Transcript GLOBAL POLICY AND PRICING DECISIONS II: MARKETING …

International Product
Pricing
Final exam: W 19th September
Room 823, 9 am
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1.
2.
Which is not usually considered when choosing an international brand name?
A) Location of the factory that produces the product
B) Whether the name is already in use in target countries
C) URL (website) availability
D) Local market pronunciation
When would a global company not choose local branding?
A) When the company is targeting a cosmopolitan market segment
B) The global company acquires a company with local brand equity
C) When the target segment is sensitive to foreign influences
3.
A global firm with several foreign subsidiaries can do which of the following:
A) Sell their global brands under different names in different countries
B) Market regional brands through host country subsidiaries
C) Market a local (host country) brand through a host country subsidiary
D) Any combination of the above
4.
When a global firm acquires a foreign subsidiary with strong local brand equity
A) The firm is likely to notify customers and then change the local brand name
B) The old local brand name will be summarily axed (name eliminated with no notice)
C) The firm may keep the local brand and use it to make positive associations with a global brand
D) None of the above
5.
Strong brand equity in a host country would be due to which factors:
A) Home country company profit
B) Local familiarity and positive associations (via experience, marketing, or information from peers)
C) Successfully competing with multiple brands in a category through incremental improvements
D) Both a and c
6.
Gaining market share typically involves
A) Winning in competition among established brands through incremental change
B) Finding unmet customer needs and then creating a new category or subcategory with the brand
C) Risk avoidance
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Cost classification depends on how costs change with
business activity
Fixed costs do not change with volume
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Variable costs vary in proportion to volume
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◦ Example: Management salaries, most property
◦ Fixed costs are typically allocated (full costing)
◦ Examples: Direct materials, direct labor, variable factory overhead
◦ Also called direct costs
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Step Variable or Step Fixed costs are constant over some
range, then increase
Marginal cost is the cost of an additional unit
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All external reporting uses absorption or full cost
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Internal decision makers may use variable costing
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◦ Marginal cost of carrying one additional airline passenger is near
zero if seats are available
◦ Marginal cost of one additional passenger would be high if a flight
has to be added
◦ Includes fixed factory overhead
◦ Margins are lower than with variable costing
Chapter 12
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COGS $6,000,000
R&D
1,000,000
SG&A
5,000,000
Total $12,000,000
Units
1,000,000
Price/unit
$12
Marginal cost
$6
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COGS $12,000,000
R&D
1,000,000
SG&A
5,000,000
Total $18,000,000
Units
2,000,000
Price/unit
$9
Marginal cost $6
Chapter 12
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Volume 100,000
Setup
$ 50,000
Direct A* 200,000
Total
$250,000
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Cost/unit
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$2.50
* Ave direct cost
per unit at $2.
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Volume
Setup
Direct*
Total
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Cost/unit
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800,000
$ 50,000
400,000
$450,000
$0.56
* Ave direct cost
per unit at $0.50
(A+700,000*$0.29)
Chapter 12
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Assume excess capacity (example 1)
◦ What is the lowest price a company would accept?
◦ If COGS includes $1 fixed factory cost/unit?
◦ Suppose a company prices additional units at direct cost
 Would this affect the price of current units?
 Where does overhead go when products are priced at
variable cost?
 How would a customer react to a price increase later?
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Assume longer production run (example 2)
◦ Would a company accept losses on initial orders to build
a market?
◦ High cost of initial production would deter prospective
customers if passed through in prices
◦ Cost of expected volumes may be used for pricing when
products are early in their life cycle
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Vision Lenses Corporation produced a full line of contact lenses at factories in UK,
Puerto Rico, USA, and Europe. The lenses were marketed globally via subsidiaries.
Consumers in 2001 wanted single-use lenses for convenience and hygiene,
however cost considerations made mass marketing of such lenses impractical.
The lead market for disposable lenses would be Japan, where consumers were
attracted to the hygiene aspect of disposables. Marketers estimated mass market
possibilities in Japan if wholesale prices drop to $0.30 per lens.
Inexpensive new digital technology available in 2001 made possible the volume
production of low cost single-use lenses. R&D staff knew major competitors such
as Johnson and Johnson were racing to exploit the new technology.
Company process engineers estimated factory cost per lens would be about
$2.00 with limited yield and efficiency during the first month of production.
Within three months the cost would fall to $0.50 per lens. At six months, with
lines running at capacity, lens cost could drop below $0.15.
The head of international marketing estimated a market of 500 million lenses per
year if Vision Lenses sell at $0.30. Manufacturing would have capacity for 100
million lenses initially. The company would have to build a new factory campus
to produce 500 million lens. Finance believes the company has access to
sufficient capital to fund the expansion. Gross margins* on legacy products (65%)
were above industry norms.
Company executives believed sales of multi-use contact lenses had limited
growth potential throughout the industry.
Question: At what price should Vision Lenses sell the disposable lenses?
* Gross margin=(Revenue-COGS)/Revenue.
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Need Seekers, Market Readers and Technology Drivers
◦ Need Seekers consistently strive to be first movers and
proactively engage customers to shape new innovations,
and align innovation and business strategies (3M)
◦ Market Readers adopt a second mover strategy and
emphasize incremental change (Samsung)
◦ Technology Drivers stress technology achievement and
both incremental and breakthrough change (Google)
Technological advances that lead to products and
services that gain traction in the marketplace come
through superior insight into customers, as well as
the development of practical value propositions that
will win those customers business (need seekers)
6/10 of the most innovative were need seekers
2/10 of the biggest spenders were need seekers
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http://www.reuters.com/article/2012/08/25/us-apple-samsung-impactidUSBRE87O02I20120825
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Innovation is the real threat to Apple’s margins
Trial publicity has made Samsung’s brand more familiar
Apple and Samsung could end up cross licensing
With high gross margins Samsung (or Apple) can absorb extra costs
 Prices decline in a growing market
 Small competitors have lower margins
http://www.ft.com/cms/s/0/b8b58c22-eea2-11e1-bcf6-00144feabdc0.html#ixzz24c0I4qbU
Samsung sells nearly twice as many phones as Apple. Why is Apple more valuable?
(Apple 2Q profit $11.6bb, iphones estimated 60%; Samsung 2Q profit $4.5bb, phones
estimated 67% of total)
◦ Samsung's gross margin in handsets is well below the levels of Apple (estimated 58%)*:
◦ Apple’s premium brand enables it to sell its devices to telecom operators at higher prices
than Samsung can command.
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Innovation enabled SE Asian shrimp able to capture foreign markets
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In the absence of innovation Apple and Samsung may compete on price alone. (Booz
and Aaker stress importance of innovation). Lower costs and greater access to cash wins
price competition – leaving few producers.
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Returning to Vision Lenses: What has to happen to revenue to achieve the same profit
if gross margin falls to 50%? (Sales must increase 30%) Example: Sales $200 with 65%
gross margin = $130. To achieve $130 gross margin at 50% need $130/.5=$260 sales
*Product gross margins are rarely disclosed by companies. Some information was
disclosed during the trial.
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Apple Inc. (AAPL)’s net margins* have widened at the expense of its main supplier as
Foxconn Technology Group cuts prices to retain orders for iPhones and iPads. (Apple
31%, Hon Hai 1.5%)
Hon Hai is willing to sacrifice margins so it can get volume and scale,” said Vincent
Chen, an analyst at Yuanta Financial Holding Co. in Taipei who has a “buy” rating on
the stock. “Apple is also getting so large that it needs a supplier that can provide such
scale.”
The iPad is “very difficult to make,” Hon Hai founder and Chairman Terry Gou told
shareholders in June. Gou’s strategy has earned him the nickname “Low-Cost Terry,”
according to Chen. Foxconn Technology Group, which employs more than 1.1 million
people worldwide, also assembles Sony Corp. televisions, Hewlett-Packard Co.
computers and Microsoft Corp. game consoles.
Hon Hai’s operating margin* declined in most of the quarters in which Apple’s rose
and widened when its main customer’s narrowed, the data show. Taipei-based
Pegatron Corp. (4938), the only other supplier of iPhones, also has seen its operating
margin decline since getting orders for the handsets, according to data compiled by
Bloomberg.
Monthly factory wage South Korea (Samsung) $2,060. China (Foxconn) $134. Figures
for 2005 at http://www.worldsalaries.org/
* Operating margin = (profit before taxes and interest)/sales. Net = (profit after t&i)/sales.
http://www.bloomberg.com/news/2012-01-04/apple-profit-margins-rise-at-foxconn-s-expense.html
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1.
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3.
4.
5.
6.
Drivers of Foreign Market Pricing
Managing Price Escalation
Pricing in Inflationary Environments
Global Pricing and Currency Fluctuations
Transfer Pricing
Global Pricing and Antidumping
Regulation
7. Price Coordination
8. Countertrade
Copyright (c) 2009 John Wiley &
Sons, Inc.
Chapter 12
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Global pricing is one of the most critical and
complex issues in international marketing.
Price is the only marketing mix instrument that
creates revenues. All other elements entail
costs.
A company’s global pricing policy may make or
break its overseas expansion efforts.
Multinationals also face the challenges of how
to coordinate their pricing across different
countries.
Pricing involves staff from accounting, finance,
tax, legal, and manufacturing, as well as
marketing.
Copyright (c) 2009 John Wiley &
Sons, Inc.
Chapter 12
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Company Goals
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Company costs set the minimum (in most cases)
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Customer Demand – willingness to pay sets the highest price
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Return on investment (ROI)
Market Share
Specified Product Goal (image, segment)
Goals may vary by country or through time.
◦ Cost-Plus Pricing – prices include all costs plus a margin
◦ Flexible Cost-Plus Pricing – adjusts prices to host market conditions
◦ Incremental Cost Approach – removes domestic fixed costs (assumes overhead
absorbed by home market)
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Consumer buying power is a factor
Recall how P&G adapted pricing to the Chinese market
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Tiers target different consumer segments with slightly different products
Risk of brand dilution or cannibalization if handled poorly
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Pricing may involve assumptions about elasticity of demand
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Prices may vary across borders due to levels of competition
Competition
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What do competitors want? Revenue? Market share?
Test by raising or lowering price and watching response
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How is my product or service perceived relative to the competition?
A leading brand or a niche brand may be able to charge premium prices
◦ Note common practice of ‘rate shopping’
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Firms may choose to compete on basis of advertising or distribution (non-price factors)
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Trade margins and length of channels differ among countries
Distribution Channels
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Large scale distributors in Europe and USA get discounts
Every day low prices (no discounts) rejected by powerful retailers
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Movement of goods from low to high price countries
Usually done by unauthorized distributors
Large price differentials between countries can lead to arbitrage
Chapter 12
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◦ Taxation
 Sales taxes vary among countries
 Sales taxes may selectively target imports
 Effect is to reduce demand for imports
 Low tax countries may subsidize prices in
high tax countries
◦ Price controls
 Common in industries where governments
often pay (pharmaceuticals)
 Economy-wide response to inflation scarcity
in some countries
◦ Fiscal and monetary policies
 Affect interest rates (a cost)
 Affects inflation and exchange rates
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Copyright (c) 2009 John Wiley & Sons, Inc.
Chapter 12
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Copyright (c) 2009 John Wiley &
Sons, Inc.
Chapter 12
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Exporting usually adds incremental costs
◦ Shipping, insurance, and additional intermediaries
◦ Tariffs
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Options to lower the export price
◦ Reduce distribution channel length (direct marketing via
internet is one current option)
◦ Eliminate costly features or unbundle features
◦ Make the product smaller (usually with local branding)
◦ Assemble or manufacture the product in foreign markets
◦ Adapt the product to escape high tariffs or tax levies
applied to selected categories
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Position as a premium product
◦ Target upscale customers
◦ Stress product advantages
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Shorten credit terms (better to be a
borrower than a lender)
Pay suppliers slowly (with cheaper currency)
Collect debts quickly
Include escalator clauses in long-term
contracts as a hedge against inflation
Quote prices in a stable currency (buyer
assumes currency risk)
Choose suppliers and components carefully
Draw lessons from countries with a history
of high inflation (such as Argentina)
Published inflation figures are often unreliable
Negotiate distinct rates with each supplier
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Chapter 12
http://www.economist.com/node/21548229
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Since 2007, Argentine prices and the official record have
been different
◦ After 1945 Argentina had periods of high inflation (4,900% in
1989*)
◦ Faced with rising inflation due to expansionary policies after
2002, government officials used price controls
◦ In 2007 officials began to conceal inflation by applying pressure
on the official statistics institute INDEC
◦ The government has gone to extraordinary lengths, involving fines
and threats of prosecution, to try to stop independent economists
from publishing accurate inflation numbers**
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PriceStats, an American provider of inflation data puts the
annual rate at 24.4% and cumulative inflation since the
beginning of 2007 at 137%.
INDEC says that the current rate is only 9.7%, and that
prices have gone up 44% over that period.
*http://academic.reed.edu/economics/parker/f10/201/cases/Argentina.html
**http://www.economist.com/node/21548229
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Suppose China and the USA have fixed
exchange rates
◦ Assume China’s annual inflation is 5%
◦ Assume the USA has 1% annual inflation
◦ At the end of one year one $US buys 3.8% fewer
goods in China (1-1.01/1.05)
◦ Same effect as stronger Chinese currency
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Assume variable exchange rates
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Beginning exchange rate is 30ThB to 1$US
Thailand’s inflation rate is 5%
USA has 1% inflation
Expected exchange rate at end of one year
1.05/1.01*30 = 31.2ThB to 1$US
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Bangkok hotel room costs 1,500
◦ Assume 30 baht to 1$US
◦ Cost in $US is 1,500/30 = $50
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Assume inflation 5% Thailand, 1% USA
◦ Bangkok hotel room costs 1,500*(1.05)=1,575 bt
◦ $50 US is now worth 50*(1.01)=$50.50
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Assume exchange rate fixed at 30/1
◦ $50.50*30=1,515
◦ Hotel room is now 1,575/1,515 too high (3.96%)
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Floating rate: 1.05/1.01*30=31.19bt/$1US
Check:$50.50*31.19bt/$=1,575bt
Chapter 12
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Bangkok hotel room costs 1,500
◦ Assume 30 baht to 1$US
◦ Cost in $US is 1,500/30 = $50
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Assume inflation 100% Thailand, 50% USA
◦ Bangkok hotel room costs 1,500*(2.0)=3,000bt
◦ $50 US is now worth 50*(1.5)=$75.00
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Assume exchange rate fixed at 30/1
◦ $75.0*30=2,250
◦ Hotel room is now 3,000/2,250 too high (33.3%)
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Floating rate: 2.0/1.5*30=40bt/$1US
Check:40bt/$*$75=3,000bt
Chapter 12
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1.
When inflation is higher in the host country than in the home country
A) You expect a floating exchange rate to stay about the same
B) The value of host country currency would fall relative to the home country
C) The value of host country currency would rise relative to the home country
2.
During periods of high inflation
A) Governments might impose price controls
B) Borrowing is generally wiser than lending
C) Global companies prefer to quote prices and get payment in a stable currency
D) All of the above
3.
During periods of high inflation
A) Government inflation statistics are the most reliable resource for pricing
B) Long term contracts should include clauses to increase prices for expected inflation
C) Companies can wait to collect receivables (extend longer credit terms to customers)
D) All of the above
4.
Assume gross margins fall from 60% to 30% and gross profit (revenue minus COGS) is $60
A) Revenue must increase 100% to generate the same $60 gross profit
B) Both revenue and gross profit stay about the same
C) Revenue must increase about 30% to generate the same $60 gross profit
D) None of the above
5.
A firm with limited supply of a popular product that has no real competitors would
A) Sell at total cost per unit plus a reasonable mark-up
B) Sell at variable cost in some countries to gain market share
C) Target consumers willing to pay premium prices
D) Both A and B
6.
If a company needs to generate $100 gross profit for SG&A and half of sales is priced at variable cost
A) The price of the remaining units must go up to pay for the $100 SG&A
B) The remaining units should also be priced at variable cost for fairness
C) Overhead is an abstract concept that has no place in the real world
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Competition in the sector is being driven by overcapacity,
says Patrick Xu, Transportation Analyst at Barclays, which
is hampering the ability of carriers to raise ticket prices to
meet rising fuel costs. China Southern's 15 percent rise in
fuel costs in the first-half, for example, was matched by
just a 3 percent increase in passenger yields.
According to Xu, the trend of rising supply is set to
continue, with carriers expected to see acceleration in
aircraft deliveries over the next two years, as a result of
orders placed back in 2010-2011, when the outlook for
demand was brighter.
"Demand and supply are going in the wrong direction we're seeing weakness in the yield, or ticket price, as a
result of price competition. (This) is killing the Chinese
airlines," Xu told CNBC.
*From CNBC, 28 August, 2012
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Compete mostly on price on many routes
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In the 1997 Asian economic crisis
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◦ Airlines add capacity as markets grow. Overcapacity happens.
◦ With overcapacity, many adopt variable cost pricing, then use
capital, or borrow to stay in business (or defer maintenance)
◦ Eventually some go out of business or merge with others
◦ A few try to sell premium service (SIA, for example)
◦ The Thai baht fell from 26/$1 to 55/$1
◦ Consumers in SE Asia could not afford to travel if tickets were
priced in $ at the new exchange rate
◦ Airlines flying to and from Thailand fixed prices in baht, which
converted at new exchange rate
◦ A 26,000 baht ticket cost $1,000 in 1996, cost $473 in 1998
◦ Airlines serving Thailand viewed Bangkok as strategic
In 2008 Thai Airlines cancelled non-stop service to NYC
though ticket prices for that flight were high
Businesses in competitive industries set prices according
to what the market will allow. They may exit the
business when opportunities seem better elsewhere.
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Governments in countries with high inflation may
impose price controls
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Controls might be selective (only certain categories)
Price controls might apply universally
Shift target segments or markets to lines with
fewer controls
Consider using the high inflation country as an
export base
Launch new products or variants of existing
products where controls are selective
Negotiate with the government – usually on an
industry basis
Predict incidence of price controls
Chapter 12
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Stronger home country currency makes exports expensive
◦ Brands with high equity can pass through the higher host country
prices to overseas consumers
◦ Firms with price sensitive customers must lower the price in home
country terms (to sell at the same price in host country currency)
◦ In many cases costs decline with stronger home currency (effect of
lower import prices)
◦ Firms might price to market (adjust prices to specific destinations)
◦ Price stability in host country terms is important
 Use price adjustments to keep prices stable in specific markets
 Can reduce company profits (Exhibits 12-5)
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Currency Quotation
◦ Buyers and sellers typically want quotes in home currency
 Avoids exchange risk
 Many will use a common currency, such as the Euro
◦ Forward contracts available for certain currencies
◦ Currency hedging is imperfect and expensive
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Copyright (c) 2009 John Wiley &
Sons, Inc.
Chapter 12
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Copyright (c) 2009 John Wiley & Sons, Inc.
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Transfer prices are charged for sales transactions between entities of the same
companies
Total company pretax profit does not change due to transfer prices among wholly
owned subsidiaries
Individual subsidiaries will show more or less profit depending on transfer prices
Example: China cogs $1=>Barbados markup 20% =>USA sells $1.30
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Total profit =$1.30-$1.00=$0.30
Profit Barbados=$1.20-$1.00=$0.20; Profit in USA=$1.30-$1.20=$0.10
Criteria for making transfer pricing decisions:
◦ Tax regimes – companies prefer to show higher profit in low tax countries
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Companies will typically place intellectual capital in low tax jurisdictions (Barbados, Ireland,
Cayman Islands, etc.)
While physical goods do not move through subsidiaries in these jurisdictions, title to the
goods does pass through
A portion of profit will reside in the low tax jurisdiction
If tax rate Barbados 10%, rate USA 35%. Tax paid = 10%*$.20+35%*$.1=$.055 vs 35%*$.30=$.105
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Tax experts have price benchmarks (intended to pass tax audits)
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Easily addressed via adjustments to performance targets
Anticipated low or negative profits due to strategic pricing are considered in setting
performance metrics
◦ Local market conditions – competition, goals
◦ >Host country market imperfections – price freezes, restrictions on moving profits out of a
host country
◦ >Joint venture partner considerations
◦ Morale of local country managers – country manager performance based on subsidiary
profits
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Direct Subsidiaries
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Entity
Jurisdiction of Incorporation
Ocular Sciences Puerto Rico, Inc.
Delaware M
Sunsoft, Inc.
New Mexico M,S
Ocular Sciences Canada, Inc.
Province of New Brunswick S
Precision Lens Manufacturing Technology, Inc. Barbados T
Ocular Sciences Australia Pty Ltd.
Australia S
Indirect Subsidiaries
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Entity
Ocular Sciences Hungary Ltd.
Ocular Sciences Limited, Inc.
Ocular Sciences UK Limited, Inc.
Sidecastle Limited
Ocular Sciences Cayman Island Corp.
Ocular Sciences - SAS
Ocular Sciences - BV
Ocular Sciences - GmbH
Ocular Sciences - Sarl
Ocular Sciences - ApS
Ocular Sciences - Srl
Ocular Sciences - KK
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Note: Principle activities: M=manufacturing, S=sales, T=intellectual property
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Jurisdiction of Incorporation
Budapest, Hungary S
United Kingdom S
United Kingdom M
Ireland T
Cayman Island T
France M,S
Netherlands S
Germany S
Switzerland S
Denmark S
Italy S
Japan S
Chapter 12
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Marketing is rarely involved in tax related transfer prices
Market-based transfer pricing to foreign sales subsidiaries
 Arm’s length prices are based on market prices
 Market prices might be missing due to lack of competition
Nonmarket-based pricing:
 Cost-based pricing adds a markup to cost of goods
 What is a fair allocation of corporate overhead? This is always a
question in cost based pricing.
 How do entities split profit?
 Negotiated pricing often occurs within companies
 Elicits cooperation among divisions
 Creates an incentive toward information sharing and best
practices within the company
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Compliance with financial reporting norms, fiscal and custom
rules, and anti-dumping regulations prompts use of marketbased transfer pricing.
Government-imposed market constraints such as import
restrictions, price controls, or exchange controls favor
nonmarket-based transfer pricing.
Most firms use a mixture of market-based and non-market
pricing procedures
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Copyright (c) 2009 John Wiley &
Sons, Inc.
Chapter 12
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Dumping occurs when imports are sold at a prices
thought to be below cost or below home country
price
◦ Low priced imports may threaten local industries
◦ Governments may then levy tariffs or fines to protect
local producers
◦ WTO member countries have guidelines about what
can be penalized as dumping (these evolve through
time)
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Voluntary Export Restraint (VER) may be a response
to a threat of anti-dumping action
Exporters can reduce risk of antidumping actions
◦ Move away from price competition by adding value
◦ Cooperate with local competitors in the host country
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Large price differences between countries create arbitrage
opportunities (gray markets)
Price coordination among countries is affected by
◦ Nature of customers
 Do customers have easy access to price information?
 Can they exploit differences?
 Internet has a role in price convergence - ability to compare prices
◦ Amount of product differentiation between countries
 Product might not be suitable for use in the same form
 Products might be adjusted to local market conditions
◦ Nature of channels - cross border channels require more price
coordination
◦ Nature of competition
 Global competition requires more coordination of prices
 Local competition requires fast response to price local changes
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◦ Market integration – elimination of barriers to movement of
goods between countries requires similar prices
◦ Internal organization – country affiliates might demand
autonomy
◦ Government regulation – government purchasers might require
prices equal to other countries
Purchasers may demand Global-Pricing Contracts from suppliers
Chapter 12
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Pricing Corridor
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Increase prices in low-price countries and lower them in high-price countries
Determine price for each country which maximizes company-wide profit
Look for gray market (arbitrage) opportunities if price differences between
countries are large
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Gray markets potentially damage authorized distributors
Product differentiation between countries discourages arbitrage
Intelligence systems needed to monitor gray markets
Set a pricing corridor with a range of acceptable prices
Goal is to maintain companywide profit while allowing flexibility
Some profit is sacrificed by setting bounds to prevent arbitrage
Four ways to implement price coordination within global
organizations
Economic measures such as transfer prices or purchase limits
Centralization of pricing decision making
Formalization - country managers allowed flexibility within boundaries
Informal coordination – use persuasion and discussion among country
managers
In stable environments among similar markets centralization
works
Complex and changing market conditions require flexibility
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Transactions that involve non-cash compensation
Forms of Countertrade (See Exhibit 12-9.)
◦ Simple barter – swap of one product for another
 Common among subsistence economies
 Sometimes used in recoveries from cash poor debtors
◦ Clearing agreement – governments agree to a given volume of imports
from each other
 Volumes are monitored
 Imbalances are settled in cash or goods
◦ Switch trading is a clearing agreement with a third party getting rights to
imbalances (credits used to buy goods)
◦ Buyback (compensation) is typically used for capital equipment, major
projects. These give the seller rights to some portion of the product of the
project or equipment
◦ Counterpurchase is the most popular form of countertrade
 Parties agree to buy goods from each other over a period of time
 Goods can be unrelated
◦ Offset (seller agrees to buy from importer’s country, or to transfer
technology to the country) is common with defense purchases
 Direct offset is an agreement by supplier to use product materials from the
importing country
 Indirect offset involves goods unrelated to the core goods
Chapter 12
39
Copyright (c) 2009 John Wiley &
Sons, Inc.
Chapter 12
40
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Gain access to new or difficult markets

Overcome exchange rate controls or lack of hard currency

Low credit worthiness of one party

Increase sales volume

Generate customer goodwill for the long term
◦ Markets may lack cash
◦ Competitors may offer countertrade for access
◦ Official exchange rates may be far from market rates
◦ Some currencies (Soviet ruble for instance) not convertible
◦ Buyer might have limited access to credit or face high borrowing
costs
◦ Countertrade offers a way around credit barriers
◦ Dispose of surplus items
◦ Increase sales to absorb overhead
◦ After credit or currency situation improves the seller may be
favored
◦ Seller gains expertise in emerging market or transition situations
Chapter 12
41

Shortcomings of Countertrade:
◦
◦
◦
◦
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Goods not used by the buyer need to be sold


Some firms rely on brokers
Poor quality or lack of demand may make sale difficult



Valuation of goods
Type of goods
Timing



Commodity prices are volatile
Value may decline before goods can be sold or exchanged
Quality issue for many types of goods


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Cost of finding buyers (if goods can not be used by the buyer)
Hedging costs for commodities
Broker commissions (if brokers are used)
Timely and costly negotiations
Uncertainty and lack of information on future prices
Transaction costs
Problems in countertrade – Latin America
◦
◦
◦
◦
◦
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Complex negotiations take time
Cost increases
Quality of goods
Difficulty selling received products
Third party involvement
Loss of flexibility
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1.
In variable exchange rate situations
A) Exporters prefer to use the currency of the host country
B) Importers want to pay in the currency of the seller’s country
C) Buyers and sellers want to use their country’s currency to escape exchange risk
D) Both A and B
2.
When the home country currency gets stronger, exporters may
A) Absorb the effect of a strong home country currency to keep export prices stable
B) Do sourcing outside the home country
C) Move more production outside the home country
D) Any of the above
3.
If a company sells the same product at different prices in different countries
A) A gray market might develop to arbitrage price differences (take advantage of price differences)
B) The company may be responding to different price sensitivities among the countries
C) Levels of competition might vary among different countries
D) All of the above
4.
To prevent gray market exploitation of product price differences across countries
A) A company could adapt product formulas to local taste
B) Make internet price comparisons easy
C) Standardize the product across all countries
D) None of the above
5.
Cost of product at A is $100. Transfer price to B is $120 and then B sells it for $125
A) Total company profit is $5
B) Company profit is $120 + $125 -100 = $145
C) Profit in B is $5
D) None of the above
6.
When a product is sold through a joint venture partner in the host country
A) The multinational should raise transfer prices to capture profit from the joint venture partner
B) Transfer prices should be based on mutually agreed upon criteria, such as cost plus a markup
C) Transfer prices from the multinational to the joint venture have no impact on partner profits
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The European Union is preparing to begin a broad investigation into whether
Chinese companies have been exporting solar panels for less than cost
The anti-dumping case follows a series of bankruptcies and factory closings by
European and U.S. solar panel manufacturers
The U.S. Commerce Department imposed preliminary anti-dumping tariffs in
May of at least 31 percent on Chinese solar panels, in addition to preliminary
anti-subsidy tariffs of 2.9 percent to 4.73 percent that were imposed in March.
The Chinese government has responded by accusing American producers of
polysilicon, the main material used in solar panels, of engaging in unfair trade
practices and has threatened steep tariffs on the producers.
The United States and the Union each follow elaborate, quasi-judicial
procedures for anti-dumping and anti-subsidy cases, taking statements from
affected companies before acting, and following detailed rules for setting any
tariffs. China’s methods for assessing trade penalties are relatively mysterious.
Chinese companies played a tiny role in the global solar power industry until
five years ago, when they began a surge that has now brought them two-thirds
of the global market. That rapid growth has been accompanied by a steep
plunge in wholesale prices for solar panels, which have dropped by up to threequarters in the past four years.
Chinese industry officials and regulators insist that their huge investments in
big new factories have brought down costs. But big Chinese solar companies
have been posting heavy losses, particularly in the second quarter.
The Chinese solar power industry now has too much capacity.
http://www.nytimes.com/2012/09/06/business/global/eu-prepares-to-investigate-chinesedumping-of-solarpanels.html?pagewanted=2&nl=todaysheadlines&emc=edit_th_20120906
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