Monday Export Class with Dr Godwin Oyefeso

MONDAY EXPORT CLASS

With

DR GODWIN OYEFESO (SUCCESSEDGE EXPORTERS NETWORK)

Topic: Business Risk Coverage (Part 1)

INTRODUCTION

Risk is inherent in every business, more so in international business compared to domestic trade. Complexities in business have been growing, so risks too have been commensurately increasing. Success in international trade depends, largely, on the careful evaluation of risks and then attempting to minimise or eliminate the risks to the greatest possible extent. Risks can be reduced, if not ruled out, by covering the risks to the extent possible.

Businessmen with long-standing experience are aware of risks in new business. When they plan to start domestic business at a new place, they start with a place where they have relations or friends who can come to their rescue, in case of need. Even, when we want to buy a house, we prefer to buy at a place where our own community lives predominantly. So, with the same business instinct, when they want to enter into international business, they make a beginning at a place where Indians are more or at least where English speaking prevails to overcome communication barriers. Every businessman wants to export to safer countries rather than unsafe countries. So, safer countries get crowded, in course of time. Unsafe places afford ample scope to enter and grow while survival becomes difficult at safe places.

The following points need consideration:

Competition is the keenest in safe markets while it is, virtually, non-existent in unsafe There is no competition to export to Afghanistan, as the country is still considered unsafe to export.
No one can foresee which countries are going to be If one can foresee future so clearly there would be no risk. Unfortunately, life is not that comfortable.

In international trade, risk assuming is voluntary. No one compels to export to Afghanistan. The opportunities are plenty, so the risks. In the initial stages, one attempts to avoid assuming risks. But, one gets prepared to accept the risks progressively and a day may not be far off when the market in Afghanistan too may be attractive!

TYPES OF RISKS IN INTERNATIONAL TRADE

The various types of risks that an international trader faces are divided into the following categories:

Commercial risks
Political risks
Risks arising out of foreign laws
Cargo Risks
Credit risks
Foreign exchange fluctuations Now, let us discuss these risks, in detail.

1. Commercial Risks

Causes of Commercial Risks: Commercial risks are caused due to the following factors:

Lack of knowledge about the foreign markets:
Inadaptability of the export product to change to the conditions of the foreign market requirements:
Longer transit time and
Varying situations to be handled, not anticipated before

Nature of Risk different in International Trade

Commercial risks exist in domestic market too. But, their impact in international market is greater, in comparison to domestic market. The changes in international market are hazardous and difficult to anticipate. Suitability and acceptability of the product in international market is rather difficult to gauge. Variations in demand and supply conditions are more unpredictable.

Most of the commercial risks are to be borne by the exporters. Exporters cannot shift these risks to the professional risk bearers, paying insurance premium. The exporter is not aware of the conditions in the foreign market as the way he is aware of domestic market. Long distances to travel along with cost and time implications distinguish international trade from domestic trade. Exporter cannot visit Paris with the same ease he does Mumbai from Bhopal. If goods are not sold or price realisation is lower than anticipated, due to changes in demand or supply, exporter has to bring back the goods, incurring additional freight cost or opt to sell the goods at a loss.

In international market, as in domestic market, presence of competitors influences the demand and supply conditions and entry of new competitors depresses the market more. Further, local production may bring down the prices. Introduction of substitutes to capture the market may take away the exporter’s share in the market.

The price realization of the product in export market is influenced by:

Changes in Exchange Rates: Changes in home currency or foreign currency affects the price If the home currency is devalued, the competitive capacity of the exporter is enhanced. If the foreign currency is depreciated, there is a considerable reduction in the exporter’s competitive strength.
Changes in Import Duties or Tariff Barriers: Changes in import duties and creation of tariff barriers disturb even an established market. In this field, through the efforts of GATT, import duties have been fairly reduced and market has become On account of these impediments, exporters open manufacturing facilities in the importing countries to overcome these problems.
Changes in Transport Costs: Transport costs constitute, generally, a major part of the invoice value and so any change in transport costs affects the competitive edge of the Change in transport costs does not affect FOB prices. There is no problem even in CIF contracts, which have escalating clause in respect of transport costs. Exporters have to worry in case of CIF contracts that are not provided with escalation clause.
Change in Foreign Market Characteristics: A classical example is change in styles, soon after shipment of goods, in particular, when the shipment is made without letter of Ready made garments suffer, greatly, from this problem.

Minimisation of Commercial Risks: Commercial risks can be minimised by using forecasting techniques and keeping a careful watch on the changing business conditions in the concerned country, in particular, and also keeping a track of the changes in the world economy. Exporters have to be prepared to face any eventuality and wisdom lies in forecasting and anticipating, of course, finally, quick responding, at the earliest hour.

2. Political Risks

These risks arise due to change in political situations in the concerned importing and exporting countries. Following are the factors, affecting the political situation:

Changes in the party in power in the concerned countries, followed by change in head of the Government;
Coups, civil wars and rebellions;
Wars between the countries or among many countries and
Capture of cargo by enemies during

Political risks can be avoided, to a certain extent, by judicious selection of the countries to which goods are exported. Insurance companies may agree to provide cover for some of these risks, by collecting additional premium. Export Credit Guarantee Corporation (ECGC) also covers some of the risks.

3. Risks Arising out of Foreign Laws (Legal Risks)

Every country has its own commercial law. So, different laws prevail both in exporter and importer countries. Legal proceedings are complex as well as expensive. In every relationship, however cordial and long-standing may be, differences are likely to arise. Legal risks can be avoided to a great extent by incorporating the provision for appointment of an arbitrator, in case of dispute about contractual terms.

4. Cargo risks

Transportation of cargo has undergone radical improvements over a period. Most of the goods are transported by sea. Transit risks are a common hazard for those engaged in export/import business. The list of dreary and hazardous risks in transit is long viz. Storms, collisions, theft, leakage, explosion, spoilage, fire, and high sea robbery. Every exporter should have working knowledge of marine insurance so that he knows whether he is getting the required risk protection at the minimum cost. It is always possible to transfer the financial losses resulting from perils of sea and perils in transit to professional risk bearers known as underwriters. Principles of marine insurance are also equally applicable to insurance of air cargo also.

5. Credit Risks

Risks are inherent in credit transactions, more so in international business. International business is invariably riskier than the domestic trade. Credit risk is not the same whether one sells the goods in domestic market or in foreign market. Success in international business depends, largely, on the ability of the exporters to give credit to importers on the most competitive and favourable terms.

Export business has become highly risky as selling on credit has become very common. Importers are sought after so it is but natural they dictate terms as there are many exporters competing for the cake of international trade. Insolvency rate is on the increase. Balance of payment difficulties has severely affected the capacity of many countries to pay the import price. However, offering credit has become unavoidable to the exporters to face competition. Two issues stand before the exporters: