Downside of export ignorance.
I once overheard a couple of small business owner-managers complaining to a business advisor about the non-performance of a foreign sales agent whose services they had both contracted.
They had each paid the agent $10,000 to represent and promote their products in a promising European market, but after a full year had received no orders.
It turned out that the agreement that they had entered into was a retainer devoid of any performance requirements. They had included a sales commission, 4 or 5 per cent on the value of any sales orders secured, as an incentive, but they had not stipulated anything in the way of required activities or expenditures to ensure that the agent was indeed trying to market the products and generate sales orders.
This issue of getting into unfavourable business agreements in order to penetrate foreign markets is not that uncommon. A couple of years ago a consulting colleague asked me to look at a distribution agreement that his client had been sent by a Middle Eastern commercial importer of electronic equipment equipment.
The agreement was probably the most one-sided import-distributor agreement that I have ever seen. The importer had all kinds of rights and options, but virtually no significant obligations or commitments, and was asking for exclusive rights to import the product line for the entire Middle East and a large chunk of North Africa.
The deal was too long for a first deal with an unfamiliar firm, especially considering, that they were not guaranteeing any minimum purchase volumes or committing to a major marketing effort with a budget to match.
The Canadian owner of the firm was advised to seek a shorter duration agreement with significant financial and marketing commitments from the importer, or to look elsewhere. He did and the whole thing came to nothing.
New exporters need to be aware of negotiating ploys such as foreign firms putting forward preset contracts around which there is little room for negotiating and which may set unwarranted limits on what is up for consideration.
How many exporters have run into expressions like, "We never do that in the States," or, "this is. the standard contract in..."? It is not difficult to obtain information on the content of business contacts that are relevant to specific regions or legal jurisdictions.
It is a similar situation for various contractual terms set for export orders including pricing, payment method, shipping and insurance arrangements, delivery dates, penalties, etc. Many firms' first export orders come as unsolicited requests to purchase from foreign buyers that have learned of the firm or its products.
If you get a foreign order for your products, but are not happy with some of the proposed terms and conditions then make a counter-proposal. Do not let your enthusiasm to secure new sales and enter new markets get in the way of your better business judgment.
These things are routinely negotiable with the final agreement being an acceptable compromise between the buyer and the seller. Don't be too eager.
The United States is our No. 1 export market and a valued trading partner. For many firms that decide to be proactive in initiating export activity, the proximity, familiarity and similarity of business practices with the U.S. make it a natural first market to enter.
It is important to recognize, however, that there are numerous significant dissimilarities between our two countries. For starters, U.S. business people are far more litigious than we. Also, their consumer protection and product liability laws are more far-reaching and their commercial bankruptcy laws are more accommodating. Firms in dire financial straits can often secure shelter from having to pay their bills while they endeavour to restructure their commercial affairs.
The significance of these differences should not be readily dismissed. U.S. firms will hold you liable for your agreements, U.S. consumers will hold you liable for your products, but the U.S. courts may not ensure that you get promptly paid for your goods.
Some years ago I heard the owner of an up-market Canadian shoe manufacturer explain how his firm was nearly bankrupted by its inability to collect monies owed it by a U.S. retail shoe chain that was operating under bankruptcy protection.
The ability to extend credit, say by delaying payment or selling on open account, can increase a firm's export potential in many markets.
New exporters, eager for sales, may be tempted to do this, but such credit must be extended carefully and insurance of the receivables should definitely be considered. Exporters should also closely watch that clients extended such credit make prompt payment as scheduled.
One very successful exporter I know was ripped off to the tune of about half a million dollars by her first export client whom she had been doing repeat business with for five years.
She got lax in following up on the outstanding receivables while continuing to fill new orders placed by the client, only to learn too late that the client had filed for bankruptcy.
This was a bankruptcy carefully calculated to facilitate theft without legal recourse, but many other exporter rip-offs facilitated through payment grace periods involve buyers that take receipt of the goods and then promptly disappear. Here we are talking about "seller beware".
The experience of not getting paid for goods shipped is definitely something to be avoided if at all possible, yet even payment in advance can present risks. Some years back we had the experience in Thunder Bay of "Nigerian firms with impeccable credentials" trying to purchase equipment from local firms to be paid for by Midland Bank PLC letters of credit.
The problem was that the letters of credit were as phony as the firms that sent them. The lesson here is to always have your bank review foreign payment instruments sent with export orders and seek their advice on whether or not to accept them before you ship the goods or otherwise begin preparing the shipment.
Even if the payment instruments are real they may be risky.
When it comes to shipping goods abroad, firms new to exporting, especially those that do their own export packing and shipping arrangements, really risk running into problems. Foreign firms generally do not pay for goods that fall to arrive or arrive damaged, and they may refuse to accept goods that arrive late. They may have the option of renegotiating the price to be paid for the goods in question.
Add to this the fact that typically neither cargo carriers nor cargo insurers accept liability for losses or damages attributable to improper export packing or container stuffing, and it becomes quite clear why doing your own export packing and shipping arrangements as an export novice can result in costly consequences.
Many novice exporters make mistakes, sometimes very costly ones. Ironically, these novices often make the same kinds of mistakes that their novice predecessors made.
Such errors are avoidable, all the more so if new-to-exporting firms do their homework, seek counsel, and learn from the mistakes of others.
Graham Clayton is an economist and general manager, international, of Confederation College.
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|Publication:||Northern Ontario Business|
|Date:||Nov 1, 2000|
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