Fundamentals of Exporting to Latin America

Fundamentals of Exporting to Latin America

Eric Nystrom – 2013

Lake Atitlán - Guatemala



Approximately US$ 355,691 million in trade between U.S. and Central & South America in 2012

U.S. Trade with Central & South America has increased 19.8% from 2008 to 2012

U.S. Exports to Central & South America have increased 34.3% from 2008 to 2012

U.S. Exports in 2012 to China = US$ 110,590 million (US$ 536,234 trade total)

The U.S. exported 66.3% more goods to Central & South America (US$ 183,866 million) than to China in 2012

Trade Facts



Highlights of this Presentation

The Basic Fundamentals of Exporting (anywhere)

Latin American Export Strategic Plan Elements

Latin American Strategic Issues

General Export Plan Tips, Suggestions & Recommendations


Eric Nystrom – 2013Export

Success

Market Selection

PartnersMarketing

Finance

Logistics

HR

Sales

Product Selection

Entry Mode

Export Plan Components



Assessment & Planning

Self-Assessment

Must-Have Conditions

Nice-to-Have Conditions

Global Strategic Plan



Self-Assessment

Useful at the beginning planning stages

Helps to set goals and get everyone on the same page

http://export.gov/begin/assessment.asp

http://export.gov/begin/assessment.asp



SWOT Analysis Strengths: Weaknesses:1. Strong Brand in USA2. Production Capacity3. Low Cost Producer

1. English only Marketing Materials

2. Little International Experience3. Not ISO 9000 Certified

Opportunities: Threats:1. Growing Latin American

Industrial Markets2. Few Foreign Competitors3. High & Low End Markets

1. Copycats & Pirates2. Increased Latin American

Government Regulations3. Rising Fuel Costs



Porter’s 6 Forces Analysis: More robust than SWOT Analysis

Comp. products/

Gov’t/ public



“MUST HAVE” Conditions Upper Management Buy-In,

Commitment & Realistic Expectations

Knowledge & Experience producing & selling product or service

Sufficient Corporate Infrastructure

Solid Cash Flow

Production Capacity & Flexibility to produce international products or provide the service



“NICE-TO-HAVE” Conditions

International Expertise

Foreign Language Ability

Cultural Awareness / Sensitivity

Travel to Foreign Markets



Strategic Plan Layout

Strategic Plan Elements:

I. Creating a Vision

II. Forming Supporting Initiativesi. Market Selection ii. Market Entryiii. Cultural Intelligenceiv. Export Plan Pillars



Creating a Vision Statement 1, 5, or 10 years out Where do you want to be? What do you want to happen? How are going to do it?

Ex: It is January 1st 2023 and…we have become the go-to, influential market leader in the Latin American markets we serve by focusing on giving our customers consistently outstanding service through our local sales, distribution & after-sales service locations. Our sales in Latin America are at least $50 million and…



What are the Initiatives that Support the Vision?

Which markets am I going to select and why?

What will my entry mode be and who will be my partner?

What other strategic issues will I have to account for when I am building my:

Sales & Marketing Plan?

Logistics Plan?

Finance, Legal, and HR Plan?



Market Selection

Reactive Strategy

Pro-Active Strategy

PrimaryResearch

Secondary Research

Qualitative Research

Risk Assessment

FTA’s



Market SelectionPro-Active Approach to Foreign Market Selection: Create decision criteria/indicators to assess each markets’ potential.

Use secondary data to narrow the field or create a pool of possibilities (5 to 10 markets)

Use primary data for final selection (1 to 3 markets; create a list ranking all identified markets)

Use qualitative data as criteria to select or narrow selections



Market Selection

International commodity coding system that most countries use to classify their products

6-digit HS Code is known as the “international level” or “subheading” (e.g. 8429.39)

All imported goods are subject to duties based on the HS code, value listed on commercial invoice & country of origin of manufacture (not necessarily the country of export)

Key Factor in Secondary Research: Harmonized System Code



Market SelectionHarmonized System Code:

You can find your HS Code/Schedule B Number by using:

https://uscensus.prod.3ceonline.com/ (search engine)

http://www.census.gov/foreign-trade/schedules/b/ (by chapter)

https://uscensus.prod.3ceonline.com/



http://www.census.gov/foreign-trade/schedules/b/

http://www.census.gov/foreign-trade/schedules/b/



Market SelectionGood Secondary Research Data Sites

Subscription Based: Piers Euromonitor GTIS USA Trade Online Datamyne* Kompass*

Free: Export.gov (USDOC) Global Edge (MSU) World Bank Trade Data Comdata (UN) DCEO / OTI (IL)



Market SelectionPrimary Data Sources: Direct data collection through interviews, surveys and direct contact

More expensive, time consuming + personal involvement

Tailored to your needs, gives specific answers

Private & Government offers this service



Market SelectionQualitative Research: research dealing with phenomena that are difficult or impossible to quantify mathematically, such as beliefs, meanings, attributes, and symbols

Generally used for exploratory purposes; a small number of respondents; not generalizable to the whole population; statistical significance & confidence not calculated

Examples include focus groups, in-depth interviews, personality tests

Can be time consuming, expensive & requires personal involvement



Market SelectionGlobal Assessment Suitability Indicators:

Demographic – population, literacy, education, per capita, language, Human Development Index (HDI)

Macroeconomic – GDP, growth, inflation, economic activity index, industrial activity index

Government – taxes, tariffs, political stability, corruption index, ease of doing business index, non-tariff barriers, intellectual property rights, Free Trade Agreements (FTA)

Environmental – infrastructure, climate, geography



Market SelectionRisk Assessment Factors:

Political – expropriation, terrorism, instability, bureaucracy, corruption, relationship with US Government, trade & non-trade barriers

Economic – currency exchange, recession, inflation, financial, taxes

Legal – intellectual property protection, contract law, employment laws

Cultural – nationalism, religion, packaging, language, context



Description Detail Imported Product (US$)

Brazilian-made Product (US$)

Cost (FOB) Milking Machine (8434.10.00)

50,000.00 50,000.00

International Ocean Freight Estimated Cost 2,000.00 0.00

International Insurance 0.3% of FOB & Freight 156.00 0.00

CIF Value (basis for calculation of taxes)

Cost + Insurance + Freight

52,156.00 50,000.00

Import Duty (ID) – Federal Tax 14% on CIF 7,301.84 0.00

IPI – Federal Tax Industrialized Products (0- 5%)

0% on CIF+ID 0.00 0.00

PIS – Federal TaxProgram for the Social Integration

1.65% on CIF+ID+IPI 1,185.59 1,108.65

COFINS – Federal Tax Social Security

7.6% on CIF+ID+IPI+PIS 5,460.92 5,106.50

ICMS – State Tax (Sao Paulo)Circulation of Goods & Services

18% on CIF+ID+IPI+PIS+COFINS

14,510.71 12,339.91

Total Value after Taxes 80,615.07 68,555.05

Cost Differential +15%



Market SelectionForeign Corruption Index: http://cpi.transparency.org/cpi2011/results/

Rank Country Score

1 New Zealand 9.5

2 Denmark 9.4

2 Finland 9.4

4 Sweden 9.3

5 Singapore 9.2

6 Norway 9.0

7 Netherlands 8.9

8 Australia 8.8

8 Switzerland 8.8

10 Canada 8.7

24 USA 7.1

Top Latin American countries:Rank Country Score

22 Chile 7.2

25 Uruguay 7.0

73 Brazil 3.8

80Colombia, El Salvador,

Peru 3.4

86 Panama 3.3

100 Argentina, Mexico 3.0

118 Bolivia 2.8

120 Ecuador, Guatemala 2.7

http://cpi.transparency.org/cpi2011/results/





Market SelectionEase of doing business index: http://www.doingbusiness.org/rankings

Economy Overall World Rank

Singapore 1Hong Kong (SAR) 2New Zealand 3USA 4Denmark 5Norway 6UK 7S. Korea 8Iceland 9Ireland 10Canada 13Germany 19Japan 20

Latin American Economy

Overall World Rank

Chile 39

Peru 41

Colombia 42

Mexico 53

Panama 61

Uruguay 90

Belize 93

Guatemala 97

El Salvador 112

Argentina 113

http://www.doingbusiness.org/rankings





Market SelectionFree Trade Agreements (FTA)

USA has 14 FTA’s, 6 of which involve 11 LATAM countries:

NAFTA (Mexico) CAFTA (Guatemala, El Salvador, Honduras, Nicaragua, Costa Rica

& Dominican Republic) Peru Colombia Panama Chile

Free Trade Agreement of Americas (FTAA) Proposed - ???



FTA Tool - Check out tariff rates & schedules by accessing FTA tool:

http://export.gov/fta/ftatarifftool/TariffSearch.aspx

Need HS Code (4 to 10 digits)

Select FTA partner

Pending FTA partners included

Market Selection






Market SelectionMarket research conclusionsTop markets share certain traits, some are:

Domestic sales & dist. methods similar

Solid comparative advantage for product with good sales potential

Stable political & economic systems

Low tariffs, restrictions and regulations

Relative ease of currency conversion & favorable exchange rates

Realistic transportation costs as a percentage of the cost of goods sold



Entry ModesChoosing your entry method should be based on the following factors:

How much feedback you want?

How much control you want?

How much access to overseas resources you want?

How much infrastructure/resources you currently have?



Entry ModesTypes of Entry Modes:

Indirect

Direct with no investment

Direct with investment Turnkey projects Wholly owned subsidiaries

Joint Venture Strategic alliance

Licensing Franchising



Entry ModesWhat is the best mode for you?

Consider your current infrastructure & plan

Start smart & build up expertise

Choose mode on a region by region basis

Work toward direct foreign investment mode



Entry Modes

Risk & Reward

Cont

rol &

Co

mm

itm

ent

IndirectLicensing

JV

Direct+invest

Direct export



Mode Conditions Favoring this Mode

Advantages Disadvantages

Exporting (no investment)

Limited sales potential in target country; little product

adaptation required

Distribution channels close to production

High target country production costs

Liberal import policies

High political risk

Minimizes risk & investment

Speed of entry

Maximizes scale; uses existing facilities

Trade barriers & tariffs add to costs

Transport costs

Limits access to local information

Company viewed as an outsider

Licensing

Import & investment barriers

Legal protection possible in target environment

Low sales potential in target country

Large cultural difference

Licensee lacks ability to become a competitor

Minimizes risk & investment

Speed of entry

Able to circumvent trade barriers

High ROI

Lack of control over use of assets

Licensee may become competitor

Knowledge theft , leaks, spillovers

Licensee period is limited



Mode Conditions Favoring this Mode

Advantages Disadvantages

Joint Ventures

Import barriers

Large cultural differences

Assets cannot be fairly priced

High sales potential

Some political risk

Gov. restrictions on foreign ownership

Local company can provide skills, resources, distribution

network, brand name, etc.

Overcomes ownership restrictions & cultural

differences

Combines resources of 2 companies

Potential for learning

Viewed as insider

Less investment required

Difficult to manage

Dilution of control

Greater risk than exporting & licensing

Knowledge theft, leaks & spillovers

Partner may become a competitor

Direct Investment

Import barriers

Small cultural differences

Assets cannot be fairly priced

High sales potential

Low political risk

Greater knowledge of local market

Can better apply specialized skills

Minimizes knowledge spillover

Can be viewed as an insider

Higher risk than other modes

Requires more resources & commitment

May be difficult to manage the local resources



Entry Modes

Indirect

Direct

EMC’s, Export Agents, ETC’s, Piggyback Marketing, Confirming Houses

MODE PARTNER

Commission & Direct Sales Reps, Distributors (regional, master, retail) & End Users



STRATEGIC ISSUES: LEGALCommon Law vs. Civil Law: Latin America has a Civil Law legal system In Common Law, prior decisions are binding, while in a Civil Law

system they are merely permissive

Economic Nationalism (discrimination against foreign business interests)

Choice of Law Clauses in export contracts (party autonomy) Most L.A. countries historically have not recognized party autonomy More L.A. countries beginning to recognize the principle of party

autonomy



STRATEGIC ISSUES: LEGALUniform Commercial Code (UCC) vs. Contracts for the Int’l Sales of Goods (CISG): UCC is good but some L.A. countries are uncomfortable with some of

the common law requirements (e.g. consideration) Many UCC and CISG provisions are similar If both countries accept CISG, then automatically in force Be careful that offer acceptance “mirrors” the terms of offer If you can choose which law to use, go with UCC – most familiar &

most judges in state courts & foreign countries unfamiliar with CISG

Analyze local rules on Agent and Distributor Relationships (i.e. title of ownership, commission fees, termination, exclusivity, etc.)



STRATEGIC ISSUES: LEGALOrganizational structures can differ significantly in scope & detail in Latin American countries (i.e. partnerships, corporations, LLC’s)

Intellectual Property Law: If you want IP protection rights in a country, you must obtain the

protection under that country’s rules – no automatic protection Trademark registration requirements in L.A. can be very different

than those in U.S. Get agents or distributors to obtain IP protection for their territory

Arbitration not often used in L.A. because L.A. countries traditionally have not enforced arbitral awards obtained outside that country. In order for arbitration to be binding, add an arbitration clause to your export contract.



STRATEGIC ISSUES: Cross Cultural Communication

Distortion or misinterpretation can occur when messages are sent from one cultural perspective to a different one.

This is because the sender is using a different set of values, attitudes, beliefs, expectations and preconceptions from that of the receiver.




Latin America is more… USA is more… Contextually focused Communal – Collective society Relationship oriented Oriented to the past Complex non-verbal cues Hierarchical / Elitist Want to like what we do (work) Threatened by uncertainty Patient – long term orientation

Content focused Individualistic Task oriented Oriented to the future Straightforward non-verbal cues Egalitarian Want to be the best at (work) Tolerant of uncertainty Impatient, quick decisions &

results




Understand cultural framework

Customer service #1 focus

Be consistent but flexible

Be careful of granting “exclusivity”

Its all about relationships

Minimize perceived risk



STRATEGIC ISSUES: Product Selection

Factors to consider: What are the needs of your Latin

American customer (VOC)?

How easily can you modify your product to meet Latin American needs?

How will your packaging, labeling & manuals change?

What about after-market sales support, returns & warranties?



Export Plan Tips and AdviceFreight is your #1 variable cost. Getting your product to your customer in good shape, on time and at the lowest cost should be a top priority

Freight Tips: Find a knowledgeable Freight Forwarder/Carrier you can work with An average shipment is handled between 44 and 91 times during

transit & falls 2 meters (6.5 ft.) or receives a blow equal to a 2-meter fall at least once during transit

Select packing materials that consider the mode of transport (e.g. air or ocean freight), type of commodity & weather (e.g. desiccant)

Use international handling & instruction symbols Be shrink-wrapped if feasible

Remember the ISPM 15 Regulation (keep bugs out!)http://www.aphis.usda.gov/import_export/plants/plant_exports/wpm/wpm_faqs.shtml

http://www.leeinspect.net/International_Exports_Contact_Us_Bossier_City_LA.html



Export Plan Tips and AdviceCompliance

Most exporters are unsure if they are 100% compliant. Make sure your international sales processes & procedures include:

List of specific export doc’s needed for each country (tradewizards.com)

Your Export Control Classification Number (ECCN)

Use the Denied Parties List (DPL) on BIS website to check new buyers

Having a Destination Control Statement (DCS) on key export documents



Export Plan Tips and AdviceSales, Marketing & Promotion

Get FREE or low cost secondary research from International Trade Centers, SBDC’s, State Agencies (DCEO), Federal Government (Dept. of Commerce – export.gov)

Market Selection Market Entry

Find new overseas reps, distributors & partners via: Dept. of Commerce Gold Key program ($700 - $1300) Go to trade shows & trade missions (STEP program) Connect with OTI foreign offices



Export Plan Tips and Advice

Finance

Using Credit Insurance (e.g. EX-IM Bank) to gain new customers & increase order sizes

Develop an Export List Price in local currency to increase revenues 5 to 15% via foreign currency exchange (FX)



Thanks, Gracias, Obrigado, Merci!

Documents

Fundamentals of Exporting to Latin America