Chapter 4: METHODS OF EXPORTING AND CHANNELS OF DISTRIBUTION

The most common methods of exporting are indirect selling and direct selling (see Export Strategy). In indirect selling, an export intermediary such as an EMC or an ETC normally assumes responsibility for finding overseas buyers, shipping products, and getting paid. In direct selling, the U.S. producer deals directly with a foreign buyer.

The paramount consideration in determining whether to market indirectly or directly is the level of resources a company is willing to devote to its international marketing effort. These are some other factors to consider when deciding whether to market indirectly or directly:

DISTRIBUTIONS CONSIDERATIONS

INDIRECT EXPORTING

The principal advantage of indirect marketing for a smaller U.S. company is that it provides a way to penetrate foreign markets without the complexities and risks of direct exporting. Several kinds of intermediary firms provide a range of export services. Each type of firm offers distinct advantages for the U.S. company.

Commission Agents

Commission or buying agents are finders for foreign firms that want to purchase U.S. products. They seek to obtain the desired items at the lowest possible price and are paid a commission by their foreign clients. In some cases, they may be foreign government agencies or quasi-governmental firms empowered to locate and purchase desired goods. Foreign government purchasing missions are one example.

Export Management Companies

An EMC acts as the export department for one or several producers of goods or services. It solicits and transacts business in the names of the producers it represents or in its own name for a commission, salary, or retainer plus commission. Some EMCs provide immediate payment for the producer's products by either arranging financing or directly purchasing products for resale. Typically, only larger EMCs can afford to purchase or finance exports.

EMCs usually specialize either by product or by foreign market or both. Because of their specialization, the best EMCs know their products and the markets they serve very well and usually have well-established networks of foreign distributors already in place. This immediate access to foreign markets is one of the principal reasons for using an EMC, since establishing a productive relationship with a foreign representative may be a costly and lengthy process.

One disadvantage in using an EMC is that a manufacturer may lose control over foreign sales. Most manufacturers are properly concerned that their product and company image be well maintained in foreign markets. An important way for a company to retain sufficient control in such an arrangement is to carefully select an EMC that can meet the company's needs and maintain close communication with it. For example, a company may ask for regular reports on efforts to market its products and may require approval of certain types of efforts, such as advertising programs or service arrangements. If a company wants to maintain this type of relationship with an EMC, it should negotiate points of concern before entering an agreement, since not all EMCs are willing to comply with the company's concerns.

Export Trading Companies

An ETC facilitates the export of U.S. goods and services. Like an EMC, an ETC can either act as the export department for producers or take title to the product and export for its own account. Therefore, the terms ETC and EMC are often used interchangeably. A special kind of ETC is a group organized and operated by producers. These ETCs can be organized along multiple- or single-industry lines and can represent producers of competing products.

Export Trading Company Act of 1982

The goal of the Export Trading Company Act of 1982 is to stimulate U.S. exports by (1) promoting and encouraging the formation of export management and export trading companies; (2) expanding the options available for export financing by permitting bank holding companies to invest in ETCs and reducing restrictions on trade finance provided by financial institutions; and (3) reducing uncertainty about applying U.S. antitrust law to export operations. This legislation allows banks, for the first time in recent history, to make equity investments in commercial ventures that qualify as ETCs. In addition, for the first time, the Export-Import Bank (Eximbank) of the United States is allowed to make working capital guarantees to U.S. exporters. Through the Office of Export Trading Company Affairs (OETCA) within the ITA, the U.S. Department of Commerce promotes the formation and use of U.S. export intermediaries and issues export trade certificates of review providing limited immunity from U.S. antitrust laws.

OETCA informs the business community of the benefits of export intermediaries through conferences, presentations before trade associations and civic organizations, and publications. The major publication on this subject is the Export Trading Company Guidebook, available for purchase through the U.S. Government Printing Office. OETCA provides counseling to businesses seeking to take advantage of the act.

OETCA also maintains the Contact Facilitation Service (CFS) data base, a listing of U.S. producers of goods and services and of organizations that provide trade facilitation services. Under a public-private sector arrangement, the CFS data base is published annually in a directory entitled The Export Yellow Pages, which is available free from local Department of Commerce district offices. The directory provides users with the names and addresses of banks, EMCs, ETCs, freight forwarders, manufacturers, and service organizations and names the export products or export-related services that these firms supply. By obtaining CFS registration forms from Commerce district offices, firms can register in the data base free of charge and be listed in subsequent editions of The Export Yellow Pages.

The certificates of review are issued by the Secretary of Commerce with the concurrence of the U.S. Department of Justice. Any U.S. corporation or partnership, any resident individual, or any state or local entity may apply for a certificate of review. A certificate can be issued to an applicant if it is determined that the proposed "export trade activities and methods of operation" will not result in a substantial lessening of domestic competition or restraint of trade within the United States. For the conduct covered by the certificate, its holder and any other individuals or firms named as members are given immunity from government suits under U.S. federal and state antitrust laws. In private party actions, liability is reduced from treble to single damages, greatly reducing the probability of nuisance suits. Moreover, in the event of private litigation involving conduct covered by the certificate of review, a prevailing certificate holder recovers the costs of defending the suit, including reasonable attorney's fees.

The certificate of review program provides exporters with an antitrust "insurance policy" intended to foster joint activities where economies of scale and risk diversification can be achieved. The act also amends the Sherman Antitrust Act and the Federal Trade Commission Act to clarify the jurisdictional reach of these statutes to export trade. Both acts now apply to export trade only if there is a "direct substantial and reasonably foreseeable" effect on domestic or import commerce of the United States or the export commerce of a U.S. competitor.

Firms and individuals interested in additional information should contact the Office of Export Trading Company Affairs, Room 1800, U.S. Department of Commerce, Washington, DC 20230; telephone 202-482-5131. For a copy of The Export Yellow Pages, contact the nearest Commerce district office.

Export Agents, Merchants, or Remarketers

Export agents, merchants, or remarketers purchase products directly from the manufacturer, packing and marking the products according to their own specifications. They then sell overseas through their contacts in their own names and assume all risks for accounts.

In transactions with export agents, merchants, or remarketers, a U.S. firm relinquishes control over the marketing and promotion of its product, which could have an adverse effect on future sales efforts abroad. For example, the product could be underpriced or incorrectly positioned in the market, or after-sales service could be neglected. On the other hand, the effort required by the manufacturer to market the product overseas is very small and may lead to sales that otherwise would take a great deal of effort to obtain.

Piggyback Marketing

Piggyback marketing is an arrangement in which one manufacturer or service firm distributes a second firm's product or service. The most common piggybacking situation is when a U.S. company has a contract with an overseas buyer to provide a wide range of products or services. Often, this first company does not produce all of the products it is under contract to provide, and it turns to other U.S. companies to provide the remaining products. The second U.S. company thus piggybacks its products to the international market, generally without incurring the marketing and distribution costs associated with exporting. Successful arrangements usually require that the product lines be complementary and appeal to the same customers.

DIRECT EXPORTING

The advantages of direct exporting for a U.S. company include more control over the export process, potentially higher profits, and a closer relationship to the overseas buyer and marketplace. These advantages do not come easily, however, since the U.S. company needs to devote more time, personnel, and corporate resources than are needed with indirect exporting.

When a company chooses to export directly to foreign markets, it usually makes internal organizational changes to support more complex functions. A direct exporter normally selects the markets it wishes to penetrate, chooses the best channels of distribution for each market, and then makes specific foreign business connections in order to sell its product. The rest of this chapter discusses these aspects of direct exporting in more detail.

Organizing for Exporting

A company new to exporting generally treats its export sales no differently from domestic sales, using existing personnel and organizational structures. As international sales and inquiries increase, however, the company may separate the management of its exports from that of its domestic sales.

The advantages of separating international from domestic business include the centralization of specialized skills needed to deal with international markets and the benefits of a focused marketing effort that is more likely to lead to increased export sales. A possible disadvantage of such a separation is the less efficient use of corporate resources due to segmentation.

When a company separates international from domestic business, it may do so at different levels in the organization. For example, when a company first begins to export, it may create an export department with a full- or part-time manager who reports to the head of domestic sales and marketing. At later stages a company may choose to increase the autonomy of the export department to the point of creating an international division that reports directly to the president.

Larger companies at advanced stages of exporting may choose to retain the international division or to organize along product or geographic lines. A company with distinct product lines may create an international department in each product division. A company with products that have common end users may organize geographically; for example, it may form a division for Europe, another for the Far East, and so on. A small company's initial needs may be satisfied by a single export manager who has responsibility for the full range of international activities. Regardless of how a company organizes for exporting, it should ensure that the organization facilitates the marketer's job. Good marketing skills can help the firm overcome the handicap of operating in an unfamiliar market. Experience has shown that a company's success in foreign markets depends less on the unique attributes of its products than on its marketing methods.

Once a company has been organized to handle exporting, the proper channel of distribution needs to be selected in each market. These channels include sales representatives, agents, distributors, retailers, and end users.

Sales Representatives

Overseas, a sales representative is the equivalent of a manufacturer's representative in the United States. The representative uses the company's product literature and samples to present the product to potential buyers. A representative usually handles many complementary lines that do not compete. The sales representative usually works on a commission basis, assumes no risk or responsibility, and is under contract for a definite period of time (renewable by mutual agreement). The contract defines territory, terms of sale, method of compensation, reasons and procedures for terminating the agreement, and other details. The sales representative may operate on either an exclusive or a nonexclusive basis.

Agents

The widely misunderstood term agent means a representative who normally has authority, perhaps even power of attorney, to make commitments on behalf of the firm he or she represents. Firms in the United States and other developed countries have stopped using the term and instead rely on the term representative, since agent can imply more than intended. Any contract should state whether the representative or agent does or does not have legal authority to obligate the firm.

Distributors

The foreign distributor is a merchant who purchases merchandise from a U.S. exporter (often at substantial discount) and resells it at a profit. The foreign distributor generally provides support and service for the product, relieving the U.S. company of these responsibilities. The distributor usually carries an inventory of products and a sufficient supply of spare parts and maintains adequate facilities and personnel for normal servicing operations. The distributor typically carries a range of noncompetitive but complementary products. End users do not usually buy from a distributor; they buy from retailers or dealers.

The payment terms and length of association between the U.S. company and the foreign distributor are established by contract. Some U.S. companies prefer to begin with a relatively short trial period and then extend the contract if the relationship proves satisfactory to both parties.

Foreign Retailers

A company may also sell directly to a foreign retailer, although in such transactions, products are generally limited to consumer lines. The growth of major retail chains in markets such as Canada and Japan has created new opportunities for this type of direct sale. The method relies mainly on traveling sales representatives who directly contact foreign retailers, although results may be accomplished by mailing catalogs, brochures, or other literature. The direct mail approach has the benefits of eliminating commissions, reducing traveling expenses, and reaching a broader audience. For best results, however, a firm that uses direct mail to reach foreign retailers should support it with other marketing activities.

American manufacturers with ties to major domestic retailers may also be able to use them to sell abroad. Many large American retailers maintain overseas buying offices and use these offices to sell abroad when practicable.

Direct Sales to End Users

A U.S. business may sell its products or services directly to end users in foreign countries. These buyers can be foreign governments; institutions such as hospitals, banks, and schools; or businesses. Buyers can be identified at trade shows, through international publications, or through U.S. government contact programs, such as the Department of Commerce's Export Contact List Service (ECLS). Making Contacts details these and other buyer contact activities and programs.

The U.S. company should be aware that if a product is sold in such a direct fashion, the exporter is responsible for shipping, payment collection, and product servicing unless other arrangements are made. Unless the cost of providing these services is built into the export price, a company could end up making far less than originally intended.

Locating Foreign Representatives and Buyers

A company that chooses to use foreign representatives may meet them during overseas business trips or at domestic or international trade shows. There are other effective methods, too, that can be employed without leaving the United States. Ultimately, the exporter may need to travel abroad to identify, evaluate, and sign overseas representatives; however, a company can save time by first doing homework in the United States. Methods include use of US&FCS contact programs, banks and service organizations, and publications. For more information on these methods, see Making Contacts.

Contacting and Evaluating Foreign Representatives

Once the U.S. company has identified a number of potential representatives or distributors in the selected market, it should write directly to each. Just as the U.S. firm is seeking information on the foreign representative, the representative is interested in corporate and product information on the U.S. firm. The prospective representative may want more information than the company normally provides to a casual buyer. Therefore, the firm should provide full information on its history, resources, personnel, the product line, previous export activity, and all other pertinent matters. The firm may wish to include a photograph or two of plant facilities and products or possibly product samples, when practical. (Whenever the danger of piracy is significant, the exporter should guard against sending product samples that could be easily copied.) For more information on correspondence with foreign firms see chapter 9, Selling Overseas.

A U.S. firm should investigate potential representatives of distributors carefully before entering into an agreement. See table 4-1 for an extensive checklist of factors to consider in such evaluations. In brief, the U.S. firm needs to know the following points about the representative or distributor's firm:

A U.S. company may obtain much of this information from business associates who currently work with foreign representatives. However, U.S. exporters should not hesitate to ask potential representatives or distributors detailed and specific questions; exporters have the right to explore the qualifications of those who propose to represent them overseas. Well-qualified representatives will gladly answer questions that help distinguish them from less-qualified competitors.

In addition, the U.S. company may wish to obtain at least two supporting business and credit reports to ensure that the distributor or representative is reputable. By using a second credit report from another source, the U.S. firm may gain new or more complete information. Reports are available from commercial firms and from the Department of Commerce's World Traders Data Report (WTDR) program.

The WTDR service (see Making Contacts) provides background reports on specific foreign firms prepared by the US&FCS posts overseas. In addition to information on size, product lines, and financial stability, each WTDR also contains a general narrative statement by the commercial officer who conducted the investigation.

Commercial firms and banks are also sources of credit information on overseas representatives. They can provide information directly or from their correspondent banks or branches overseas. Directories of international companies may also provide credit information on foreign firms.

If the U.S. company has the necessary information, it may wish to contact a few of the foreign firm's U.S. clients to obtain an evaluation of their representative's character, reliability, efficiency, and past performance. To protect itself against possible conflicts of interest, it is also important for the U.S. firm to learn about other product lines that the foreign firm represents.

Once the company has qualified some foreign representatives, it may wish to travel to the foreign country to observe the size, condition, and location of offices and warehouses. In addition, the U.S. company should meet the sales force and try to assess its strength in the marketplace. If traveling to each distributor or representative is difficult, the company may decide to meet with them at U.S. and worldwide trade shows.

Negotiating an Agreement with a Foreign Representative

When the U.S. company has found a prospective representative that meets its requirements, the next step is to negotiate a foreign sales agreement. The Department of Commerce district offices can provide counseling to firms planning to negotiate foreign sales agreements with representatives and distributors.

The potential representative is interested in the company's pricing structure and profit potential. Representatives are also concerned with the terms of payment, product regulation, competitors and their market shares, the amount of support provided by the U.S. firm (sales aids, promotional material, advertising, etc.), training for sales and service staff, and the company's ability to deliver on schedule.

The agreement may contain provisions that the foreign representative

To ensure a conscientious sales effort from the foreign representative, the agreement should include a requirement that the foreign representative apply the utmost skill and ability to the sale of the product for the compensation named in the contract. It may be appropriate to include performance requirements such as a minimum sales volume and an expected rate of increase.

In the drafting of the agreement, special attention must be paid to safeguarding the exporter's interests in cases in which the representative proves less than satisfactory. (See chapter 11, Export Regulations, Customs Benefits and Tax Incentives for recommendations on specifying terms of law and arbitration.) It is vital to include an escape clause in the agreement, allowing the exporter to end the relationship safely and cleanly if the representative does not work out. Some contracts specify that either party may terminate the agreement with written notice 30, 60, or 90 days in advance. The contract may also spell out exactly

what constitutes just cause for ending the agreement (e.g., failure to meet specified performance levels). Other contracts specify a certain term for the agreement (usually one year) but arrange for automatic annual renewal unless either party gives notice in writing of its intention not to renew.

In all cases, escape clauses and other provisions to safeguard the exporter may be limited by the laws of the country in which the representative is located. For this reason, the U.S. firm should learn as much as it can about the legal requirements of the representative's country and obtain qualified legal counsel in preparing the contract. These are some of the legal questions to consider:

The exporter should also be aware of U.S. laws that govern such contracts. For instance, the U.S. company should seek to avoid provisions that could be contrary to U.S. antitrust laws. The Export Trading Company Act provides a means to obtain antitrust protection when two or more companies combine for exporting. In any case, the U.S. firm should obtain legal advice when preparing and entering into any foreign agreement.

TABLE 4-1: FACTORS TO CONSIDER WHEN CHOOSING A FOREIGN REPRESENTATIVE OR DISTRIBUTER

The following checklist should be tailored by each company to its own needs. Key factors vary significantly with the products and countries involved.

Size of Sales Force

Sales Record

Territorial Analysis

Product Mix

Facilities and Equipment

Marketing Policies

Customer profile

Principals represented

Promotional thrust

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