STARTING EXPORT INTRODUCTION. [pic][pic][pic][pic][pic] CHAPTER I INTRODUCTION How to Start Export is a fair question that every first time exporter wants to ask. Export in itself is a very wide concept and lot of preparations is required by an exporter before starting an export business. A key success factor in starting any export company is clear understanding and detail knowledge of products to be exported. In order to be a successful in exporting one must fully research its foreign market rather than try to tackle every market at once. The exporter should approach a market on a priority basis.
Overseas design and product must be studies properly and considered carefully. Because there are specific laws dealing with International trade and foreign business, it is imperative that you familiarize yourself with state, federal, and international laws before starting your export business. Price is also an important factor. So, before starting an export business an exporter must considered the price offered to the buyers. As the selling price depends on sourcing price, try to avoid unnecessary middlemen who only add cost but no value. It helps a lot on cutting the transaction cost and improving the quality of the final products.
However, before we go deep into “How to export ? ” let us discuss what an export is and how the Government of Indian has defined it. In very simple terms, export may be defined as the selling of goods to a foreign country. However, As per Section 2 (e) of the India Foreign Trade Act (1992), the term export may be defined as ‘an act of taking out of India any goods by land, sea or air and with proper transaction of money”. Exporting a product is a profitable method that helps to expand the business and reduces the dependence in the local market.
It also provides new ideas, management practices, marketing techniques, and ways of competing, which is not possible in the domestic market. Even as an owner of a domestic market, an individual businessman should think about exporting. Research shows that, on average, exporting companies are more profitable than their non-exporting counterparts. Why Need to Export There are many good reasons for exporting: The first and the primary reason for export is to earn foreign exchange. The foreign exchange not only brings profit for the exporter but also improves the economic condition of the country.
Secondly, companies that export their goods are believed to be more reliable than their counterpart domestic companies assuming that exporting company has survive the test in meeting international standards. Thirdly, free exchange of ideas and cultural knowledge opens up immense business and trade opportunities for a company. Fourthly, as one starts visiting customers to sell one’s goods, he has an opportunity to start exploring for newer customers, state-of-the-art machines and vendors in foreign lands. Fifthly, by exporting goods, an exporter also becomes safe from offset lack of demand for seasonal products.
Lastly, international trade keeps an exporter more competitive and less vulnerable to the market as the exporter may have a business boom in one sector while simultaneously witnessing a bust in a different sector. No doubt that in the age of globalization and liberalizations, Export has became of the most lucrative business in India. Government of India is also supporting exporters through various incentives and schemes to promote Indian export for meeting the much needed requirements for importing modern technology and adopting new technology from MNCs through Joint ventures and ollaboration. CHAPTER II Introduction Before starting an export, an individual should evaluate his company’s “export readiness”. Further planning for export should be done only, if the company’s assets are good enough for export. There are several methods to evaluate the export potential of a company. The most common method is to examine the success of a product in domestic market. It is believed that if the products has survived in the domestic market, there is a good chance that it will also be successful in international market, at least those where similar needs and conditions exist.
One should also evaluate the unique features of a product. If those features are hard to duplicate abroad, then it is likely that you will be successful overseas. A unique product may have little competition and demand for it might be quite high. Once a businessman decides to sell his products, the next step is to developing a proper export plan. While planning an export strategy, it is always better to develop a simple, practical and flexible export plan for profitable and sustainable export business.
As the planners learn more about exporting and your company’s competitive position, the export plan will become more detailed and complete. Objective The main objective of a typical export plan is to: • Identifies what you want to achieve from exporting. • Lists what activities you need to undertake to achieve those objectives. • Includes mechanisms for reviewing and measuring progress. • Helps you remain focused on your goals. For a proper export planning following questions need to answered: 1. Which products are selected for export development? 2.
What modifications, if any, must be made to adapt them for overseas markets? 3. Which countries are targeted for sales development? 4. In each country, what is the basic customer profile? 5. What marketing and distribution channels should be used to reach customers? 6. What special challenges pertain to each market (competition, cultural differences, import controls, etc. ), and what strategy will be used to address them? 7. How will the product’s export sale price be determined? 8. What specific operational steps must be taken and when? 9. What will be the time frame for implementing each element of the plan? 0. What personnel and company resources will be dedicated to exporting? 11. What will be the cost in time and money for each element? 12. How will results be evaluated and used to modify the plan? From the start, the plan should be viewed and written as a management tool, not as a static document. Objectives in the plan should be compared with actual results to measure the success of different strategies. The company should not hesitate to modify the plan and make it more specific as new information and experience are gained. Some “Do’s and Don’ts of Export Planning
DO ensure your key staff members are ‘signed on’ to the Plan. DO seek good advice – and test your Export Plan with advisers. DON’T create a bulky document that remains static. DO review the Export Plan regularly with your staff and advisers. DO assign responsibility to staff for individual tasks. DON’T use unrealistic timelines. Review them regularly – they often slip. DO create scenarios for changed circumstances – look at the “what ifs” for changes in the market environment from minor to major shifts in settings. e. g. changes of government, new import taxes.
DO develop an integrated timeline that draws together the activities that make up the Export Plan. DO make sure that you have the human and financial resources necessary to execute the Export Plan. Ensure existing customers are not neglected. CHAPTER III Introduction A key factor in any export business is clear understanding and detail knowledge of products to be exported. The selected product must be in demand in the countries where it is to be exported. Before making any selection, one should also consider the various government policies associated with the export of a particular product.
Whether companies are exporting first time or have been in export trade for a long time – it is better for both the groups to be methodical and systematic in identifying a right product. It’s not sufficient to have all necessary data ‘in your mind’ – but equally important to put everything on paper and in a structured manner. Once this job is done, it becomes easier to find the gaps in the collected information and take necessary corrective actions. There are products that sell more often than other product in international market. It is not very difficult to find them from various market research tools.
However, such products will invariably have more sellers and consequently more competition and fewer margins. On the other hand – a niche product may have less competition and higher margin – but there will be far less buyers. Fact of the matter is – all products sell, though in varying degrees and there are positive as well as flip sides in whatever decision you take – popular or niche product. Key Factors in Product Selection • The product should be manufactured or sourced with consistent standard quality, comparable to your competitors.
ISO or equivalent certification helps in selling the product in the international market. • If possible, avoid products which are monopoly of one or few suppliers. If you are the manufacturer – make sure sufficient capacity is available in-house or you have the wherewithal to outsource it at short notice. Timely supply is a key success factor in export business • The price of the exported product should not fluctuate very often – threatening profitability to the export business. • Strictly check the government policies related to the export of a particular product.
Though there are very few restrictions in export – it is better to check regulatory status of your selected product. • Carefully study the various government incentive schemes and tax exemption like duty drawback and DEPB. • Import regulation in overseas markets, specially tariff and non-tariff barriers. Though a major non-tariff barrier (textile quota) has been abolished – there are still other tariff and non-tariff barriers. If your product attracts higher duty in target country – demand obviously falls. • Registration/Special provision for your products in importing country.
This is specially applicable for processed food and beverages, drugs and chemicals. • Seasonal vagaries of selected products as some products sell in summer, while others in winter. Festive season is also important factor, for example certain products are more sellable only during Christmas. • Keep in mind special packaging and labeling requirements of perishable products like processed food and dairy products. • Special measures are required for transportation of certain products, which may be bulky or fragile or hazardous or perishable. CHAPTER IV Market Selection. pic][pic][pic][pic][pic] Introduction Foreign Market Research Foreign Market Selection Process Introduction After evaluation of company’s key capabilities, strengths and weaknesses, the next step is to start evaluating opportunities in promising export markets. It involves the screening of large lists of countries in order to arrive at a short list of four to five. The shorting method should be done on the basis of various political, economic and cultural factors that will potentially affect export operations in chosen market. Some factors to consider include: 1. Geographical Factors Country, state, region, o Time zones, o Urban/rural location logistical considerations e. g. freight and distribution channels 2. Economic, Political, and Legal Environmental Factors o Regulations including quarantine, o Labelling standards, o Standards and consumer protection rules, o Duties and taxes 3. Demographic Factors o Age and gender, o Income and family structure, o Occupation, o Cultural beliefs, o Major competitors, o Similar products, o Key brands. 4. Market Characteristics o Market size, o Availability of domestic manufacturers, o Agents, distributors and suppliers.
Foreign Market Research Understanding a market’s key characteristics requires gathering a broad range of primary and secondary research, much of which you can source without cost from the internet. Primary research, such as population figures, product compliance standards, statistics and other facts can be obtained without any cost from international organizations like United Nations (UN) and World Trade Organizations (WTO). Analysis of export statistics over a period of several years helps an individual to determine whether the market for a particular product is growing or shrinking.
Secondary research, such as periodicals, studies, market reports and surveys, can be found through government websites, international organisations, and commercial market intelligence firms. Foreign Market Selection Process Step 1: Gather Information on a Broad Range of Markets Market selection process requires a broad range of informations depending upon the products or services to be exported, which includes: The demand for product/service. • The size of the potential audience. • Whether the target audience can affords product. • What the regulatory issues are that impact on exports of product. Ease of access to this market – proximity/freight. • Are there appropriate distribution channels for product/service. • The environment for doing business – language, culture, politics etc. • Is it financially viable to export to selected market. You can gather much of the first step information yourself from a variety of sources at little or no cost. Sources of information include: • Talking to colleagues and other exporters. • Trade and Enterprise – web site, publications, call centre. • The library. • The Internet. Step 2: Research a Selection of Markets In-Depth
From the results of the first stage, narrow your selection down to three to five markets and undertake some in-depth research relating specifically to your product. While doing so, some of the questions that may arise at this stage are: • What similar products are in the marketplace (including products that may not be similar but are used to achieve the same goal, e. g. the product in our sample matrix at the end of this document is a hair removal cream. As well as undertaking competitor research on other hair removal creams, we would also need to consider other products that are used for hair removal, i. . razors, electrolysis, wax). • What is your point of difference? What makes your product unique? What are the key selling points for your product? • How do people obtain/use these products? • Who provides them? • Are they imported? If so from which countries? • Is there a local manufacturer or provider? • Who would your major competitors be? What are the key brands or trade names? • What is the market’s structure and shape? • What is the market’s size? • Are there any niche markets, and if so how big are they? • Who are the major importers/ stockists / distributors / agencies or suppliers? What are the other ways to obtain sales/representation? • What are the prices or fees in different parts of the market? • What are the mark-ups at different distribution levels? • What are the import regulations, duties or taxes, including compliance and professional registrations if these apply? • How will you promote your product or service if there is a lot of competition? • Are there any significant trade fairs, professional gathers or other events where you can promote your product or service? • Packaging – do you need to change metric measures to imperial, do you need to list ingredients? Will you need to translate promotional material and packaging? • Is your branding – colours, imagery etc. , culturally acceptable? Foreign Market Selection Entry Having completed the market selection process and chosen your target market, the next step is to plan your entry strategy. There are a number of options for entering your chosen market. Most exporters initially choose to work through agents or distributors. In the longer term, however, you may consider other options, such as taking more direct control of your market, more direct selling or promotion, or seeking alliances or agreements. CHAPTER V Introduction
SWOT analysis is a useful method of summaries all the information generated during the export planning. SWOT stands for strengths, weakness, opportunities and threats, which helps to isolate the strong and week areas within an export strategy. SWOT also indicates the future opportunities or threats that may exist in the chosen markets and is instrumental in strategy formulation and selection. To apply your own SWOT analysis, start by creating a heading for each category – ‘Strengths’, ‘Weaknesses’, ‘Opportunities’, and ‘Threats’. Under each of these, write a list of five relevant aspects of your business and external market environment.
Strengths and weaknesses apply to internal aspects of your business; opportunities and threats relate to external research. Your final analysis should help you develop short and long term business goals and action plans, and help guide your market selection process. Environmental factors internal to the company can be classified as strengths or weaknesses, and those external to the company can be classified as opportunities or threats. Strengths Business strengths are its resources and capabilities that can be used as a basis for developing a competitive-advantage.
Examples of such strengths include: • Patents • Strong brand names. • Good reputation among customers. • Cost advantages from proprietary know-how. • Exclusive access to high grade natural resources. • Favorable access to distribution networks. Weaknesses The absence of certain strengths may be viewed as a weakness. For example, each of the following may be considered weaknesses: • Lack of patent protection. • A weak brand name. • Poor reputation among customers. • High cost structure. • Lack of access to the best natural resources. • Lack of access to key distribution channels. Opportunities
The external environmental analysis may reveal certain new opportunities for profit and growth. Some examples of such opportunities include: • An unfulfilled customer need. • Arrival of new technologies. • Loosening of regulations. • Removal of international trade barriers. Threats Changes in the external environmental also may present threats to the firm. Some examples of such threats include: • Shifts in consumer tastes away from the firm’s products • Emergence of substitute products. • New regulations. • Increased trade barriers Successful SWOT Analysis Simple rules for successful SWOT analysis: Be realistic about the strengths and weaknesses of the organization. • Analysis should distinguish between where the organization is today, and where it could be in the future. • Be specific. • Always analyse in relation to your competition i. e. better than or worse than your competition. • Keep your SWOT short and simple. A SWOT analysis can be very subjective, and is an excellent tool for indicating the negative factors first in order to turn them into positive factors. Once all the research and analysis is done its time to get registered with the various government authorities. Registration with Reserve Bank of India (RBI)
Prior to 1997, it was necessary for every first time exporter to obtain IEC number from Reserve Bank of India (RBI) before engaging in any kind of export operations. But now this job is being done by DGFT. Registration with Director General of Foreign Trade (DGFT) For every first time exporter, it is necessary to get registered with the DGFT (Director General of Foreign Trade), Ministry of Commerce, Government of India. DGFT provide exporter a unique IEC Number. IEC Number is a ten digits code required for the purpose of export as well as import. No exporter is allowed to export his good abroad without IEC number.
However, if the goods are exported to Nepal, or to Myanmar through Indo-Myanmar boarder or to China through Gunji, Namgaya, Shipkila or Nathula ports then it is not necessary to obtain IEC number provided the CIF value of a single consignment does not exceed Indian amount of Rs. 25, 000 /-. Application for IEC number can be submitted to the nearest regional authority of DGFT. Application form which is known as “Aayaat Niryaat Form – ANF2A” can also be submitted online at the DGFT web-site: http://dgft. gov. in. While submitting an application form for IEC number, an applicant is required to submit his PAN account number.
Only one IEC is issued against a single PAN number. Apart from PAN number, an applicant is also required to submit his Current Bank Account number and Bankers Certificate. A amount of Rs 1000/- is required to submit with the application fee. This amount can be submitted in the form of a Demand Draft or payment through EFT (Electronic Fund Transfer by Nominated Bank by DGFT. Registration with Export Promotion Council Registered under the Indian Company Act, Export Promotion Councils or EPC is a non-profit organisation for the promotion of various goods exported from India in international market.
EPC works in close association with the Ministry of Commerce and Industry, Government of India and act as a platform for interaction between the exporting community and the government. So, it becomes important for an exporter to obtain a registration cum membership certificate (RCMC) from the EPC. An application for registration should be accompanied by a self certified copy of the IEC number. Membership fee should be paid in the form of cheque or draft after ascertaining the amount from the concerned EPC.
The RCMC certificate is valid from 1st April of the licensing year in which it was issued and shall be valid for five years ending 31st March of the licensing year, unless otherwise specified. Registration with Commodity Boards Commodity Board is registered agency designated by the Ministry of Commerce, Government of India for purposes of export-promotion and has offices in India and abroad. At present, there are five statutory Commodity Boards under the Department of Commerce. These Boards are responsible for production, development and export of tea, coffee, rubber, spices and tobacco. Registration with Income Tax Authorities
Goods exported out of the country are eligible for exemption from both Value Added Tax and Central Sales Tax. So, to get the benefit of tax exemption it is important for an exporter to get registered with the Tax Authorities. CHAPTER V Introduction An export license is a document issued by the appropriate licensing agency after which an exporter is allowed to transport his product in a foreign market. The license is only issued after a careful review of the facts surrounding the given export transaction. Export license depends on the nature of goods to be transported as well as the destination port.
So, being an exporter it is necessary to determine whether the product or good to be exported requires an export license or not. While making the determination one must consider the following necessary points: • What are you exporting? • Where are you exporting? • Who will receive your item? • What will your items will be used? Canalisation Canalisation is an important feature of Export License under which certain goods can be imported only by designated agencies. For an example, an item like gold, in bulk, can be imported only by specified banks like SBI and some foreign banks or designated agencies.
Application for an Export License To determine whether a license is needed to export a particular commercial product or service, an exporter must first classify the item by identifying what is called ITC (HS) Classifications. Export license are only issued for the goods mentioned in the Schedule 2 of ITC (HS) Classifications of Export and Import items. A proper application can be submitted to the Director General of Foreign Trade (DGFT). The Export Licensing Committee under the Chairmanship of Export Commissioner considers such applications on merits for issue of export licenses. Exports Free unless regulated
The Director General of Foreign Trade (DGFT) from time to time specifies through a public notice according to which any goods, not included in the ITC (HS) Classifications of Export and Import items may be exported without a license. Such terms and conditions may include Minimum Export Price (MEP), registration with specified authorities, quantitative ceilings and compliance with other laws, rules, regulations. • Introduction • 1. Myth: I Am Too Small to Export • 2. Myth: I Cannot Afford to Export • 3. Myth: I Cannot Compete With Large Overseas Companies • 4. Myth: Exporting is Too Risky • 5. Myth: Exporting is Too Complicated
CHAPTER VI Introduction Many first time exporters or firm managers believe the myths about exporting that it’s too difficult or too costly to sell their product in a foreign country. But given below the some of the important facts that will help a first time exporter to clear all his misconceptions. 1. Myth: I Am Too Small to Export Only large firms with name recognition, abundant resources, and formal export departments can export successfully. It is true that large firms typically account for far more total exports but the real fact is that vast majority of exporting firms in most countries are small and medium-sized enterprises (SMEs). . Myth: I Cannot Afford to Export I don’t have the money for hiring new employees, for marketing abroad, or expanding production for new business. There are various low-cost ways to market and promote abroad, handle new export orders, and finance receivables. This does not require hiring new staff or setting up an export department. At little or no cost for example, you can receive product and country market research, worldwide market exposure, generate trade leads, and find qualified overseas distributors through various Commodity Boards and Export Promotion Councils. 3. Myth: I Cannot Compete With Large Overseas Companies
My products are unknown and my prices are too high for foreign markets. If the product is known in the domestic market then it’s a plus point but even an unknown product can be exported in a foreign market. Low demand of a product doesn’t indicates that it will be also not accepted in the international market. Price is also an important, but it is not the only selling point. Other competitive factors play a large role including quality, service, and consumer taste – these may override price. Also prices of a product may not be relatively high in countries with a strong currency, as in the European Union. 4.
Myth: Exporting is Too Risky I might not get paid. Selling anywhere has risks even in the domestic market, but it can be reduced with reasonable precautions. To assure you get paid, use Letters of Credit (L/Cs). A L/C is a letter from a bank guaranteeing that a buyer’s payment to a seller will be received on time and for the correct amount. In the event that the buyer is unable to make payment on the purchase, the bank will be required to cover the full or remaining amount of the purchase. Proper documentation can minimize the risk associated with the export business. 5. Myth: Exporting is Too Complicated
Exporting is too complicated; I won’t understand the laws and documentation requirements. You don’t need to be an expert to export. There is an abundance of resources available online that helps the first time exporter about all ins and outs of the export operations. Government of India and its associated agencies like Commodity Boards and Export Promotion Councils also provide guidelines to the exporters. Introduction Export Sales leads are initial contacts a seller or exporter seeks in order to finalize a deal or agreement for export of goods and are considered as the first step in the entire sales process.
After getting the first lead, a company should respond to that lead in a very carefully manner in order to convert that opportunity into real export deal. Generating Sales Leads Sales leads can be generated either through a word-of-mouth or internet research or trade show participation. Qualifying sales leads As the buyer is far away and sometimes communication process can be difficult, so it’s always better to make an extra effort to understand the exact need of the customer. Sending Acknowledgement After receiving a lead it is quite important to acknowledge the enquirer within 48 hours of receiving the enquiry either through e-mail or fax.
Acknowledgement also gives an option to provide further detail about the product or to make an enquiry about the buyer. Responding with quality products Quality products strengthen buyer seller relationship, so it’s always better to provide quality products to the buyers. Follow Ups Always try to be in touch with the buyer or customer. For this purpose one can ask a phone number and a convenient time to call. It is always better to make the call in the presence of an Export Adviser. One should avoid high pressure call during follow up. Table of Contents Introduction
The foreign customer may ask for product samples before placing a confirmed order. So, it is essential that the samples are made from good quality raw materials and after getting an order, the subsequent goods are made with the same quality product. Extra care should be taken in order to avoid the risk associated in sending a costly product sample for export. Secrecy is also an important factor while sending a sample, especially if there is a risk of copying the original product during export. Before exporting a product sample an exporter should also know the Government policy and procedures for export of samples.
While sending a product sample to an importer, it is always advised to send samples by air mail to avoid undue delay. However, if the time is not an issue then the product sample can also be exported through proper postal channel, which is cheaper as compared to the air mail. Sending Export Samples from India Samples having permanent marking as “sample not for sale” are allowed freely for export without any limit. However, in such cases where indelible marking is not available, the samples may be allowed for a value not exceeding US $ 10,000, per consignment.
For export of sample products which are restricted for export as mentioned in the ITC (HS) Code, an application may be made to the office of Director General of Foreign Trade (DGFT). Export of samples to be sent by post parcel or air freight is further divided into following 3 categories, and under each category an exporter is required to fulfill certain formalities which are mentioned below : 1. Samples of value up to Rs. 10, 000- It is necessary for the exporter to file a simple declaration that the sample does not involve foreign exchange and its value is less than Rs. 10,000. . Samples of value less than Rs. 25,000- It is necessary for the exporter to obtain a value certificate from the authorised dealer in foreign exchange (i. e. your bank). For this purpose, an exporter should submit a commercial invoice certifying thereon that the parcel does not involve foreign exchange and the aggregate value of the samples exported by you does not exceed Rs. 25,000 in the current calendar year. 3. Samples of value more than Rs. 25,000- It becomes necessary for the exporter to obtain GR/PP waiver from the Reserve Bank of India Export Samples against Payment
A sample against which an overseas buyer agrees to make payment is exported in the same manner as the normal goods are exported. Sample can also be carried personally by you while travelling abroad provided these are otherwise permissible or cleared for export as explained earlier. However, in case of precious jewellery or stone the necessary information should be declared to the custom authorities while leaving the country and obtain necessary endorsement on export certificate issued by the Jewelry Appraiser of the Customs. Export of Garment Samples
As per the special provision made for the export of garment samples, only those exporters are allowed to send samples that are registered with the Apparel export Promotion Council (AEPC). Similarly, for export of wool it is necessary for the exporter to have registration with the Woolen Export Promotion Council. Export of Software All kinds electronic and computer software product samples can only be exported abroad, if the exporter dealing with these products is registered with the Electronics and Computer Software Export Promotion Council (ESC)
Similarly samples of other export products can be exported abroad under the membership of various Export Promotion Councils (EPC) of India. Introduction Pricing and costing are two different things and an exporter should not confuse between the two. Price is what an exporter offer to a customer on particular products while cost is what an exporter pay for manufacturing the same product. Export pricing is the most important factor in for promoting export and facing international trade competition. It is important for the exporter to keep the prices down keeping in mind all export benefits and expenses.
However, there is no fixed formula for successful export pricing and is differ from exporter to exporter depending upon whether the exporter is a merchant exporter or a manufacturer exporter or exporting through a canalising agency. Determining Export Pricing Export Pricing can be determine by the following factors: • Range of products offered. • Prompt deliveries and continuity in supply. • After-sales service in products like machine tools, consumer durables. • Product differentiation and brand image. • Frequency of purchase. • Presumed relationship between quality and price. • Specialty value goods and gift items. Credit offered. • Preference or prejudice for products originating from a particular source. • Aggressive marketing and sales promotion. • Prompt acceptance and settlement of claims. • Unique value goods and gift items. Export Costing Export Costing is basically Cost Accountant’s job. It consists of fixed cost and variable cost comprising various elements. It is advisable to prepare an export costing sheet for every export product. As regards quoting the prices to the overseas buyer, the same are quoted in the following internationally accepted terms which are commonly known as Incoterm. Introduction
An exporter without any commercial contract is completely exposed of foreign exchange risks that arises due to the probability of an adverse change in exchange rates. Therefore, it becomes important for the exporter to gain some knowledge about the foreign exchange rates, quoting of exchange rates and various factors determining the exchange rates. In this section, we have discussed various topics related to foreign exchange rates in detail. Spot Exchange Rate Also known as “benchmark rates”, “straightforward rates” or “outright rates”, spot rates represent the price that a buyer expects to pay for a foreign currency in another currency.
Settlement in case of spot rate is normally done within one or two working days. Forward Exchange Rate The forward exchange rate refers to an exchange rate that is quoted and traded today but for delivery and payment on a specific future date. Method of Quoting Exchange Rates There are two methods of quoting exchange rates: • Direct Quotation: In this system, variable units of home currency equivalent to a fixed unit of foreign currency are quoted. For example: US $ 1= Rs. 42. 75 • Indirect Quotation: In this system, variable units of foreign currency as equivalent to a fixed unit of home currency are quoted.
For example: US $ 2. 392= Rs. 100 Before 1993, banks were required to quote all the rates on indirect basis as foreign currency equivalent to RS. 100 but after 1993 banks are quoting rates on direct basis only. Exchange Rate Regime The exchange rate regime is a method through which a country manages its currency in respect to foreign currencies and the foreign exchange market. • Fixed Exchange Rate A fixed exchange rate is a type of exchange rate regime in which a currency’s value is matched to the value of another single currency or any another measure of value, such as gold.
A fixed exchange rate is also known as pegged exchange rate. A currency that uses a fixed exchange rate is known as a fixed currency. The opposite of a fixed exchange rate is a floating exchange rate. • Floating Exchange Rate A Floating Exchange Rate is a type of exchange rate regime wherein a currency’s value is allowed to fluctuate according to the foreign exchange market. A currency that uses a floating exchange rate is known as a floating currency. A Floating Exchange Rate or a flexible exchange rate and is opposite to the fixed exchange rate. • Linked Exchange Rate
A linked exchange rate system is used to equlise the exchange rate of a currency to another. Linked Exchange Rate system is implemented in Hong Kong to stabilise the exchange rate between the Hong Kong dollar (HKD) and the United States dollar (USD). Forward Exchange Contracts A Forward Exchange Contract is a contract between two parties (the Bank and the customer). One party contract to sell and the other party contracts to buy, one currency for another, at an agreed future date, at a rate of exchange which is fixed at the time the contract is entered into. Benefits of Forward Exchange Contract Contracts can be arranged to either buy or sell a foreign currency against your domestic currency, or against another foreign currency. • Available in all major currencies. • Available for any purpose such as trade, investment or other current commitments. • Forward exchange contracts must be completed by the customer. A customer requiring more flexibility may wish to consider Foreign Currency Options. Foreign Currency Options Foreign Currency Options is a hedging tool that gives the owner the right to buy or sell the indicated amount of foreign currency at a specified price before a specific date.
Like forward contracts, foreign currency options also eliminate the spot market risk for future transactions. A currency option is no different from a stock option except that the underlying asset is foreign exchange. The basic premises remain the same: the buyer of option has the right but no obligation to enter into a contract with the seller. Therefore the buyer of a currency option has the right, to his advantage, to enter into the specified contract. Flexible Forwards Flexible Forward is a part of foreign exchange that has been developed as an alternative to forward exchange contracts and currency options.
The agreement for flexible forwards is always singed between two parties (the ‘buyer’ of the flexible forward and the ‘seller’ of the flexible forward) to exchange a specified amount (the ‘face value’) of one currency for another currency at a foreign exchange rate that is determined in accordance with the mechanisms set out in the agreement at an agreed time and an agreed date (the ‘expiry time’ on the ‘expiry date’). The exchange then takes place approximately two clear business days later on the ‘delivery date’). Currency Swap
A currency swap which is also known as cross currency swap is a foreign exchange agreement between two countries to exchange a given amount of one currency for another and, after a specified period of time, to give back the original amounts swapped. Foreign Exchange Markets The foreign exchange markets are usually highly liquid as the world’s main international banks provide a market around-the-clock. The Bank for International Settlements reported that global foreign exchange market turnover daily averages in April was $650 billion in 1998 (at constant exchange rates) and increased to $1. trillion in 2004 . Trade in global currency markets has soared over the past three years and is now worth more than $3. 2 trillion a day. The biggest foreign exchange trading centre is London, followed by New York and Tokyo. Introduction Selling a product through an overseas agent is a very successful strategy. Sales agents are available on commission basis for any sales they make. The key benefit of using an overseas sales agent is that you get the advantage of their extensive knowledge of the target market.
Sales agent also provides support to an exporter in the matter of transportation, reservation of accommodation, appointment with the government as and when required. It is, therefore, essential that one should very carefully select overseas agent. Merits of Appointing a Sales Agent There are various types of merits associated with appointed a sales agent for export purpose are as follow: • Sales agent avoids the recruitment, training, time and payroll costs of using own employees to enter an overseas market. • An agent is a better option to identify and exploit opportunities in overseas export market. An agent already have solid relationships with potential buyers, hence it saves the time of the exporter to build own contacts. • An agent allows an exporter to maintain more control over matters such as final price and brand image – compared with the other intermediary option of using a distributor. Demerits of Appointing a Sales Agent There are also certain disadvantages associated with appointing a sales agent for export purpose which are as follows: • After-sales service can be difficult when selling through an intermediary. • There is a risk for exporter to lose some control over marketing and brand image.
Important Points While Appointing a Sales Agent: Appointing right sales agent not only enhance the profit of an exporter but also avoid any of risks associated with a sales agent. So it becomes important for an exporter to take into consideration following important points before selection an appropriate sales agent for his product. • Size of the agent’s company. • Date of foundation of the agent’s company. • Company’s ownership and control. • Company’s capital, funds, available and liabilities. • Name, age and experience of the company’s senior executives. • Number, age and experience of the company’s salesman. Oher agencies that the company holds, including those of competing products and turn-over of each. • Length of company’s association with other principal. • New agencies that the company obtained or lost during the past year. • Company’s total annual sales and the trends in its sales in recent years. • Company’s sales coverage, overall and by area. • Number of sales calls per month and per salesman by company staff. • Any major obstacles expected in the company’s sales growth. • Agent’s capability to provide sales promotion and advertising services • Agent’s transport facilities and warehousing capacity. Agent’s rate of commission; payment terms required. • References on the agents from banks, trade associations and major buyers. Some source of Information on Agents is: • Government Departments Trade Associations. • Chambers of Commerce. • Banks. • Independent Consultants. • Export Promotion Councils. • Advertisement Abroad. Agent v Distributor There is a fundamental legal difference between agents and distributors and an exporter should not confuse between the two. An agent negotiates on the behalf of an exporter and may be entitled to create a legal relationship between exporter and the importer
A distributor buys goods on its own account from exporter and resells those products to customers. It is the distributor which has the sale contract with the customer not the exporter. In the case of distributor, an exporter is free from any kinds of risks associated with the finance. Introduction Export pricing is the most important factor in for promoting export and facing international trade competition. It is important for the exporter to keep the prices down keeping in mind all export benefits and expenses.
However, there is no fixed formula for successful export pricing and is differ from exporter to exporter depending upon whether the exporter is a merchant exporter or a manufacturer exporter or exporting through a canalising agency. Like any business transaction, risk is also associated with good to be exported in an overseas market. Export is risk in international trade is quite different from risks involve in domestic trade. So, it becomes important to all the risks related to export in international trade with an extra measure and with a proper risk management.
The various types of export risks involve in an international trade are as follow: Credit Risk Sometimes because of large distance, it becomes difficult for an exporter to verify the creditworthiness and reputation of an importer or buyer. Any false buyer can increase the risk of non-payment, late payment or even straightforward fraud. So, it is necessary for an exporter to determine the creditworthiness of the foreign buyer. An exporter can seek the help of commercial firms that can provide assistance in credit-checking of foreign companies. Poor Quality Risk
Exported goods can be rejected by an importer on the basis of poor quality. So it is always recommended to properly check the goods to be exported. Sometimes buyer or importer raises the quality issue just to put pressure on an exporter in order to try and negotiate a lower price. So, it is better to allow an inspection procedure by an independent inspection company before shipment. Such an inspection protects both the importer and the exporter. Inspection is normally done at the request of importer and the costs for the inspection are borne by the importer or it may be negotiated that they be included in the contract price.
Alternatively, it may be a good idea to ship one or two samples of the goods being produced to the importer by an international courier company. The final product produced to the same standards is always difficult to reduce. Transportation Risks With the movement of goods from one continent to another, or even within the same continent, goods face many hazards. There is the risk of theft, damage and possibly the goods not even arriving at all. Logistic Risk The exporter must understand all aspects of international logistics, in particular the contract of carriage. This contract is drawn up between a shipper and a carrier (transport operator).
For this an exporter may refer to Incoterms 2000, ICC publication. Legal Risks International laws and regulations change frequently. Therefore, it is important for an exporter to drafts a contract in conjunction with a legal firm, thereby ensuring that the exporter’s interests are taken care of. Political Risk Political risk arises due to the changes in the government policies or instability in the government sector. So it is important for an exporter to be constantly aware of the policies of foreign governments so that they can change their marketing tactics accordingly and take the necessary steps to prevent loss of business and investment.
Unforeseen Risks Unforeseen risk such as terrorist attack or a natural disaster like an earthquake may cause damage to exported products. It is therefore important that an exporter ensures a force majeure clause in the export contract. Exchange Rate Risks Exchange rate risk is occurs due to the uncertainty in the future value of a currency. Exchange risk can be avoided by adopting Hedging scheme. Export Risk Management Plan Risk management is a process of thinking analytically about all potential undesirable outcomes before they happen and setting up measures that will avoid them.
There are six basic elements of the risk management process: • Establishing the context • Identifying the risks • Assessing probability and possible consequences of risks • Developing strategies to mitigate these risks • Monitoring and reviewing the outcomes • Communicating and consulting with the parties involved A risk management plan helps an exporter to broaden the risk profile for foreign market. For a small export business, an exporter must keep his risk management analysis clear and simple. Export Risk Mitigation
Export risk mitigations are the various strategies that can be adopted by an exporter to avoid the risks associated with the export of goods. • Direct Credit: Export Credit Agencies support exports through the provision of direct credits to either the importer or the exporter. o Importer: a buyer credit is provided to the importer to purchase goods. o Exporter: makes a deferred payment sale; insurance is used to protect the seller or bank. • Guarantees o Bid bond (tender guarantee): protects against exporter’s unrealistic bid or failure to execute the contract after winning the bid. Performance bond: guarantees exporter’s performance after a contract is signed. o Advance payment guarantee (letter of indemnity): in the case where an importer advances funds, guarantees a refund if exporter does not perform. o Standby letter of credit: issuing bank promises to pay exporter on behalf of importer. • Insurance o Transportation insurance: Covers goods during transport; degree of coverage varies. o Credit Insurance: Protects against buyer insolvency or protracted defaults and/or political risks. o Seller non-compliance (credit insurance): Covers advance payment risk. Foreign exchange risk insurance: Provides a hedge against foreign exchange risk. • Hedging Instruments used to Hedge Price Risk o Stabilization programs and funds. o Timing of purchase/sale. o Fixed price long-term contracts. o Forward contracts. o Swaps Introduction An important stage after manufacturing of goods or their procurement is their preparation for shipment which involves packaging and labelling of goods to be exported. Proper packaging and labelling not only makes the final product look attractive but also save a huge amount of money by saving the product from wrong handling the export process.
Packaging The primary role of packaging is to contain, protect and preserve a product as well as aid in its handling and final presentation. Packaging also refers to the process of design, evaluation, and production of packages. The packaging can be done within the export company or the job can be assigned to an outside packaging company. Packaging provides following benefits to the goods to be exported: • Physical Protection – Packaging provides protection against shock, vibration, temperature, moisture and dust. Containment or agglomeration – Packaging provides agglomeration of small objects into one package for reason of efficiency and cost factor. For example it is better to put 1000 pencils in one box rather than putting each pencil in separate 1000 boxes. • Marketing: Proper and attractive packaging play an important role in encouraging a potential buyer. • Convenience – Packages can have features which add convenience in distribution, handling, display, sale, opening, use, and reuse. • Security – Packaging can play an important role in reducing the security risks of shipment. It also provides authentication seals to indicate that he package and contents are not counterfeit. Packages also can include anti-theft devices, such as dye-packs, RFID tags, or electronic article surveillance tags, that can be activated or detected by devices at exit points and require specialized tools to deactivate. Using packaging in this way is a means of loss prevention. Labeling Like packaging, labeling should also be done with extra care. It is also important for an exporter to be familiar with all kinds of sign and symbols and should also maintain all the nationally and internationally standers while using these symbols.
Labelling should be in English, and words indicating country of origin should be as large and as prominent as any other English wording on the package or label. Labelling on product provides the following important information: • Shipper’s mark • Country of origin • Weight marking (in pounds and in kilograms) • Number of packages and size of cases (in inches and centimeters) • Handling marks (international pictorial symbols) • Cautionary markings, such as “This Side Up. ” • Port of entry • Labels for hazardous materials
Labelling of a product also provides information like how to use, transport, recycle, or dispose of the package or product. With pharmaceuticals, food, medical, and chemical products, some types of information are required by governments. It is better to choose a fast dyes for labelling purpose. Only fast dyes should be used for labeling. Essential data should be in black and subsidiary data in a less conspicuous colour; red and orange and so on. For food packed in sacks, only harmless dyes should be employed, and the dye should not come through the packing in such a way as to affect the goods.
Inspection Certificates and Quality Control. [pic][pic][pic][pic][pic] Introduction • ISI Certification • AgMmark Certification • Benefits of ISI and Agmark Certification • In-Process Quality Control (IPQC) • Self Certification Scheme Introduction An important aspect about the goods to be exported is compulsory quality control and pre-shipment inspection. For this purpose, Export Inspection Council (EIC) was set up by the Government of India under Section 3 of the Export (Quality Control and Inspection) Act, 1963. It includes more than 1000 commodities which are organized into various groups for a compulsory pre-shipment inspection.
It includes Food and Agriculture, Fishery, Minerals, Organic and Inorganic Chemicals, Rubber Products, Refractoriness, Ceramic Products, Pesticides, Light Engineering, Steel Products, Jute Products, Coir and Coir Products, Footwear and Footwear Products. An important aspect about the goods to be exported is compulsory quality control and pre-shipment inspection. For this purpose, Export Inspection Council (EIC) was set up by the Government of India under Section 3 of the Export (Quality Control and Inspection) Act, 1963. It includes more than 1000 commodities which are organized into various groups for a compulsory pre-shipment inspection.
It includes Food and Agriculture, Fishery, Minerals, Organic and Inorganic Chemicals, Rubber Products, Refractoriness, Ceramic Products, Pesticides, Light Engineering, Steel Products, Jute Products, Coir and Coir Products, Footwear and Footwear Products. ISI Certification Indian Standards Institute now known as Bureau of Indian Standard (BIS) is a registered society under a Government of India. BIS main functions include the development of technical standards, product quality and management system certifications and consumer affairs. Founded by Professor P. C.
Mahalanobis in Kolkata on 17th December, 1931, the institute gained the status of an Institution of National Importance by an act of the Indian Parliament in 1959. AgMmark Certification AgMark is an acronym for Agricultural Marketing and is used to certify the food products for quality control. Agmark has been dominated by other quality standards including the non manufacturing standard ISO 9000. Benefits of ISI and Agmark Certification Products having ISI Certification mark or Agmark are not required to be inspected by any agency. These products do not fall within the purview of the export inspection agencies network.
The Customs Authorities allow export of such goods even if not accompanied by any pre-shipment inspection certificate, provided they are otherwise satisfied that the goods carry ISI Certification or the Agmark. In-Process Quality Control (IPQC) In-Process Quality Control (IPQC) inspection is mainly done for engineering products and is applied at the various stages of production. Units approved under IPQC system of in-process quality control may themselves issue the certificate of inspection, but only for the products for which they have been granted IPQC facilities.
The final certificate of inspection on the end-products is then given without in-depth study at the shipment stage. Self Certification Scheme Under the self Certification Scheme, large exporters and manufacturers are allowed to inspect their product without involving any other party. The facility is available to manufacturers of engineering products, chemical and allied products and marine products. Self-Certification is given on the basis that the exporter himself is the best judge of the quality of his products and will not allow his reputation to be spoiled in the international market by compromising on quality.
Self-Certification Scheme is granted to the exporter for the period of one year. Exporters with proven reputation can obtain the permission for self certification by submitting an application to the Director (Inspection and Quality Control), Export Inspection Council of India, 11th Floor, Pragati Tower, 26 Rajendra Place, New Delhi. ISO 9000 The discussion on inspection certificate and quality control is incomplete without ISO-9000. Established in 1987, ISO 9000 is a series of international standards that has been accepted worldwide as the norm assuring high quality of goods.
The current version of ISO 9000 is ISO 9000:2000. Introduction An exporter without any commercial contract is completely exposed of foreign exchange risks that arises due to the probability of an adverse change in exchange rates. Therefore, it becomes important for the exporter to gain some knowledge about the foreign exchange rates, quoting of exchange rates and various factors determining the exchange rates. In this section, we have discussed various topics related to foreign exchange rates in detail. Export from India required special document depending upon the type of product and destination to be exported.
Export Documents not only gives detail about the product and its destination port but are also used for the purpose of taxation and quality control inspection certification. Shipping Bill / Bill of Export Shipping Bill/ Bill of Export is the main document required by the Customs Authority for allowing shipment. A shipping bill is issued by the shipping agent and represents some kind of certificate for all parties, included ship’s owner, seller, buyer and some other parties. For each one represents a kind of certificate document. Documents Required for Post Parcel Customs Clearance
In case of Post Parcel, no Shipping Bill is required. The relevant documents are mentioned below: • Customs Declaration Form – It is prescribed by the Universal Postal Union (UPU) and international apex body coordinating activities of national postal administration. It is known by the code number CP2/ CP3 and to be prepared in quadruplicate, signed by the sender. • Despatch Note- It is filled by the exporter to specify the action to be taken by the postal department at the destination in case the address is non-traceable or the parcel is refused to be accepted. Commercial Invoice – Issued by the exporter for the full realisable amount of goods as per trade term. • Consular Invoice – Mainly needed for the countries like Kenya, Uganda, Tanzania, Mauritius, New Zealand, Burma, Iraq, Ausatralia, Fiji, Cyprus, Nigeria, Ghana, Zanzibar etc. It is prepared in the prescribed format and is signed/ certified by the counsel of the importing country located in the country of export. • Customs Invoice – Mainly needed for the countries like USA, Canada, etc. It is prepared on a special form being presented by the Customs authorities of the importing country.
It facilitates entry of goods in the importing country at preferential tariff rate. • Legalised / Visaed Invoice – This shows the seller’s genuineness before the appropriate consulate or chamber or commerce/ embassy. • Certified Invoice – It is required when the exporter needs to certify on the invoice that the goods are of a particular origin or manufactured/ packed at a particular place and in accordance with specific contract. Sight Draft and Usance Draft are available for this. Sight Draft is required when the exporter expects immediate payment and Usance Draft is required for credit delivery. Packing List – It shows the details of goods contained in each parcel / shipment. • Certificate of Inspection – It is a type of document describing the condition of goods and confirming that they have been inspected. • Black List Certificate – It is required for countries which have strained political relation. It certifies that the ship or the aircraft carrying the goods has not touched those country(s). • Manufacturer’s Certificate – It is required in addition to the Certificate of Origin for few countries to show that the goods shipped have actually been manufactured and is available. Certificate of Chemical Analysis – It is required to ensure the quality and grade of certain items such as metallic ores, pigments, etc. • Certificate of Shipment – It signifies that a certain lot of goods have been shipped. • Health/ Veterinary/ Sanitary Certification – Required for export of foodstuffs, marine products, hides, livestock etc. • Certificate of Conditioning – It is issued by the competent office to certify compliance of humidity factor, dry weight, etc. • Antiquity Measurement – It is issued by Archaeological Survey of India in case of antiques. Shipping Order – Issued by the Shipping (Conference) Line which intimates the exporter about the reservation of space of shipment of cargo through the specific vessel from a specified port and on a specified date. • Cart/ Lorry Ticket – It is prepared for admittance of the cargo through the port gate and includes the shipper’s name, cart/ lorry No. , marks on packages, quantity, etc. • Shut Out Advice – It is a statement of packages which are shut out by a ship and is prepared by the concerned shed and is sent to the exporter. Short Shipment Form – It is an application to the customs authorities at port which advises short shipment of goods and required for claiming the return. In India custom clearance is a complex and time taking procedure that every export face in his export business. Physical control is still the basis of custom clearance in India where each consignment is manually examined in order to impose various types of export duties. High import tariffs and multiplicity of exemptions and export promotion schemes also contribute in complicating the documentation and procedures.
So, a proper knowledge of the custom rules and regulation becomes important for the exporter. For clearance of export goods, the exporter or export agent has to undertake the following formalities: Registration Any exporter who wants to export his good need to obtain PAN based Business Identification Number (BIN) from the Directorate General of Foreign Trade prior to filing of shipping bill for clearance of export goods. The exporters must also register themselves to the authorised foreign exchange dealer code and open a current account in the designated bank for credit of any drawback incentive.
Registration in the case of export under export promotion schemes: All the exporters intending to export under the export promotion scheme need to get their licences / DEEC book etc. Processing of Shipping Bill – Non-EDI: In case of Non-EDI, the shipping bills or bills of export are required to be filled in the format as prescribed in the Shipping Bill and Bill of Export (Form) regulations, 1991. An exporter need to apply different forms of shipping bill/ bill of export for export of duty free goods, export of dutiable goods and export under drawback etc. Processing of Shipping Bill – EDI:
Under EDI System, declarations in prescribed format are to be filed through the Service Centers of Customs. A checklist is generated for verification of data by the exporter/CHA. After verification, the data is submitted to the System by the Service Center operator and the System generates a Shipping Bill Number, which is endorsed on the printed checklist and returned to the exporter/CHA. For export items which are subject to export cess, the TR-6 challans for cess is printed and given by the Service Center to the exporter/CHA immediately after submission of shipping bill.
The cess can be paid on the strength of the challan at the designated bank. No copy of shipping bill is made available to exporter/CHA at this stage. Quota Allocation The quota allocation label is required to be pasted on the export invoice. The allocation number of AEPC (Apparel Export Promotion Council) is to be entered in the system at the time of shipping bill entry. The quota certification of export invoice needs to be submitted to Customs along-with other original documents at the time of examination of the export cargo.
For determining the validity date of the quota, the relevant date needs to be the date on which the full consignment is presented to the Customs for examination and duly recorded in th