EID/U1 Topic 3 Selection of Products and Market Payment Terms
Selection of Export Products:
(a) Export Trends: An exporter should analyse trends in export of different items to the overseas market(s) for proper selection of the product. Such information can be gathered from the following sources:
Monthly statistics of foreign trade of India.
Export Promotion Council (EPC) Bulletins.
Export Import Times.
The final selection of the product, however, depends upon one’s own ability and experience relating to the product.
(b) Supply Base: Along with demand of product in the international market, it is also necessary to analyse its supply base in the domestic market. Most of the agricultural products defy this criterion as their supply depends upon a number of factors, which are based on nature. Seasonal commodities like onions, fruits or even sugar, wheat or rice have not proved to be good items for sustained export business. Even manufactured products may not have a good supply base due to factors like strike, power shortage, lockouts, transport problems, etc.
(c) Production Capacity and Product Availability: Sky is the limit for selling a product in international markets. Hence, a manufacturer exporter must consider his production capacity and a merchant exporter must take into consideration the availability of the product selected for export before entering into an export contract. If the production capacity or availability is limited, then the exporter should focus on smaller markets. However, if the product can be made available easily, a sustained export drive is worthwhile.
(d) Product Adaptability: Associated with the production capacity and availability is the possibility of adapting the product as per the requirements of the foreign markets. The needs and requirements of buyers differ from market to market and country to country. What sells well in one market may not sell at all in other markets. This calls for product adaptability. Product adaptability is not an easy task, as it requires large amount of investment in adjusting production process as per the needs of the different markets.
(e) Servicing Facilities: If the product selected for export is such that it requires servicing after sales, then the exporter should see to it that he can avail such T facilities to the overseas buyers. It is not always easy and within one’s means s to open servicing centres abroad. At the same time, it is difficult to find a h distributor or agent having servicing facilities. If it is not possible for the exporters to provide such servicing facilities then the exporter should not venture to export such products.
(f) Target Markets: Selection of a product also depends upon the markets E which have been identified for sales abroad. All products may not have equally good markets everywhere. Therefore, selection of the product e. depends upon the market requirements. It is always better to concentrate on one or two markets at least to start with. One should study the target markets (E closely, with regard to market requirements in terms of product specification, (t continuity of demand, change in fashion, credit requirement, if any, etc.
(g) Demand Stability: Product(s) selected for selling whether overseas or in the (c domestic market should not only have stable but a rising demand. Seasonal (E products should be avoided unless the exporter has necessary infrastructure (f’ for selling them. Products depending upon fashion trends, though comparatively H more profitable, may not always prove to be good for those exporters who T. cannot cope with such trends. Therefore, the exporter should select such products, which provide a large and stable market
(h) Trade Restrictions: While selecting product(s) for exports, it must be ensured that such product(s) should not be subject to the country’s export (t Control regulations or import Control regulations of the concerned target (c markets. Although, export restrictions in all the Countries are minimum as (c there is a tendency to promote exports of all products, still there are a iv number of items where Controls do exist. Therefore, the exporter should try to avoid export of such product(s).
(i) Profitability: Last but not the least; Profitability is the prime objective of all marketing activities. The product selected for exports must fetch a fair profit (F to the exporter. Moreover, profitability should as far as Possible be direct, Le” arising from the sale price itself. Though export benefits like duty drawback, excise refund, etc., are necessarily to be taken into consideration while calculating the export price, it is always better if the product sells in the overseas markets even if such assistance is not available.
With cash-in-advance payment terms, an exporter can avoid credit risk because payment is received before the ownership of the goods is transferred. For international sales, wire transfers and credit cards are the most commonly used cash-in-advance options available to exporters. With the advancement of the Internet, escrow services are becoming another cash-in-advance option for small export transactions. However, requiring payment in advance is the least attractive option for the buyer, because it creates unfavorable cash flow. Foreign buyers are also concerned that the goods may not be sent if payment is made in advance. Thus, exporters who insist on this payment method as their sole manner of doing business may lose to competitors who offer more attractive payment terms.
Letters of Credit
Letters of credit (LCs) are one of the most secure instruments available to international traders. An LC is a commitment by a bank on behalf of the buyer that payment will be made to the exporter, provided that the terms and conditions stated in the LC have been met, as verified through the presentation of all required documents. The buyer establishes credit and pays his or her bank to render this service. An LC is useful when reliable credit information about a foreign buyer is difficult to obtain, but the exporter is satisfied with the creditworthiness of the buyer’s foreign bank. An LC also protects the buyer since no payment obligation arises until the goods have been shipped as promised.
A documentary collection (D/C) is a transaction whereby the exporter entrusts the collection of the payment for a sale to its bank (remitting bank), which sends the documents that its buyer needs to the importer’s bank (collecting bank), with instructions to release the documents to the buyer for payment. Funds are received from the importer and remitted to the exporter through the banks involved in the collection in exchange for those documents. D/Cs involve using a draft that requires the importer to pay the face amount either at sight (document against payment) or on a specified date (document against acceptance). The collection letter gives instructions that specify the documents required for the transfer of title to the goods. Although banks do act as facilitators for their clients, D/Cs offer no verification process and limited recourse in the event of non-payment. D/Cs are generally less expensive than LCs.
An open account transaction is a sale where the goods are shipped and delivered before payment is due, which in international sales is typically in 30, 60 or 90 days. Obviously, this is one of the most advantageous options to the importer in terms of cash flow and cost, but it is consequently one of the highest risk options for an exporter. Because of intense competition in export markets, foreign buyers often press exporters for open account terms since the extension of credit by the seller to the buyer is more common abroad. Therefore, exporters who are reluctant to extend credit may lose a sale to their competitors. Exporters can offer competitive open account terms while substantially mitigating the risk of non-payment by using one or more of the appropriate trade finance techniques covered later in this Guide. When offering open account terms, the exporter can seek extra protection using export credit insurance.
Consignment in international trade is a variation of open account in which payment is sent to the exporter only after the goods have been sold by the foreign distributor to the end customer. An international consignment transaction is based on a contractual arrangement in which the foreign distributor receives, manages, and sells the goods for the exporter who retains title to the goods until they are sold. Clearly, exporting on consignment is very risky as the exporter is not guaranteed any payment and its goods are in a foreign country in the hands of an independent distributor or agent. Consignment helps exporters become more competitive on the basis of better availability and faster delivery of goods. Selling on consignment can also help exporters reduce the direct costs of storing and managing inventory. The key to success in exporting on consignment is to partner with a reputable and trustworthy foreign distributor or a third-party logistics provider. Appropriate insurance should be in place to cover consigned goods in transit or in possession of a foreign distributor as well as to mitigate the risk of non-payment.