Pricing

Based on Philip cateora and RM Joshi- any books is ok Think- Suppose your company is putting a new factory have to import- computers, heavy machinery, stainless steel, generators. Which countries you will prefer?

Pricing fundamentals
Basics of pricing Cost and existing contributions decide the bottom Demand supply positions and uniqueness of product and services decide the top Competition or market prices give orientations Company policy to international marketing decide actual price- entry at any cost, continuity of business, big volumes or only if better profit

Others Country and customer specific pricing Future prospects associated with this contract Payment conditions, foreign exchange fluctuations

Factors influencing pricing decisions in international markets

cost full cost, marginal cost,
Full cost plus mark up, Marginal cost- these prices could attract anti dumping

Competition- high in India, OECD, China, low in Angola, Mali Algeria irregular or unaccounted payments- bribes in Bangladesh, India, Russia, Nigeria, Phil, Ukraine purchasing power of customers- discussed elsewhere buyers behaviour- performance (in developed countries) or price (in poorer countries) based depending on culture and advancement foreign exchange fluctuations- Singapore $ very stable, Indian rupee, GBP moderately stable against dollar

Terms of payment in international transactions

Different terms of payments have different levels of security, speed cost and risk. Major modes advance payment- TTs, Wire, safest, fastest, popular for smaller payments, after signing contracts but before shipment, risky for buyer open account or running account- (do not follow Joshi) its pure credit sale. very very risky, normally not in use.
Used in case of exports to subsidiary/branch of exporter or to old customers

consignment- not popular, shipments on consignment basis, title with exporter,

consignment is sold by agents or company rep. under consultation with shipper rates decided at the time of sale, tentative value declared in GR require warehousing at destination, Used for exports to own subsidiary or branch or to old and reliable agents

Payments- LC- refer Philip cateora chapter 15

Letter of credit- most popular specially for bigger transactions safest, for shipper and buyer both LC shifts the credit risk from buyer to opening bank Could be revocable or irrevocable. Irrevocable is safe as it means that once LC is accepted by exporter it wont be revoked by opener Exporter could add further security by asking buyer for confirmed LC. Confirmation is done by an Indian bank and Indian bank take responsibility of paying even if foreign bank and buyers fail. Confirmation costs extra and restrict the LC. So avoided while dealing with old customers

LCs
Revolving immediate after buyer accept docs and pays the LC is reinstated without opening a new LC Back to back and freely transferable Availability of credit- issuing bank authorises their corresponding bank in India to honour the docs on openers behalf, Unless credit stipulate availability with issuing bank, nominated bank is authorised to pay In freely negotiable credits any bank is nominated bank. These are better for seller as their own bank handle the negotiation and discount/purchase of drafts If not freely negotiable, credit must be available for negotiation with shippers bank

Payments
Signing Contract is starting point to open LC LCs have universally standard formats with provisions for special conditions to be fulfilled by exporter Buyer applies to their bank with copy of contract, specifying special instructions. Normally buyers fax/mail a copy of application to shipper for approval before applying as amendments are expensive- usd 80 to 180 per amendment LCs are not flat payment guarantees, rather based on certain contractual fulfillments by shipper. Shipper should examine terms of LC carefully and comply Discrepancies require acceptance by buyer, if not accepted, LC become in operational

Payments
Bills of exchange- like hundis- drawn by sellers on foreign buyers Seller take all risks till payments are received Seller draws the draft on buyer with all negotiable and original documents for collection through their bankers to buyers bankers Buyers bank present it to buyer for acceptance and payments on sight or on deferred due dates
sight mean payment on presentation and acceptance DAP, safer than DA. Documents are handed over on payments only or on deferred due dates, Usance or time draft, DA, like 30, 45, 90 or 120 days or as agreed, BLs are handed over on acceptance and buyer take delivery. Docs are presented again on due date. Risky, buyer may not pay on due or not at all on some pretext

payments
Others- part cash (10-15%) before production and balance before shipment or part cash (25%) before production and balance bills of exchange/CAD- with regular customers Forfaiting and factoring- first is one time and second is running arrangement of discounting with bank or others

INCOTERMS- www.iccwbo.org
Known as International commercial term- INCOTERMS developed by International Chambers of commerceICC, Paris in 1936. INCOTERMS 2000 is current version Define cost risk and obligations of two parties. Incoterms apply if mentioned in contract or LC Pre carriage mean transportation up to vessel/port Main carriage mean sea freight Under F terms- pre carriage paid by seller and main carriage by buyer Under C terms pre carriage and main carriage paid by seller but seller risk limited till delivery to main carrier Under D terms all risk and expenditure up to destination are in seller a/c

Terms of delivery
Some terms are EXW (Ex Works) name of city specified, without loading and clearing FCA (Free Carriers) named place- cleared for export, loaded on carrier, FAS (Free Alongside Ship) named port of, cleared, inland freight paid FOB (Free on Board) named port of shipment, goods loaded on vessel CFR (Cost and Freight) also C&f, named port of destination - FOB + sea freight upto destination port CIF (cost, Insurance, and Freight) named port of destination- CFR plus insurance by sea CIP (Carriage and Insurance Paid to) named place of destination same as CIF by all modes, air, post

Terms of delivery
CPT (carriage Paid To) named place of destination like CFR any mode DAF (Delivered at Frontier) named place, land border, cleared for export but not import DES (Delivered Ex Ship) named port of destination like CFR but CFR delivers at loading port DEQ (Delivered Quay) named port of destination- DEQ plus discharging, delivery in dock, not cleared for import DDU (Delivered Duty Unpaid) named place of destination, import duty unpaid DDP (Delivered Duty Paid) named place of destinationcleared for import, all duties and taxes paid but not unloaded

dumping
selling a product or commodity below the cost of production or at a lower price in overseas markets as compared to its price in domestic markets. WTO consider it unfair trade practice and attract penal duty if harm domestic industry of importer types of dumping
sporadic dumping- occasional not regular predatory dumping- it forces competitors out and after getting control the predator increases price. Developed countries in farm products, Japan in electronics, persistent dumping- continuous, China in consumer items and textiles

Transfer pricing
Transfer Pricing relate to pricing amongst different units of corporate like consignment transfers or exports to branches, subsidiaries, joint ventures, SIAs or otherwise related parties

MNCs, with offices and branches in many countries, have scope to manipulate prices to exploit Normally pricing should evenly distribute profits amongst producing, procuring and distributing units Companies use different units to manipulate taxes income tax by generating major income in planned country tariffs in importing country Reduced foreign exchange exposures

Transfer pricing- Legal frameworks

Re-invoicing or third country invoicing such countries have, liberal tax laws and or corporate / head office Value additions only assembling/repacking but shown major on paper.

governments are getting concerned, increasingly restrictive and paying special attention to transfer pricing in tax audits. Govt. departments compare market based (Arms Length) transfer pricing to that of related firms transfer pricing India introduced laws related to transfer pricing in 2001, US in 1994, UK in 1999, Germany 1983, Japan 1986, South Korea 1996, Malaysia 2003, Australia 1994----

Grey marketing
import or export of goods and marketing them through unauthorized channels conditions that create profitable opportunity for a parallel market Variations in the value of currencies between countries- When the dollar was high relative to the West German mark, Cabbage Patch dolls were purchased from German distributors at what amounted to a discount and resold in US Purposefully restricting the supply of a product in a market. Mercedes-Benz automobile supply was limited in the U.S. Americans returning from Germany with cars used to sell, in US, for double the price they paid in Germany. This situation persisted until the relative value of the dollar to the Mark weakened and controlled distribution ended.

Grey markets- competition from within

Parallel importing- when prices are cheaper in home market or in one of overseas markets. importers buy from distributors in home country or such cheaper third country and sell them to distributors not part of the manufacturers regular channel.
Mercedes cars from Germany to US earlier Coke from US and Canada in HK, Taiwan Pampers from Saudi to India

Re- importing when prices in overseas markets are cheaper than home country- Electronics in Japan Panasonic cordless phones @ $59.95 in NY versus $152 in Tokyo and Sony Walkman @ $89.00 in NY versus $165.23 in Tokyo OTC Medicines in US normally start with USD 15.00, ( own labels @ $ 10.00) for a pack of 30 pills, cost half in Canada and about $ 0.75 in India. Prescriptions in US are more expensive

Grey markets- competition from within

Parallel Sale of copyrighted material like, movie and programs on CDs/DVDs common. Taiwan, HK, New Zealand, Australia ban parallel trade but Canada and Europe do not if product is official

Price escalation in USD for cotton yarn, fabric brand garments using same raw material Price in Indian market- Rs. 150.00 CFR price- 174.00 or usd 3.90 or say 4.00 Import duty for yarn 10% Import duty for for fabric- 25% Import duty for garment 50%

Price escalation in USD for cotton yarn, fabric brand garments using same raw material
Items Yarn/ kg Fabric/kg Ts/Pc loose 7000 2.75 3.15 0.80 1.00 xxxx 1.25 xx 6.20 7000 1.50 2.00 1.00 1.00 0.50 1.15 2.85 8.50 Ts /Pc box Pack 2800 1.70 3.00 1.50 1.50 xxxx 1.50 3.75 11.25

Stuffing 20 7000 frt 1500$ Price- India 2.50 CIF Price Import duty Importer + repacking 2.90 0.30 0.80 xxxx

Wholesaler 1.00 Retailer Final price xx 5.00

Escalation- books by S.C.Jain and Philip Cateora

When products move across borders, additional costs are incurred like cost of the physical movement of goods from exporters godown to buyers godown tariffs and non-tariff barriers. Charges and margins of intermediaries like buyer, converter, wholesaler, retailer

This addition of cost over export price is price escalation. Companies able to control or minimise, some elements of escalation, could expect better profit, price competitiveness and above all smoother business How to minimise???

Escalations
Options host country or third country
productions, assembly, repacking

Unethical options under invoicing, wrong classifications bribing custom pass. Not possible in all countries. Could attract anti dumping

FTZs- reduction in cost of financing (escalations) shortening channels, reclassifications, net rate invoicing, consignment sales,