Question:
Following on from the BRICs, the large emerging markets that were identified as key for future business development, Morgan Stanley dubbed Indonesia, South Africa, Brazil, Turkey and India ‘The Fragile Five’, potentially indicating that while they are emerging markets there is still a level of risk related to them..As a newly appointed export operations manager of a medium sized company manufacturing specialist electronic equipment for business customers, you have been asked to make recommendations to the Board of Directors on the operational aspects of dealing with emerging markets.
Introduction
Economic growth of a nation is boosted by the international trade. It must be noted that in 2010, the world had encountered vigorous growth in terms of global trade (United Nations, 2014). Various organizations are focusing on investing in the emerging economies in order to capitalize huge opportunities. The importance developing nations in terms of trade are significantly influencing the business operations of different firms across the world (Luo & Tung, 2007). The leading multinational organizations are targeting emerging countries due to various reasons. First of all, the labor force is cheaper in the developing economies such as China and India. On the other hand, significant growth of middle income group has provided a huge market for international products and services. Increasing number of middle class has contributed in enhancing demand as they are known as consumer class. The logistics service in the emerging nation has been also developing in order to facilitate the international trade operations (KPMG, 2011). Additionally, mode of payments is a important aspect which must be scrutinized by the investors in order to ensure sustainable growth through achievement of predetermined objectives of the international business integration. This paper will focus on discussing the operational activities of a company seeking to integrate its business operation in the foreign market.
This paper will consider a medium sized business organization which is emphasizing on exploring the emerging markets as a part of international trade activities. The organization has been engaged into manufacturing of electronic equipments of business customers. Presently, the company ships its products to the developed nations of Western Europe. The management of the organization has decided to conduct its business activity in the Indian market. India is a developing nation with large potential for achieving sustainable growth (Grimwade, 2000). International investors can choose from wide range of business sectors which are booming in India. The market of electronic equipments is found to be rapidly growing in India as the growing population is becoming technology dependent. The export operations manager of the company has been recently appointed and asked to make recommendations regarding different operational activities in order to expand it in India. This report focuses upon identification of the important operational aspects in conducting international trade such as mode of transport delivery terms, mode of payments and credit period allowed to the business clients (Rugman & Hodgetts, 2003). This paper will review different mode of transport and payment in order to choose the most appropriate one or alternatives for this business firm.
Transport and delivery of the products manufactured by the organization is one of the major operational activities. Presently, the organization has been delivering its products to the developed nations of Western Europe. Now the company has chosen to ship its products to the business clients in India. First of all, the major objectives of the logistics system of the company that will be responsible for transporting and delivering products to the Indian business clients must be identified. The company will focus on ensuring the following:
Transport and delivery of the electronics equipments by the company must focus on fulfilling the above objectives in order to ship their products to Indian business clients. First of all, the available options of transport and delivery must be discussed along with the pros and cons of each system in order to identify the most appropriate option for the company. In order to choose the transport and delivery term, the following aspects needed to be considered:
Viability of Road Transport:
Road transport is considered to be one of the most flexible options for undertaking the operational activities of International trade in Europe. The motorway network is found to be very efficient and provide quick delivery option. Additionally, the cost of transport is comparative low and the company can easily schedule the transport according to its personal viability. Moreover, the transport procedure can be easily tracked by the company (Raven, 2000). However, in the given situation, it is not possible to deliver the electronic equipments with the aid of road transport as India cannot be connected through land. Hence, the option of road transport cannot be considered (Folsom, Gordon & Spanogle, 2009).
Viability of Sea Transport:
Sea transport is another option which is widely used in case of international trade. It has been observed that when the clients do not impose significant pressure of fastest delivery, sea transport is considered to be one of the best options. There are two ways for shipping via ocean freight: full container load ocean freight (FCL) and less than container load ocean freight (LCL). In first type, the logistics partner will help in suggesting the size of container according to the volume as well as type of the product that needs to be shipped. The second type is used, when the exporter do not have adequate cargo for filling the container load. Hence, the exporter only needs to pay for the space utilized in the container. The rate will be dependent on the volume of the product. Additionally, another way is to use both sea and road transport for shipping the product. In this method, the cargo can be transported to the nearest destination through ocean freight and therefore use road to reach the destination; this can be also cost-efficient for the company (Valentinov & Chatalova, 2013).
Insurance and Documents:
Few things must be kept in mind while choosing the sea transport for delivering the product. The consignments needed to be protected with insurance. According to the maritime transport conventions, the company has certain insurance cover. However, it is advised to opt for additional insurance such as general cargo insurance.
It must be noted that, in case of sea transport, the company needs to make sure the consignments are accompanied by Sea Waybill or Bill of Lading. It is very important as these documents help in understanding the terms of the contract of transport along with the name of the consignment owner. As this company will start its business operation in India, the clients will new. Hence, it is suggested that the company must use Bill of Lading as it permits the company to keep hold of the ownership of the goods until those re released to the customers. It is evident that significant risk is associated with releasing the goods before realization of the revenue unless the company is aware of the creditworthiness of the client. Hence, Bill of Lading will provide documentary security along with greater control over the consignments.
Suitability of Sea Transport in This Case:
The major advantages of sea transport for the company is, it will help in shipping large volume at lower price in comparison to the air freight. Additionally, shipping containers can be utilized for further transportation by railways or road. It is known that, India is well connected through railways. Hence, it will be advantageous for the company to adopt the combination of sea and road transport for delivering the products to the new business clients (Grath, 2008).
However, it must be considered that there are some major disadvantages which need to be considered by the company while it is adopting the sea transport. It has been found that the shipping through sea is slower in comparison to other transport. Additionally, it has been found that the unfavorable weather leads to huge delay in the delivery. The timetables and routes of sea transport are not flexible. Additionally, one of the major issues of sea transport is, it does not provide easy option for tracking the shipment procedure. While sending the products to India, the company needs to bear the cost of port duties as well as tax. It is evident that further transportation must be carried out overland in order to deliver the product to the final destination. The basic freight rates of sea transport are reliant upon the fuel and currency surcharge (Hill, 2003).
Viability of Air Transport:
Air transport is the fastest at the same time most expensive mode of transport. In case of managing the operations of international trade, air transport is highly reliable. In order to choose the best mode of transport for the company, the major advantages, disadvantages and requirements must be analyzed.
Insurance and Documents:
The general cargo insurance is also applicable in case of air freight. For air transport, general cargo insurance has three levels: A, B and C. Additionally, the air transport may use the Institute Cargo Clauses (Air). Hence, the company must choose the insurance on the basis of the potential risk associated with the consignment. The Air Waybill is necessary for air transport as it is the contract between the business and the air carrier (Gov.uk, 2012).
Advantages and Disadvantages
It has been found that the air transport has various advantages for delivering product overseas. The principle advantages of air freight are the quick delivery of products over long distance. The customers demanding quick delivery need to opt for the air transport. Additionally, air freight provides high level of security for the sensitive products. Moreover, air freight can be used for wide range of goods.
However, air transport has several issues which must be considering by the company before choosing the air freight as the mode of transport. It has been estimated that the air transport is associated with high cost in comparison to other options. Additionally, it is also not suitable for all type of goods. Sometimes, due to weather condition and some internal issues, flights are delayed or cancelled. Additionally, the exporter needs to pay tax for each airport used during the transportation of the products. It has been observed that the currency surcharge along with fuel cost is added to the cost of air freight. It must be considered that further transportation will be required from the airport to the final destination mentioned by the clients (Gov.uk, 2012).
Assessing the two modes of transport ad delivery terms, it is recommended that the combination of ocean and road/ rail transport will be appropriate for exporting the electrical equipments to India. It will cost lower and appropriate for medium size organization for the new business integration. An appropriate freight forwarder must be chosen in order to manage this operation.
Cash in Advance:
Cash in advance or prepayment is associated with almost zero risk regarding international trade payment. In this case, payment will be received by the company before delivering the product. In order to pay in advance, wire transfer and credit cards are considered to be the most common options (Da Costa, 2010). However, as the company is initiating its foreign operations in India, the clients will not be able to trust the company to make advance payments. This mode of payment will not seem to be attractive to the clients. Hence, the company can lose its market to the competitors. Hence it can be stated that cash in advance or prepayment is not a suitable option for this company expanding its trade activities in India (Folsom, Gordon & Spanogle, 2009).
Letter of Credit:
Letter of credit is considered to be the most secure instrument which is available for the international businesses. First of all, the concept of Letter of Credit must be understood. Letter of credit is the commitment made by the bank on behalf of the client that the payment will be made to the exporter when the terms as well as conditions mentioned in the Letter of Credit are satisfied and it will be verified with the aid of production of relevant documents. The client needs to pay the bank charge for rendering this service to the international trader. It has been found that in India, Letter of Credit is a useful tool for making payment (Kumar, 2000). The reason is, it will be difficult for the organization to obtain all relevant information regarding the creditworthiness of the foreign client. But, when the bank takes the responsibility of the payment, the exporter can be ensured that if the documents are produced, payment will be received. It can be observed that the letter of credit helps in protecting the purchaser as they need not make any payment before the shipment of the product. Hence, it will be also preferred by the Indian clients (Da Costa, 2010).
Documentary Collection:
Documentary collection refers to the transaction in which the exporter needs to delegate the collection of payment to the remitting bank which will be responsible for sending documents to the bank of the importer. The amount received from the importer will b remitted to the company or exporter through the banks participating in the collection procedure and exchanging relevant documents (Zhou, Zhong & Wahab, 2013). Document collection procedure uses a draft which is paid by the importer on face value on the specified date. The draft will give the instruction which will specify the required documents for transfer of title to the products. In this case, the bank will act as a facilitator. The cost associated with this process is less than letter of credit. However, this process does not offer verification and it has limited resource (Anna Wodyńska, 2008).
Open Account Transaction:
It has been found that in case of the Western Nations, the company has adopted open account transaction. In this case, the exporter will offer credit period of 30 to 90 days. It may seem to be the most advantageous option from the importer’s perspective. As the company is just starting its operation in India, the clients will be new and it will be difficult to allow the credit period. Hence, the risk will be high in this case. Later, this can be considered as the mode of payment (Folsom, Gordon & Spanogle, 2009).
From the above discussion, it can be stated that the letter of credit will be appropriate mode of payment for the company (Bergami, 2014). Later, the company can consider open account terms for payment in order to compete in the Indian market (Maria Sierpińska, 2011).
Conclusion
This report has provided an insight to the appropriate mode of transport and delivery along with the payment terms. It has been found that, for the medium sized enterprise, combination of sea transport and road/ rail transport will be suitable. It is advised that the company must ensure that the consignments are accompanied by Bill of Lading. Additionally, general cargo insurance is needed. In case of payments, it has been found that Letter of credit will be initially appropriate for the company. In order to deal with the competitors in the Indian market, the company needs to consider open account terms for offering credit period in order to attract the clients
References
Anna Wodyńska, A. (2008). Transactions Security Tools in Account Receivables Management. Contemporary Economics, 2(1). doi:10.5709/ce.1897-9254.o48
Bergami, R. (2014). The Link Between Incoterms 2000 and Letter of Credit Documentation Requirement and Payment Risk. Journal Of Business Systems, Governance & Ethics, 1(4). doi:10.15209/jbsge.v1i4.91
Da Costa, G. (2010). International trade and payments. Mumbai: Himalaya Pub. House.
Folsom, R., Gordon, M., & Spanogle, J. (2009). International business transactions in a nutshell. St. Paul, MN: West.
Gov.uk,. (2012). Transport and distribution for international trade – Detailed guidance – GOV.UK. Retrieved 31 January 2015, from https://www.gov.uk/transport-and-distribution-for-international-trade
Grath, A. (2008). The handbook of international trade and finance. London: Kogan Page.
Grimwade, N. (2000). International trade. London: Routledge.
Hill, C. (2003). International business. Boston, Mass.: McGraw-Hill/Irwin.
KPMG,. (2011). International Trade and Customs A global approach to grow beyond borders. Mexico: KPMG.
Kumar, B. (2000). Letter of Credit Fraud. Journal Of Financial Crime, 7(3), 251-254. doi:10.1108/eb025944
Luo, Y., & Tung, R. (2007). International expansion of emerging market enterprises: A springboard perspective. J Int Bus Stud, 38(4), 481-498. doi:10.1057/palgrave.jibs.8400275
Maria Sierpińska, M. (2011). Methods of Account Receivables Recover. Contemporary Economics, 4(4). doi:10.5709/ce.1897-9254.o193
Raven, J. (2000). Trade and transport facilitation. Washington, DC: World Bank.
Rugman, A., & Hodgetts, R. (2003). International business. Harlow, England: Prentice Hall/Financial Times.
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Valentinov, V., & Chatalova, L. (2013). Transaction Costs, Social Costs and Open Systems: Some Common Threads. Syst. Res., 31(2), 316-326. doi:10.1002/sres.2204
Zhou, Y., Zhong, Y., & Wahab, M. (2013). How to make the replenishment and payment strategy under flexible two-part trade credit. Computers & Operations Research, 40(5), 1328-1338. doi:10.1016/j.cor.2012.12.013
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