All business is local. However, all markets are global. Global trade and technology has created opportunities for business to serve an existing market segment over a wider geographical area. …

– page 67, Sustaining High Growth for Long Term Success

The rapidly growing global middle class are experiencing a convergence of lifestyles. This has created a huge demand for similar consumer goods around the world. The implication is that the niche markets that many businesses serve in established locations now also exist in other parts of the world, and present exciting opportunities for companies willing to enter those markets.

The Asian block, consisting of West Asia, Central Asia, South Asia, Southeast Asia (ASEAN) and East Asia, contributes the largest share of the global GDP. Following is the GDP share of the three largest blocks:

Global GDP

1. The Asian Bloc – 33.84% of global GDP
2. The North American Block – 27.95% of global GDP
3. The European Bloc – 21.37% of global GDP

Combined, these 3 blocs generate 83.16% of global GDP.

Asian countries have diverse political and economic systems with varied business cultures, and a “one size fits all” approach to marketing and negotiating business partnerships may not be the best approach when we plan to export from North America to Asia. With that in mind, what steps should you take to negotiate effective partnerships and expand your presence in Asian markets?

Never be afraid to keep your options open in negotiations

The following case illustrates the different factors a North American cereal company identified when negotiating with two Asian businesses in two different countries.

A prospective supermarket chain was willing to purchase cereal products from the cereal company at the agreed price. An issue arose, however, when the supermarket chain asked for credit terms of payment in 90 days instead of 60 days as stated in the cereal company’s “Standard Terms of Contract”.

The supermarket chain had a reputation of making prompt payment on terms it agrees to. Furthermore, they had the ability to purchase an estimated 65% of the cereal company’s production capacity for the Asian market, so they felt their position gave them the necessary leverage to make this request.

The cereal company then had to weigh its negotiating options. Even though the supermarket chain insisted on a 90 day credit period, the local political, economic and social conditions would enable the supermarket chain to get a bank guarantee for payments.

An option for the cereal company was to sell at a higher price to accommodate for the expected delay in payment or to bare the loss from delay in payment as a result of agreeing to extend the payment period to 90 days.

Their alternative was to sell to a distributor in a neighbouring country that agreed to the price and 60 days payment term. However, there were greater political, economic and social uncertainties in this neighbouring country, which resulted in market and currency fluctuations.

Additionally, the distributor was not able to provide a bank guarantee for payments, but the owner of the distributor had a reputation with other North American companies of being true to his word with payments made as agreed.

By simultaneously negotiating with the supermarket chain and the distributor, the cereal company was able to assess the walk-away position with both parties. Having an alternative enabled the negotiator to achieve the best terms possible in negotiations with both parties.

What factors were most important to weigh in getting the best possible agreement?

To get the best agreement possible in Asia, the cereal company’s negotiator evaluated the two alternative businesses (the supermarket chain and the distributor) as well as the countries within which they did business.

As part of that evaluation, the negotiator went through the following steps:

1. Analyze the desired agreement objectively
2. Understand the people in the prospect business
3. Identify the other parties’ true interests in the agreement
4. Explore best alternatives and options before making a decision

To achieve a meeting of minds and agreement, it’s crucial to understand the thinking and values of the owners and operators of the business involved in the negotiations. This includes understanding them in both a social and business environment. Cultural understanding plays a significant part in assessing the prospect of a productive long-term relationship being established.

To decide which of the two alternatives would be best for their needs, the cereal company had to address the questions:

1. How should they value qualitative versus quantitative factors?
2. What if the supermarket chain delayed payment beyond the 90 days payment period?
3. What if the alternative deal with the distributor is then no longer available?

A PEST analysis is your key to understanding important market factors

Additionally, the cereal company had to do a PEST Analysis to assess the political, economic, social and technological factors that would impact its business in the respective countries. This required an assessment of the supermarket chain and the distributor, as well as their competitors within the local business environment in relation to the following factors:

Political analysis: This includes environmental policy, domestic law, international regulations, government policies, funding and grants, local market, pressure groups, conflicts, human rights, etc.

Economic analysis: With this aspect of analysis, the local economy, market trends, global economics, competitors, taxes and tariffs, seasonal market trends, unique industry practices, distribution trends, currency interest and financial exchange rates are all evaluated.

Social analysis: Through this analysis, you’ll understand the lifestyle, demographics, consumer taste, brand perception, fashion trends, retail outlets, and cultural norms in the assessed markets.

Technological analysis: Complete this analysis to understand the impact of competing technology, research and development funding, supporting technology, maturity of technology innovation, production capacity, communications platforms, legal frameworks and intellectual property protection.

Bringing everything together to make your best final decision

The cereal company evaluated all available evidence pertaining to:

1. The values of the owner and operator,
2. The business capacity of the prospects
3. The risk involved from the PEST Analysis.

In the end, they negotiated and concluded an agreement with the supermarket chain based on an analysis and assessment of risk and opportunities arising from establishing this business relationship. While the 90 day period was outside of their usual contract, the risks in the distributor’s market and their inability to secure a bank guarantee meant the supermarket chain provided a safer, more stable partnership with opportunities for growth.

With these steps in mind, you’ll be ready to step into your next negotiation in Asian markets and come out with the deal that will best serve your business needs and goals.

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As any experienced international trade professional can tell you, doing business in global markets isn’t without its trade finance challenges.

Breaking into a new market often involves a significant investment upfront, and keeping track of currency fluctuations can be an ongoing concern once you do. On top of that, it’s not always easy to secure payment, and chasing down money owed to you or your business can be a real hassle.

With these trade finance challenges in mind, here’s some advice from case studies from the FITTskills International Trade Finance course that will help smooth the path towards success.

1. How do I choose the right bank or financial institution to help finance my international business?

The thought of taking out a sizable loan or financing plan can cause trepidation. Fortunately, taking the right steps before money ever changes hands to select a financial partner you trust and will offer you what you need should alleviate many of your concerns.

Like many aspects of exporting and importing, thorough research of several options is necessary. It’s OK to have a preferred option in mind, but make sure you’re not missing opportunities elsewhere that could benefit your business in the long run. Thoroughly investigate and compare each option before you even make an initial appointment, and understand the costs, benefits, and disadvantages of each option.

Having trouble deciding which options to focus on? Referrals are one excellent option.

If a bank or financial institution has worked well for similar companies you know, it could be a strong option to start your search.

Government-supported options are also excellent places to look for financing. In Canada, organizations such as Export Development Canada (EDC) and the Business Development Bank of Canada (BDC) are well equipped to help you with trade finance challenges, while American companies can look at the U.S. Export-Import Bank and the U.S. Small Business Administration.

2. How can I minimize risk related to fluctuations in foreign currency?

While a change in the exchange rate could potentially reduce costs, it’s the opposite situation where a change increases costs that can keep finance professionals up at night.

One solution could be to write a fixed rate of exchange directly into a contract, along with the price, date and quantity of an order. This type of contract is known as a forward foreign exchange contract. While this forces you to forego any potential benefits of a changing exchange rate, the stability reduces risk and makes it easier to budget within a larger financial plan.

Another option is to negotiate to have the prices set in your domestic currency, meaning any risk then falls on your buyer or supplier who uses a different currency, rather than your business. Different businesses may value using their own currency, so make sure you know how much such a concession would be worth to your business, and what you may be willing to give in order to assure your needs are met in your contract.

Potential exchange rate fluctuations could also be used as a factor when negotiating the overall price. A buyer may be able to use intense fluctuations as part of a strategy to negotiate a lower price, while a seller may use a stable rate to negotiate a higher price.

In some situations, a company may want to purchase an option from a bank or other financial institution, a specific agreement to allow you or your company buy or sell a certain currency at a fixed exchange rate by a specific date. Another similar option would be to sign a futures contract, fixing a rate to exchange one currency for another with a specific bank or institution for a certain date.

3. How can I make sure I receive payments, and don’t have to chase debtors around the world?

It’s bad enough trying to chase someone down who owes you something back in an everyday context, like books they borrowed or their share of a restaurant tab.

Just think of how those issues would become exponentially more complicated when you’re chasing down another person or business in another country, who owes significantly more money.

A debt collection agency can be used if needed, but results cannot be guaranteed and a portion of the reclaimed amount will then be owed to the agency, reducing the amount your business will receive in total.

Receiving some of the money owed to you is certainly better than none, but whenever possible take steps up front to ensure full payment will be made.

While not always an option, the most fail-proof way to ensure you get paid is to guarantee payment from a third party through a confirmed letter of credit or export credit insurance. This way, payment is guaranteed to the seller, even if the buyer is unable to make the full payment, as is the funds will be backed by the bank or agency.

A company can also request full prepayment before delivery when there is a perceived risk of non-payment. It is also possible to negotiate to receive money in installments based on specific actions if concerns about the buyer’s immediate cash flow are part of the discussion.

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When your company has selected a new international supplier, the negotiation process must be handled carefully and the terms of the deal finalized to the satisfaction of both parties.

If your company is intending to resell manufactured products, contractual terms will involve details such as the number of units required, warranty conditions, product availability and technical documentation, as well as promotional or advertising support.

However, when the deal revolves around services, raw materials, components, machinery or equipment, the terms will be adjusted to the specifics of the transaction.

The following sections address the negotiated considerations that are essential in this type of transaction.

Priority negotiating elements

Price is obviously a vital area of the deal to negotiate. When negotiating a price, the company should address the following questions:

What volume is being purchased?

Are discounts available as volumes increase?

What logistics costs related to imports and transportation are covered in the price?

Does the price include packing, cargo insurance and customs duties? Note that each of these items will be borne by either the exporter or the importer and will be included or excluded from the quoted price of the goods.

When do the supplier’s responsibilities end and those of the importer begin, as determined by the contracted Incoterm?

What are the expected payment terms and how will they affect company cash flow?

Are there discounts for accelerated payments?

The answers to these questions will not only determine the final price, but may also later have consequences for defining and calculating the value of the goods for any applicable customs duties and taxes.

Before signing an agreement, the supplier and the purchasing company must define who will be responsible for carrying out the different parts of the agreement.

For example, who will arrange for transport, insurance, export and import permits, and customs clearance and inspection? All these responsibilities may fall to one of the parties to the transaction, or they may be apportioned in some other way.

A case study in walking away from the table

A negotiating team from a Canadian high tech company had completed two weeks of discussions with a Chinese buyer. All the details had been agreed to and both sides sat down to initial each page of the agreement while the other participants were waiting in an adjoining room decorated with flags of both countries and featuring champagne for celebratory toasts.

As the Canadians began initialing their copies, one of the Chinese negotiators interrupted the proceedings to explain apologetically, that they needed an additional 25% discount to the agreed price. The Canadian team looked at each other, smiled at the group, and stood up, telling their hosts that they would be returning to the hotel and leaving in the morning, since they had offered their best prices.

On arriving at the hotel they received an urgent call from the Chinese side agreeing to the settled terms and inviting them back to the negotiating hall, where they enjoyed champagne and received the fully initialled contract.

The lesson to be taken here is that first, there are schools of negotiating techniques abroad that train their teams well, and second, walking away is one of the options a company should always be prepared to implement.

Note also that this is a case of supplier leverage, where there was limited competition and the product quality had been previously established in the market (“the Mercedes effect”).

Making the best sourcing decisions for your company

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