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15- 0 © The McGraw-Hill Companies, Inc., 1999 Irwin/McGraw-Hill Chapter 15 Exporting and Logistics Special Issues for The Small Business
15- 1 © The McGraw-Hill Companies, Inc., 1999 Irwin/McGraw-Hill Feb. 3 - Trade Show and Order Mar. 3 - Financing Jul. 3 - Import License and Letter of Credit Aug. 1 - Closing The Deal Sep.4 - Production and Shipment Nov. 1 - Submission of Letter of Credit Dec. 12 - Final Inspection of Shipping Schedules Dec. 13 - Test Run Jan. 2 - “It’s on the way” An Export Sale From Show to Installation
15- 2 © The McGraw-Hill Companies, Inc., 1999 Irwin/McGraw-Hill The Exporting Process Licenses General Validated Documentation Export declaration Commercial invoice Bill of lading Consular invoice Special certificates And other documents Leaving the Exporting Country Physical Distribution International shipping and logistics Packing Insurance Entering the Importing Country Tariffs, taxes Non-tariff Barriers Standards Inspection Documentation Quotas Fees Licenses Special certificates Exchange permits And other barriers
15- 3 © The McGraw-Hill Companies, Inc., 1999 Irwin/McGraw-Hill Import Restrictions Tariffs Exchange Permits Quotas Import Licenses Boycotts Standards Voluntary Agreements Other Restrictions
15- 4 © The McGraw-Hill Companies, Inc., 1999 Irwin/McGraw-Hill Examples of Commerce Control List Export Regulations 4997B Viruses or viroids for human, veterinary, plant, or laboratory use, except hog cholera and attenuated or inactivated systems. Controls for ECCN 4997B: Unit: Report in "$ value." Validated License Required: Country Groups QSTVWYZ. GLV $ Value Limit: $0 for all destinations. Processing Code: CM. Reason for Control: National security. Special Licenses Available: See Part 373. 3D94F "Software" specially designed for the "development" "production," or "use" of items controlled by 3A80C, electronic test equipment controlled by 3A93F, or manufacturing and test equipment controlled by 3B91F. Controls for 3D94F: Unit: $ value Validated License Required: Country Groups S, Z, Iran, Syria, South African military and police. Reason for Control: FP (foreign policy) GTDU (general license): Yes, except destinations listed under Validated License Required. SOURCE: Export Administration Regulations, Commerce Control List, Part 799, 1, March 1994.
15- 5 © The McGraw-Hill Companies, Inc., 1999 Irwin/McGraw-Hill 4996B Western Red Cedar (Thuja Picata Logs and Timber, and Rough, Dressed and Worked Lumber Containing Wane Listed in Supplement No. 4 to Part 377) CONTROLS FOR ECCN 4996B UNIT: Report in "Million Board Feet Scribner." VALIDATED LICENSE REQUIRED: Country Groups QSTVWYZ and Canada. GLV $ VALUE LIMIT: $0 to all destinations. PROCESSING CODE: SS. REASON FOR CONTROL: Short Supply. SPECIAL LICENSES AVAILABLE: None.
15- 6 © The McGraw-Hill Companies, Inc., 1999 Irwin/McGraw-Hill CIF- (Cost, Insurance, Freight) to a named overseas port of import. A CIF quote is more meaningful to the overseas buyer because it includes the costs of goods, insurance, and all transportation and miscellaneous charges to the named place of debarkation. C&F- (Cost and Freight) to a named overseas port. The price includes the costs of goods and transportation costs to the named place of debarkation. The cost of insurance is born to the buyer. FAS- (Free Alongside) at a named U.S. port of export. The price includes cost of goods and charges for delivery of the goods alongside the shipping vessel. The buyer is responsible for the cost of loading onto the vessel, transportation, and insurance. Terms of Sale
15- 7 © The McGraw-Hill Companies, Inc., 1999 Irwin/McGraw-Hill Who’s Responsible for Costs Under Various Terms? *Who absorbs export packing? This charge should be clearly agreed on. Charges are sometimes controversial. **The seller has responsibility to arrange for consular invoices (and other documents requested by buyer's government). According to official definitions, buyer pays fees, but sometimes as a matter of practice, seller included in quotations. Export packing*Buyer Seller SellerSeller Inland freight Buyer SellerSeller Seller Port charges Buyer Buyer Seller Seller Forwarder's fee BuyerBuyerBuyer Seller Consular fee Buyer Buyer Buyer Buyer ** Loading on vessel or plane Buyer Buyer Buyer Seller Ocean freight Buyer BuyerBuyer Seller Cargo insuranceBuyerBuyer Buyer Seller Customs duties Buyer Buyer Buyer Buyer Ownership of When goods on When goods When goodsWhen goods goods passesboard an inlandunloaded byalongside on board air carrier (truck, rail,inland carriercarrier, in or ocean etc.) or in hands hands of aircarrier at port of inland carrieror ocean carrierof shipment FOB (Free on FOB (Free on FAS (Free CIF (Cost Board) InlandBoard) InlandAlong Side)Insurance, Carrier atCarrier atVessel orFreight) at FactoryPoints ofPlane at PortPort of Shipmentof Shipment Destination
15- 8 © The McGraw-Hill Companies, Inc., 1999 Irwin/McGraw-Hill Letters of Credit Revocable Irrevocable Bills of Exchange Cash in advance Open Accounts Forfeiting Getting Paid Foreign Commercial Payments
15- 9 © The McGraw-Hill Companies, Inc., 1999 Irwin/McGraw-Hill Export Payment Terms Risk/Cost Tradeoff Risk to Exporter Least Risk____________________________________________ Highest Risk ConfirmedIrrevocableBankBank Cash inIrrevocableLetter ofCollectionCollectionOpen AdvanceLetter of CreditCreditSight DraftTime DraftAccount Cost to Buyer Highest Cost ___________________________________________ Least Cost SOURCE: Business America, February 1995.
15- 10 © The McGraw-Hill Companies, Inc., 1999 Irwin/McGraw-Hill A Short Hedge - U.S. Company Selling to a Japanese Firm February 6 July 6 (same year) Spot Market TransactionsFutures Market Transactions Note: The $ 12,410 gain in the futures market less the $ 11,540 loss in the spot- market transactions left the company with a slight gain of $ 870. After commissions are paid, there will be a slight loss on this transaction. U.S. company agrees to sell 100 gross of western shirts to a Japanese retailer for 10 million yen for delivery in may, with payment due July 6. Current spot market for yen is $0.010106 (U.S.)/yen U.S. company receives 10 million yen and exchanges the yen for dollars at the current price of $0.008952 (U.S.)/yen to receive. The company realized a loss due to decreasing value of the yen during the time of exposure. $101,060 - 89,520 = To hedge the risk of a falling price for yen, the company sells August 5 yen contracts for $0.010196 (U.S.)/yen and receives a credit (10 million times $0.010196=) for The U.S. company completes the hedge by buying August 5 yen contracts for $0.008955 (U.S.)/yen (10 million times $0.008955=) The company realized a gain the futures market with which to offset the loss in the spot market. $101,960 - 89,550 = $ 101,060 $ 89,520 ($ 11,540) $ 101,960 $ 89,550 $ 12,410
15- 11 © The McGraw-Hill Companies, Inc., 1999 Irwin/McGraw-Hill Transaction Exposure Transaction Exposure Occurs When a Company: Has assets in one currency that it expects to convert to another to realize a profit. Has assets denominated in one currency that must be converted into another at some expected value. Borrows money in one currency that, when repaid, must be exchanged to make repayment. Purchase goods for resale in one currency, sells them in another, and needs to convert the proceeds into a third currency to realize planned profits.
15- 12 © The McGraw-Hill Companies, Inc., 1999 Irwin/McGraw-Hill Export Documents Export Declaration Consular Invoice or Certification of Origin Bill of Lading Commercial Invoice Insurance Policy or certificate Licenses Others Health Certificates Packing Lists Etc.
15- 13 © The McGraw-Hill Companies, Inc., 1999 Irwin/McGraw-Hill Customs-Privileged Facilities Foreign Trade Zones Offshore Assembly (Maquiladoras)
15- 14 © The McGraw-Hill Companies, Inc., 1999 Irwin/McGraw-Hill Real Physical Distribution Costs Between Air and Ocean Freight - Singapore to the United States In this example, 44,000 peripheral boards worth $7.7 million are shipped from a Singapore plant to the U.S. West Coast. Cost of capital to finance inventories is 10 percent annually; $2,109 per day to finance $7.7 million. Transport costs$31,790 $ 127,160 (in transit 21 days)(in transit 3 days) In-transit inventory financing costs$ 44,289$ 6,328 Total transportation costs$ 76,079$ 133,487 Warehousing inventory costs(60 days @ $2,109 per day) Singapore and U.S.$ 126,540 Warehouse rent $ 6,500 Real physical distribution costs $ 209,119$ 133,487 OceanAir SOURCE: Adapted from: "Air and Adaptec'c Competitive Strategy," International Business, September 1993, p.44.
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