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COUNTER TRADE
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COUNTER TRADE
At the end of this module, the learning outcomes are
1.What are the concepts of counter trade
2.Benefits of counter trade
3.Types of counter trade
4.How is counter trade seen in many countries
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COUNTER TRADE
Suggested readings
1.International Business by Czinkota & Ron Kainen Chapter 18
2.International Marketing by Onkvisit & Shaw chapter 7
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COUNTER TRADE
What is counter trade • Those transactions which have as a basic
characteristics a linkage legal or otherwise, between exports and imports of goods or services in addition to or in place of financial settlements.
•Historically barter•Money was not used•Barter still used
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COUNTER TRADE
Why counter trade
•Lack of money
•Lack of value
•Lack of faith in money
•Ease of transactions
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COUNTER TRADE
•Quite prevalent in East European countries
•Poor financial conditions
•Increasing counter trade•1972 – 15 nations
•1983 – 88 nations
•1995- 105 nations
•15 – 20% of world trade (estimate)
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COUNTER TRADE
Benefits of counter trade
• Heavy debt of developing countries
• No further credit
• How to trade
• Exchange goods
• Permits covert reduction of prices
• Avoid price and exchange controls
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COUNTER TRADE
OPEC
•Oil Cartel
•Agreed prices
•How to get discount
•Counter trade
•Increasing bilateralism
•“You scratch my back and I’ll scratch your’s”
Example of Turkmenistan
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COUNTER TRADE
Entry into new markets
• Counter trade
• NEC Japan and Egypt
• Increasing Japanese tourists to Egypt
• New opportunities for developing countries
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COUNTER TRADE
Organizations
• Stability for long term sales
• Long term contracts
• Avoids problem of fluctuating prices
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COUNTER TRADE
Criticism of Counter trade
• Need for surplus at both ends
• Leads to trading of inefficient goods
• Uncompetitive goods traded in
• Discourage efficient production
• Lowers quality
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COUNTER TRADE
Types of Counter trade
1.Barter
• Simplest
• Exchange
• Assessment of value
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COUNTER TRADE
2. Counter purchase (parallel barter)
• Barter is single transactions
• Counter purchases involves two separate transactions
• Each with its own cash value
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COUNTER TRADE
Example - Counter purchase
•Iraq buying New Zealand meat
•Deal for 200 million $
•New Zealand buys Iraqi oil
•Supplied at future date
•No cash outflow
•Future date
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COUNTER TRADE
Compensation trade • Counter purchase• Two unrelated products• Related • Japanese Co supplies textile machinery to
Chinese Co• Chinese uses machines to make garments • Supplies garments back to Japan
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COUNTER TRADE
4. Switch Trading • Problems of non requirement of full consignment• Bilateral • What to do• Involve third party • New Zealand sell milk to Kuwait • Full requirement not consumed by Kuwait • Involve a party from Switzerland
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COUNTER TRADE
Switch Trading
• Switzerland supplies other material to Kuwait
• Switzerland buys from New Zealand the shortfall at discount.
• Switzerland sells these to fourth party in England
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COUNTER TRADE
5. Offset • Foreign supplier required to produce locally• Defence deals• Purchaser insists to manufacture locally• Could be
– Licensing – Subcontracting– Joint venture
• Major way of doing business
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COUNTER TRADE
6. Debt Swap• Less developing countries • Huge debt• Unable to pay• Exchange debt for something else• Five types of Swaps
– Debt for debt swap– Debt for equity swap– Debt for product swap– Debt for nature swap– Debt for education swap
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COUNTER TRADE
ATTITUDES TOWARDS COUNTERTRADE• Many condemn • Encourages inefficiency • Some are neutral• Still many are constrained to do this• Bad economic situation of developing
countries • Refusal may mean loss of business
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COUNTER TRADE
• More companies in counter trade
• Improve market position
Mercedes Benz
• Established subsidiary
• Sells trucks
• Buys hand tools
• Some sale better than no sale
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COUNTER TRADE
Pepsi Cola• Pioneers in counter trade• Russia and East European countries • Expand operations • How?• Accepted Vodka from Russia • Accepted Wines from Romania • To finance Pepsi – Cola bottling plants in these
countries • Profitable arrangement for all
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COUNTER TRADE
Benefits to developed nations
• Counter trade
• Creation of new markets
Pepsi in USSR
• Maintain market share
• Barriers for entry of competitors
• Pepsi exclusive arrangements in USSR
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COUNTER TRADE
Pepsi in USSR • Build good relationship with governments • gives access to market other products• Socialist countries in particular• State owned organizations• Expand bottling operations • Pepsi in Ukraine • Pepsi marketing Ukrainian made commercial
ships for 8 year period
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COUNTER TRADE
Pepsi in USSR • 1 billion $ order. • Pepsi dominates Cola market in former
USSR Republics • Exclusive arrangements • No arrangements with Coke • Coke could not enter for 12 yearsClear advantage for Pepsi
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COUNTER TRADE
Risks with counter trade
• There are risks
• Counter trade partner
• Goods specification
• Delivery time
• Reliability
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COUNTER TRADE
Impact of counter trade on future prices
• Contracts period longer
• Goods obtained at future date
• Looks profitable at the time of agreement
• May not be six years down the line
• Supply demand equation
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COUNTER TRADE
Barter Houses
• Specialist in counter trade
• Counter trade requires time
• Find partner
• Puts financial strain
• Capital tied up for longer time than normal transactions
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COUNTER TRADE
Citi Bank• Created counter trade department • Consultant and financing of bartered
goodsUniversal Trading Exchange• New York company• Clearing house for bartered goods• 500 barter exchange houses in US
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COUNTER TRADE
Motors Trading co• A subsidiary of General Motors• Develops market for General Motors products • Cash deals are not possible• Counter trade with 20 countries • More than 50% business in former USSR
republics• A well developed strategy for counter trade can
be successful.