seldom requires legal dispositions or formalities. Imported goods, on the contrary, are subject to strict legal, fiscal and health regulations which are particularly dynamic.
Import programs are complicated by laws that attempt to prevent abuses or imbalances in local markets. Constant legal changes are required to ensure adequate protection to the national economy as it encounters competition from abroad.
Due to these complications, many consultants have emerged. Not infrequently they are lawyers offering workshops and seminars that help company executives to avoid legal sanctions and fiscal omissions.
There are many forms and courses that teach us about the theory and legal structures of importing; however, there is a scarcity of those that enable us in a practical and easy way to understand day-to-day trade concepts.
“Wanting to acquire experience only by learning Theory is like wanting to get rid of hunger by reading the menu” Anonymous
When importing, what are the possible costly “traps” one might expect in dealing with foreign suppliers and currencies? How do we protect against fees charged for improper documentation or receiving the goods we ordered? How do we specify packaging and shipping to save costs? What attitudes and prejudices might we encounter as we deal with manufacturers in another land? Most consultants do not speak about these and other practical subjects. They do not teach the required “culture” of global trade.
It is very common that those who dedicate themselves to theoretical subjects about IMPORTATION, present themselves as experts in international trade. That is, they speak of one part as if it were the whole! But, of course there’s the complete other side of global trade!
Regardless of the size of the company, at some point the temptation to export will come to the fore. The impetus may arise because of novelty or because a new business possibility is glimpsed. The new U.S. - Mexican Trade Agreement will likely kindle fresh thoughts about IMPORTING & EXPORTING.
EXPORTING and the decisions that lead to profits:
There are too many cases in which this intention to export remains an unproductive fascination. In some cases, the entrepreneur uses "information" he obtains from unreliable contacts, which leads to discouragement, loss of time and resources.
Every entrepreneur understands that exporting may generate foreign currency as well as help to diversify markets; yet only a minority concludes that they should take action. Most fail to develop their export plans. They miss out on export programs that yield higher profits and diminish dependence on local markets.
Let’s look at some of the major decisions you might need to make if your company decided to export its products:
First, you might ask yourself. “Should I promote what I manufacture or develop new items for the foreign market?” My advice, begin with items you currently produce. Then, decide what percentage should be assigned to the selected export market.
A suggestion: as you begin, do not try to export to emerging markets. They are complicated. There are other markets; which are the right ones for you? You can try any of them. However, try to think the way buyers think. As you know, the first question the buyer will ask is, “What is the cost?” If your price is not competitive, you wasted time. The solution is simple; your market is where your goods will land at the lowest possible cost. For Mexican products our closest and natural market is the U.S.
Consider exporting the percentage of your total production that remains after serving captive customers. Add the quantities currently sent to delinquent and difficult customers. (Plan to cancel if, possible such local accounts, eliminating problems.)
This calculation represents “suggested” exportable quantities, even if quantities are not substantial.
Next step, locate the right customer. This effort may require several trips to foreign markets to perceive the competition, quality and pricing of similar products. You’ll have to gain an idea of the landed cost of your product and its ensuing retail price in the foreign markets. (In other blogs I have provided easy ways to accomplish accurate landed cost estimates. (Link to blog.) My opinion: there is always a customer for any type of product, based upon its quality, style and price.
Typically consultants warn that you should not export if you do not produce large volumes. This idea is a Myth. Here’s why: In the beginning, a professional buyer will not buy your total production; he will do it step by step until he makes sure you can meet deliveries on time and in a consistent way!
After honoring your commitments with your first client you will have the opportunity to expand your clientele. Eventually the time will come when you feel comfortable enough to develop new products and enter other markets.
Because the U.S. dominates globally and because it is our natural market, let’s discuss a few methods of approaching this huge market with General Merchandise:
I have discussed these approaches in detail in other blogs: http://alroexport.com/blog-english
A. Origin - Destination.
To determine retail prices buyers use up to a multiple of 5 times the cost (FOB) of origin according to the category. When exporting using “Origin-Destination” calculate your (exporter's) profits at the minimum your company can accept. In this term you are competing with the world.
B. Taking the Product to the Port of Entry.
Named; "Domestic Buying." Using this approach, the multiple used by buyers to determine the retail price is up to 3 times the cost at which they buy. If you want to increase your margin above the Origin-Destination, you can use this format to increase profits. Bear in mind higher profits, higher risk.
C. Use of Wholesalers (or the benefits of become one).
There are two ways to use this channel: one, use a Wholesaler to promote your goods. Some wholesalers will buy your products for resale. Others promote, sell and manage the distribution without taking ownership of the goods. There are wholesalers for every need: Cash & Carry, Truck, Drop Shipping, etc. Their costs depend on the services provided and can range up to 20 %.
A second way: implement your own wholesaler operation. This approach requires a larger investment and greater risk, but also provides greater long-term profit potential. You should choose the most economical options possible. Among them, consider using bonded warehouses (when duties are involved), renting a warehouse with offices, or using consolidators that can also distribute the products.
Initially, established Wholesalers offer an advantage because they possess market knowledge, having captive clients. It’s best to use them as you begin exporting so you minimize risks as well as increase the potential for profits.
For better identification – Wholesalers, handle general merchandise, Distributors, positioning of brands and/or exclusive items; Brokers, Commodities.
Within the U.S. there are a number of channels that lead to the market place. 1.) Retailers or store chains, 2.) Mom´s and pop´s or Independent stores 3.) Wholesalers 4.) Jobbers and 5) E-commerce.
Each of these channels represents a business opportunity and you will find store chains, large and small, with different buying requirements, as well as a great variety of mom´s and pop´s, and wholesalers of all types promoting different specialties. In addition, many e-commerce companies exist to promote online sales.
Normally Chain Buyers earn a salary plus a performance bonus; they require results and no problems. Most, but not all, are experienced professionals. You must determine their motives and the extent of their trade knowledge in order to benefit from your negotiations. Beware of buyers who change companies continuously.
Buyers for Wholesalers, in most cases are excellent negotiators and work hard. To profit from your negotiations you need to do your homework! You’ll find more complete analysis for negotiating with U.S. buyers in my books and other blogs. http://alroexport.com/blog-english
SALE POLICY (Establish Best Practices)
When selling a client using “Origin-Destination”, or FOB you can request a Letter of Credit. This agreement protects the exporter (Your company), avoiding legal contracts. There are several types of Letters of Credit. I advise irrevocable, confirmed at sight. Your bank will provide information, costs, etc. However, the conditions specified by any letter of credit determine its usefulness. Negotiate most advantageous conditions for you company.
There are other methods of payment, like Partial Advance, Documentary Collection, Open Account, Money Transfers, Buyer’s Check, Banker’s Draft, International Money Orders, etc.
When selling domestically (taking your product to the Port of Entry), the customer is granted 30 net days. There are online sites that will provide you with customer credit information.
For additional information and a multitude of details not found in any other text, I suggest "Myths and Facts about Global Trade.” It’s a practical book I’ve written in concise and clear language. Available in paperback on Gonvill or Amazon.
Excerpt from the FOREWORD to Myths and Facts about Global Trade “This book will change the way individuals look at their business whether they are manufacturers, wholesalers or retailers. It is a must read for those wishing to compete in challenging times … both now and in the future”.
Marvin J. Girouard
Retired Chairman / CEO Pier 1 Imports, Inc. (Multi – National U.S. Import / Retail Corporation
Alberto Romo Chávez D.