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. The organization is currently shipping to developed markets in Western Europe
The issues to be included in the report are:
The company currently uses open account payment terms for its European customers and transports its products using road freight transport.
Selection criteria and application:
Indian market
Part 1
Transport and Delivery Terms
Part 2
Payment and credit
Payment issue
Why the consumer didn’t pay on time?
– Country risk
-Bank risk
Bank in developing countries
Corruption/ bank folds
-Company risk
bankruptcy – How long does the company can pay for it?
We have to access the Level of risk in that country
– negotiate terms according to risk
– We have to know that situation in that country
PAYMENT OPTIONS
I need reference in real company.
Customers try to delay payment.
PAYMENT METHOD
Choose the one method that is appropriate for the country that we chose
buyer’s cheque, BILLs FOR COLLECTION, BILL OF EXCHANGGE
Recent developments have shown that investors have fallen out of love with emerging markets. News state that the emerging market stocks have been trailing their rich world peers. In most of the countries the currencies are falling. For instance, Russia is one country that is worst hit in this area. Recently, the Russian rouble fell by 30% against the doller. However, there are some emerging markets that can be found in a number of Asian countries. For instance, India is one such country that has an emerging market. In Q1 2014, India’s economy increased to 4.6%. During the first five months of 2014, the FDI flow in India amounted to US$13 billion. This shows that some of the Asian countries including India and China are one of the best export areas for companies.
The BRICs or the four countries of Brazil, Russia, India and China are still being eyed by a number of international companies since their markets have emerged rapidly in the last couple of years. However, even though these countries have briskly emerging markets, none of these countries will become developed in the next few years even under the best conditions.
Any international organization which aims to have a good base for export market in any country there are a few every essential things that needs to be remembered. Firstly, the growth of economy will be maintained and the secondly it needs to be considered whether the environment would be such as to result in long term profits (Veliyath & Brouthers, 2010). With regard to long-term profits, the probable answer would be positive e but for maintenance of the growth of economy, the recent economic run is not enough to guarantee anything.
It is known business fact the emerging markets are comparatively safer, but it is also known that the country risk has lessened in the international markets. The proportion of debt on the emerging market sovereign is different from the proportion of enhancement in the economic fundamentals.
The emerging markets of the developing countries are extremely volatile and this uncertainty tends to impact the foreign investors to a great extent. Additionally, even after a number of reforms there are some longstanding problems that are usually connected to these developing country markets. These include weakened government institutions, corruption, unreconstructed financial systems, erratic legal policies, unreliable regulatory regimes and restricting labor markets.
Therefore, it can be construed that even if the emerging markets are far less risky than what it used to be around five or ten years ago, these markets are still not without risk and safe for foreign investors. Risks relating to the emerging markets have not vanished and have become more critical due to the increasing dependence on the industrialized economy and emerging economy.
India’s economy has grown to a large extent and today it gives a number of opportunities for the multi-national companies to explore and expand their businesses.
The International Monetary Fund states that the Gross Domestic Product (GDP) of India is at US$1.53 trillion. This makes the Indian Economy the tenth largest in the world. The Purchasing Power Parity (PPP) of the country is US$4.06 trillion. This makes the Indian economy fourth largest in the world. During the year 2009-2010 the GDP growth rate of the country was 8% and in 2010- 2011 it was around 8.6%. This has made India one of the top five fast growing economies in the entire world (Baena, 2011).
Additionally, India also has one of the top three strategic growth markets. This helps the foreign companies to look at the country when they want to expand their foothold and increase their success in business. Among the attractive business destinations in the world India is one of the top countries (Fostel & Geanakoplos, n.d.). According to the UNCTAD World Investment Report of 2010, India is considered as the second most attractive location for Foreign Direct Investment in the year 2010-2012. The report had analyzed the international trends and sustainable growth of the foreign direct investment inflows and came to the conclusion.
The country’s sustainable growth is connected with the reforms in the market, the foreign direct investment inflows, the foreign exchange resources and the rise in real estate and IT markets (Bastia, 2008).
Nevertheless, it can be stated that even though the exporting companies have a number of opportunities when exporting in a diverse country like India, there is also a huge amount to challenges for the companies. The country has a multifaceted market dynamics which needs to be understood by any company planning to enter the Indian market area. Additionally, the companies also needs to consumer attitudes and expectations for establishing a successful business entity in the country.
Part I: Transport and Delivery Terms
The process of transportation involves the movement if the products from one particular source to another. The entire process of transportation may be made by different manners such as by air, water, road, pipeline or rail. For any business owner the primary goal would be to minimize the costs of transportation and also meet the demand of the products. The costs usually depend on the distance between the source and the destination. It also depends on the means chosen for transportation and the size of the quantity of the products (Bernard, Grazzi & Tomasi, n.d.). As a result during export of goods from one country to another the costs regarding transportation are extremely significant.
With respect to the transport and delivery of the products to the customers, there are a number of different modes for the transportation. Transportation may be made through air, or pipeline or rail or truck or water. All of these modes of transportation have their advantages and disadvantages (EIU, 2014). Nonetheless, all the modes of transport are not available to all types of market. The modes of transport available depend on a variety of factors. Firstly, the product options which relates to the different products that can be shipped by a particular mode. Secondly, the speed of delivery of the products is essential as to how fact the transportation can be made to the buyer’s location from the shipper’s area. Thirdly, the accessibility of transportation refers to whether the mode of transportation will make the delivery at the buyer’s proposed location or not. Fifthly, the shipment costs as to the distance that needs to be covered. Sixthly, the amount of product that can be shipped at one given time is to be determined. Finally intermodal shipping where two or modes of transport can be used for the transportation of goods (Bernard, Grazzi & Tomasi, n.d.).
Here it needs to be mentioned that the company Omicron Electronics being a supplier of electronic goods to the business customers, the goods that need to be transported are generally bulk and in large quantities. Hence, the modes of transport are essential criteria while determining the market where the goods are to be sold.
When cargo handling is being talked about the four primary means of transport are roadways, waterways, railways and airways. Roadways play a major role in handling cargos. Generally the transportation is done by lorries or trucks. Water is however one of the cheapest means of transportation and hence large volumes of trade is done through water channels. Railways are also essential in handling cargo and generally they have special wagons to carry cargo. The positive part of handling cargo through rails is that large volumes can be transported at a very short span of time. Airway on the other hand is very fast but is also very expensive (Nayan, 2011).
The above chart depicts the present status of the primary freight movement in the road transport system in India (kpmg, 2014).
Even if transportation cannot be considered as the cause of international trade it can be considered as an important enabling factor and essential for globalization (diva-portal, 2014). With regard to the transportation and delivery terms in the country India a number of essential factors need to be addressed before considering the expansion of business in the country (kpmg, 2014). A very essential development problem is the inability of the transport infrastructures to support the flows hence undermining the accessibility to the global market. Infrastructure is essential for the promotion of international trade (Blitz & Huij, 2012). Other transportation services such as finance, distribution, logistics, marketing etc also are very complex and hence needs to be dealt with more focus in such developing countries. India has a very complicated legal, political, financial and cultural environment where the operation of international transport system would be full of variety of risks. Exchange rates, tariffs, quotas, regulations have variety of implications making it difficult for the international market to enter (Nayan, 2011).
Part II: Payment and Credit
In developing countries like that of India, the concept of international trade is considered to have lower risk which means negative impacts are quite lesser in number than that of positive impacts. Financing trade exchange is famous as these are often short term, secured, speedily completed, and self liquidating. There are three areas of risks mainly, micro risks, macro risks, and product risks. Micro risks are associated with that of the customer level which is confined to operational as well as financial risks in the business (Pendse&Gole, n.d.). Macro risks are those external factors having a tendency to effect adversely upon customer’s international trading business. Certain common problems are outcome of lack of appreciating country risk, industry risk, foreign exchange risk, fraud, and bank risk.
Country Risk – These involve political or economic risks in the form of instability of the nation, exchange controls, and penchant of the business for protecting domestic industry. All these mentioned factors influence in the nation’s payment commitments like in case of India. India is viewed as justified short term risk. This is because the nation has liberalized exchange control, has very few default histories upon foreign debt commitments and is said to possess quite a robust economy (Thangam&Uthayakumar, 2011). The most negative aspect that holds the country back is the risk of political problems led by separatist issue. There is often friction amidst commercial bankers and simultaneously business considerations are ignored.
Foreign Exchange Risk – Payments as well as receipts in foreign currency is daily norm in international trade and business is always at the mercy of fluctuations in exchange rates owing to several political or economic speculative reasons. It is important that trading firms forge connections with foreign exchange trading zones on banks since only then they can remain ahead of the dynamic market, and also enter into contracts related to foreign exchange for protecting their profit margin (Oseni, 2013). In the mentioned nation, surprisingly, several lending officers at banks imagine dealing rooms to be mysterious, thereby leaving the customers to discuss issues of exchange rates. This is not acceptable and lenders should make efforts of gaining a preliminary understanding of market trends.
Bank Risk – While financing exporter or importer, a bank usually looks to security of backing document that is issued by another bank (Kuchimov, n.d.). However, many banks ignore this issue to specialized unit for their guidance. Contribution to business decision is necessary from the branch management and if it feels branch can maintain recourse to loyal customer, some flexibility exists to deal with increased bank risk.
Documentary Credits – The bank has two specific roles – as a financing institution to the importer and second as the bank of an exporter. It has to support the importer to pay the bill that is drawn under DC and hence it will have funds to back up (Blitz &Huij, 2012). Trade finance is self-liquidating; hence products need to be readily available for sale. There always exist the risks that an errant exporter may ship substandard products or may fill rubbish and so one may keep record by getting possible information from the bank about the exporter (Jehong Lee, 2007). It is to be considered several macro risks and this is imperative that products are well insured by renowned insurance company. The bank retains control over the products until importer receives them and this is achieved by effective transport document such as Bill of Lading or Air Waybill.
International trade is helpful in developing an economy, and at the same time several domestic players may be outperformed by multinationals that are financially stronger and compelled to get merged (Blitz &Huij, 2012). At times these multinational companies become excessively powerful in developing countries like that of India, and this may dictate political aspects to government for benefit.In developing countries like that of India, the concept of international trade is considered to have lower risk (Hoefele, Schmidt-Eisenlohr& Yu, n.d.). Financing trade exchange is famous as these are often short term, secured, speedily completed, and self liquidating.
Hence from the above given information, it may be indicated Omicron Electronics certainly has potential market to be covered only with few stages of risks at various levels.
Recommendations:
For mitigating various risks associated with non-payment, the bank that is negotiating should understand the basic transaction and remain comfortable that the trading parties should honor their commitments. Operational competency as well as integrity of the basic issue needs to be considered with care, as it can be quite tedious deal with banks that usually reject document as well as delay payments owing to trivial discrepancies (Aigbe&Akpojaro, 2014).
During sending shipping document to the importer through his bank, the Bill of Exchange is enclosed by the exporter after due sign (Thangam&Uthayakumar, 2011). In my personal perspective, international legal strength of Bill of Exchange at current scenario are required to be discussed upon insurance in export proceeds to seller.
In this respect, incoterms may also be recommended. These refer to the set of rules that state the responsibilities of both buyers and sellers for delivering goods under Sales contracts. Incoterms are published by the International Chamber of Commerce and have wide applications within commercial transactions (Blitz &Huij, 2012).
Conclusion
Most companies are now inclined to invest in emerging markets as these markets tend to produce substantial returns. Nevertheless, before investing all investors must make sure that all these high returns are to be judged within the structure of rewards and risks. Hence risks relating to politics, bankruptcies, corporate governance system, capital raising, foreign exchange rates etc. must be kept in mind before indulging into the emerging markets of the developing countries such as India.
Export Operations Manager
Omicron Electronics
References
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