10: Managing your export risk
10: Managing your export risk
There are many risks involved in exporting and in this section we briefly cover the main risks you are likely to encounter. Follow the links below to learn more about the risks in question:
Companies need to develop a professional approach when entering the field of exporting. The company's management will have to be extremely committed and will need to devote time and money to starting up their export campaign. Companies will also face greater competition and more stringent rules and regulations pertaining to products and packaging.
There are a number of risks facing exporters, while there is an element of risk in all commercial transactions, the complexity of the environments that exporters must operate in, multiplies these risks.
In most instances - mainly because of the large distances and alien environments involved - it is generally difficult for the exporter to verify the creditworthiness and reputation of an importer. If the creditworthiness of a foreign buyer is unknown there is the increased risk of non-payment, late payment or even straightforward fraud.
It is essential, therefore, that the exporter should strive to determine the creditworthiness of the foreign buyer. There are many commercial firms that can provide assistance in credit-checking foreign companies. In addition, the exporter should insist (particularly if the foreign buyer is unknown) for a secure method of payment such as an irrevocable documentary credit. The exporter could approach his bank in South Africa for assistance regarding international payment procedures.
Poor quality risk
If the goods to be exported are not inspected before they are shipped by an independent third-party, the exporter may find his entire shipment being rejected on arrival at the importer's premises due to the poor quality of the goods. Some unscrupulous importers may do this just to put pressure on an exporter and to try and negotiate a lower price - be careful! Experienced importers may request a pre-shipment inspection, to be conducted by an independent inspection company (this is commonly carried out for exports into other African countries). If they don't, then it may be worth suggesting to the importer during the negotiation stage that such an inspection be carried out as part of the contract. Such an inspection protects both the importer and the exporter.
Alternatively, it may be a good idea to ship one or two samples of the goods being produced to the importer by an international courier company. This small task will ensure that if the importer accepts the quality of the sample goods and (this is important!) the main consignment is produced to the same standard, then it will be difficult for the importer to reject the consignment (unless something happened to the goods during shipping.
Importers cannot always be present at the time of dispatch to physically inspect the goods for quality. Consequently, they often make use of the services of an independent inspection company. As it is usually at the request of the importer or his government that these inspections are conducted, the costs for the inspection are borne by the importer or it may be negotiated that they be included in the contract price.
Transportation and logistic risks
With the movement of goods from one continent to another, or even within the same continent, goods face many hazards. There is the risk of theft, damage and possibly the goods not even arriving at all.
The exporter must understand all aspects of international logistics, in particular the contract of carriage. This contract is drawn up between a shipper and a carrier (transport operator). Exporters and importers must understand their legal rights to claim against carriers. The "shipper", would be the party that pays the main carrier of freight and this could be either the exporter or the importer, dependant upon the Incoterm (see section on Incoterms 2000, ICC publication) under which that particular transaction was effected.
International laws and regulations change frequently and/or may be applied differently from that of the exporter's own country. It is therefore important that the exporter drafts a contract in conjunction with a legal firm, thereby ensuring that the exporter's interests are taken care of. The exporter should draw up a checklist of basic legal questions aimed at the imported prior to signing any formal contract.
In particular the exporter should be clear as to which law and dispute-settlement procedure will apply to the contract (known as the jurisdiction of the contract). The exporter may wish to impose choice of law and choice of forum clauses, which state that disputes will be settled under the exporter's own national law and courts.
What is more, the legal environment of a country is developed from, or through, the political environment. Great care must be taken in assessing the legal aspects of trade with a particular country. The law not only in South Africa but also in the country to which he is exporting influences the exporter when doing business internationally. By way of illustration, it is only necessary to refer to the strict product-liability situation in respect to goods sold into the United States of America and the disastrous impact that this could have on the exporter.
Another aspect for consideration is when trading with Muslim governed countries, such as Saudi Arabia. Exporters should first approach legal organisations within these countries prior to any legal negotiations being determined, in order to ensure that the exporter's best interests are protected, as these countries do not operate their legal system based on Roman/Dutch law as we do in South Africa.
When appointing a middleman or intermediary, such as a trading house, agent or distributor, exporters should be aware of many issues and responsibilities that influence the appointment of such intermediaries. A list clearly stating these issues must be included in the agreement, by specifying the rights and duties of the parties involved in the trade transaction, would prevent unpleasant legal conflicts that could arise at a later stage.
The political stability of a foreign country into which a company is exporting is of the utmost importance. Exporters must be constantly aware of the policies of foreign governments in order that they can change their marketing tactics accordingly and take the necessary steps to prevent loss of business and investment.
Instability in the target market could lead to losses resulting from war, civil strife and political instability. It is essential to warn exporters to be aware of government intervention in the target market. Most countries world-wide operate under a capitalist system within which the volumes and values of goods and services whether provided locally or by way of imports, are set by the forces of supply and demand.
There are, however, still a number of countries in which the government plays an interventionist role. Examples of such economies include North Korea, Cuba and Vietnam. In certain other countries, partial liberalisation of trade has been achieved but the extent of this liberalisation still has to be investigated by any exporter wishing to enter these markets.
Furthermore, while there are certain countries that appear to have advanced towards a more open market, there may be constraints upon their foreign currency reserves. In such countries the Reserve or Central bank of that country may not have enough foreign exchange to allow payments to progress thereby again resulting in the risk of non-payment for the exporter.
A natural disaster or terrorist action in a particular country could completely destroy an export market for a company. Unexpected occurrences may also increase the cost of transport causing great loss to the exporter. It is therefore important that the exporter ensures that a force majeure clause be included in any international contract the exporter concludes.
Exchange rate risks
All South African exporters face this risk on a daily basis, as our South African Rand strengthens or falls against other major currencies, it is difficult for South African exporters to predict the movement of the Rand, thus resulting in speculation on the part of the exporter on the likely direction of movement of the currency (i.e. up or down). Ultimately one party will benefit over the other. The easiest way to overcome this is to quote in one's own currency namely the SA Rand. However, the exporter still runs the risk that the currency will weaken and thus resulting in the benefit of a weaker exchange rate being passed onto the importer and not benefiting the exporter.
The exporter must approach the Foreign Exchange division of his bank prior to quoting any prices internationally, in order to obtain advice and the movement of the South African Rand.
A strategy that the exporter could follow in order to protect against the influence of exchange rate movements is to hedge against such movements through the purchase of forward exchange rate contracts.
Culture and language risk
Misunderstandings in communication and in international trade transactions arise because in most instances the importer and exporter come from different cultures and express themselves with different languages. In most instances business practices, tax systems, rules and regulations, accounting methods, currency controls and customs systems all differ from that of the exporter's own country.
The exporter must ensure that he fully understands these differences and often an in-market visit to the intended country of export will greatly assist the seller in having a better understanding of his intended market place and the culture differences (s)he may encounter.
Managing your risks
The task of managing your export-related risks begins with known what the risks. Your first step is therefore to identify the risks that you are likely to encounter and to give some 'weighting' to the seriousness of the risk. The more serious it is, the more attention you will need to give to addressing the risk in qiestion. With some of the risks oultined above, you can obtain insurance to cover the risk. Three main types of risk cover include credit risk cover, country risk cover and transit risk cover - these are discussed below.
In the case of exchange rate risks, you can cannot direct insure your exchange rate risk exposure, but you can take steps to minimise these risks through hedging your risk by using one of four financial instruments forward contracts, future contracts, swaps and options (these are discussed in the section on foreign exchange). For most exporters, the first two (forward contracts and future contracts) are likely to be the only two instruments you will consider. Larger exporters with many export and import contracts in place may try to pair their forex exposures (linking an export contract in, say, US dollars to an import contract also in US dollars) or by matching assets and liabilities held in foreign currencies in their books.