Methods Of Exporting And Channels Of Distribution

The most common methods of exporting are indirect selling

and direct selling. 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:

*    The size of the firm.

*    The nature of its products.

*    Previous export experience and expertise.

*    Business conditions in the selected overseas markets.

DISTRIBUTIONS CONSIDERATIONS

*    Which channels of distribution should the firm use to

market its products abroad?

*    Where should the firm produce its products and how

should it distribute them in the foreign market?

*    What types of representatives, brokers, wholesalers,

dealers, distributors, retailers, and so on should the

firm use?

*    What are the characteristics and capabilities of the

available intermediaries?

*    Should the assistance of an EMC or ETC be obtained?

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 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.

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.

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.)

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:

*    Current status and history, including background on

principal officers.

*    Personnel and other resources (salespeople, warehouse

and service facilities, etc.).

*    Sales territory covered.

*    Current sales volume.

*    Typical customer profiles.

*    Methods of introducing new products into the sales

territory.

*    Names and addresses of U.S. firms currently

represented.

*    Trade and bank references.

*    Data on whether the U.S. firm's special requirements

can be met.

*    View of the in-country market potential for the U.S.

firm's products. This information is not only useful

in gauging how much the representative knows about the

exporter's industry, it is also valuable market

research in its own right.

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.

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

*    not have business dealings with competitive firms

(this provision may cause problems in some European

countries and may also cause problems under U.S.

antitrust laws);

*    not reveal any confidential information in a way that

would prove injurious, detrimental, or competitive to

the U.S. firm;

*    not enter into agreements binding to the U.S. firm;

and

*    refer all inquiries received from outside the

designated sales territory to the U.S. firm for

action.

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. 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:

*    How far in advance must the representative be notified

of the exporter's intention to terminate the

agreement? Three months satisfy the requirements of

most countries, but a verifiable means of conveyance

(e.g., registered mail) may be needed to establish

when the notice was served.

*    What is just cause for terminating a representative?

Specifying causes for termination in the written

contract usually strengthens the exporter's position.

*    Which country's laws (or which international

convention) govern a contract dispute? Laws in the

representative's country may forbid the representative

from waiving its nation's legal jurisdiction.

*    What compensation is due the representative on

dismissal? Depending on the length of the

relationship, the added value of the market the

representative has created for the exporter, and

whether termination is for just cause as defined by

the foreign country, the U.S. exporter may be required

to compensate the representative for losses.

*    What must the representative give up if dismissed? The

contract should specify the return of patents,

trademarks, name registrations, customer records, and

so on.

*    Should the representative be referred to as an agent?

In some countries, the word agent implies power of

attorney. The contract may need to specify that the

representative is not a legal agent with power of

attorney.

*    In what language should the contract be drafted? An

English-language text should be the official language

of the contract in most cases.

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.

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

*    How many field sales personnel does the representative

or distributor have?

*    What are its short- and long-range expansion plans, if

any?

*    Would it need to expand to accommodate your account

properly? If so, would it be willing to do so?

Sales record

*    Has its sales growth been consistent? If not, why not?

Try to determine sales volume for the past five years.

*    What is its sales volume per outside salesperson?

*    What are its sales objectives for next year? How were

they determined?

Territorial analysis

*    What territory does it now cover?

*    Is it consistent with the coverage you desire? If not,

is it able and willing to expand?

*    Does it have any branch offices in the territory to be

covered?

*    If so, are they located where your sales prospects are

greatest?

*    Does it have any plans to open additional offices?

Product mix

*    How many product lines does it represent?

*    Are these product lines compatible with yours?

*    Would there be any conflict of interest?

*    Does it represent any other U.S. firms? If so, which

ones?

*    If necessary, would it be willing to alter its present

product mix to accommodate yours?

*    What would be the minimum sales volume needed to

justify its handling your lines? Do its sales

projections reflect this minimum figure? From what you

know of the territory and the prospective

representative or distributor, is its projection

realistic?

Facilities and equipment

*    Does it have adequate warehouse facilities?

*    What is its method of stock control?

*    Does it use computers? Are they compatible with yours?

*    What communications facilities does it have (fax,

modem, telex, etc.)?

*    If your product requires servicing, is it equipped and

qualified to do so? If not, is it willing to acquire

the needed equipment and arrange for necessary

training? To what extent will you have to share the

training cost?

*    If necessary and customary, is it willing to inventory

repair parts and replacement items?

Marketing policies

*    How is its sales staff compensated?

*    Does it have special incentive or motivation programs?

*    Does it use product managers to coordinate sales

efforts for specific product lines?

*    How does it monitor sales performance?

*    How does it train its sales staff?

*    Would it share expenses for sales personnel to attend

factory-sponsored seminars?

Customer profile

*    What kinds of customers is it currently contacting?

*    Are its interests compatible with your product line?

*    Who are its key accounts?

*    What percentage of its total gross receipts do these

key accounts represent?

Principals represented

*    How many principals is it currently representing?

*    Would you be its primary supplier?

*    If not, what percentage of its total business would

you represent?

How does this percentage compare with other suppliers?

Promotional thrust

*    Can it help you compile market research information to

be used in making forecasts?

*    What media does it use, if any, to promote sales?

*    How much of its budget is allocated to advertising?

How is it distributed among various principals?

*    Will you be expected to contribute funds for

promotional purposes?

How will the amount be determined?

*    If it uses direct mail, how many prospects are on its

mailing list?

*    What type of brochure does it use to describe its

company and the products that it represents?

*    If necessary, can it translate your advertising copy?