The big order seems to be the idea of international trade, to everyone except those who actually thrive in the business. Schools teach all about economies of scale, comparative advantage, currency arbitraging, which I suppose helps fill otherwise empty space in lecture time, but are not a part of real world international trade. A researcher checked in with me on an apparent anomaly:
I ran a model that said holding everything else fixed (industry, age of business, size of business, year started, etc.), a new exporter's life expectancy is negatively correlated with the value of sales in it's first year exporting. That is, the more you sell your first year, the shorter the time you continue to export. What do you think? Do you have any intuition for why that would be?
I know from personal experience that large orders to start mean one is likely being ripped off. I say so in my book.
Plenty of companies who get big first orders experience one problem or another (including plain fraud), and the cost of the mistake on a big shipment overwhelms the company. When exporting, selling to buyers overseas, the buyers are testing as much as we are. They find the rules and regs as contradictory and whimsical as the seller. They want small shipments to test out the processes.
No legitimate buyer risks big money on new product. They desperately need new, but "new" necessarily means "untested." So legitimate buyers are testing ... Measure twice, cut once vs burned once twice shy.
Exporting is notoriously easy to get burned, for a couple of reasons. First and foremost, our strengths are our weaknesses. The UCC gives us all recourse if someone rips us off. Therefore, we are innocents abroad. We just assume we can take malefactors to court, like usa. Not so...
Next, banks sell letters of credit as security. Brenda McKelvy is the only banker I ever met who said no, not true (I already knew in practice they are not, but it was good to meet a banker who said so.) I read a long book on LsC by a lawyer who said they were not security, and his recommendation was a international law enforcement agency blah blah blah... he had a good line.. "the law is supposed to bring order, but LsC bring chaos." (Also cited in my book.) Well, right. The only thing that matters in int'l trade is relationship.
I was consulting circa 1995 with a MetLife Ag investment of 1000 acres of apples and pears. First day the boss tells me he is stealing thunder from a MetLife peer who has a 1000 acres of oranges who thinks he will be the first MetLife Ag manager to export to China. Secret deal. hahaha... Full container load to China, and I ask how he is getting paid. "no problem..letter of credit." He shows me the document. Yikes... It is a Bank of China LC application form, duly filled out. I tell him it is an application form, not an LC (not that an LC would be any security). He calls in a banker who says "it is an application form, not an LC."
It is a problem that everyone is conditioned to think that the MOQ must be at least a 20', and since a 20' is 80% the cost of a 40", reason dictates the MOQ is a 40'. I've seen plenty of scamming in int'l trade in my time. The full container load premise invites disaster.
There are far more potential customers at a $2000 MOQ than a $100,000 MOQ, potential customers who can test markets and find something no one foresaw.
The trick to avoid getting burned in exporting is to offer the FOB your currency prepaid low MOQ export offer. You ship to everyone who prepays, and then you let them reorder slowly over time. Upon reorders, you can study that company, and find their creditworthiness.
Feel free to forward this by email to three of your friends.
4 comments:
I would prefer to just use check (or credit card) payment for orders under $5-$10K. But use LOC (letter of credit) for larger orders - after several test orders and after it has been confirmed that the product actually has customers. With larger orders, say $20-$50K or more, would it be better (or required?) to use a LOC? Or is it always better to pay without LOC if possible no matter how large the reorders get?
The bottom line is relationship, can you trust the other side. LsC are so flexible they can solve all sorts of problems, so their use is a question of mutual benefit.
When you say "larger orders" I wonder how that would come about. You mean to say that the product is so popular that they no longer sell 1000 in six months, the now sell 6000 in six months, therefore they order 6000 every six months? is this why the order is larger?
If so, I would say don't ship larger orders ever six months, ship 1000 piece orders every month. In this way you manage risk in the areas of finance and logistics and production.
But what about the economies of scale in larger shipments? Delusional! Email me for a tutorial on this topic.
Hi John: In one of your youtube videos (costings, part 7), you state that you believe that LOC's will eventually become defunct - is this still certain (the video was apparently made back in 2008)? Will small business importers just use credit card payments for small orders? In your last comment above, you state that LOC's do have mutual benefits - can other forms of payment provide some kind of "security" or mutual benefit?
In 2008 I may have said that, and even in 2009, given that Obama had been elected president to end the bank bailouts and stop the damage being done. Well, it turns out under his presidency the Bush policies were accelerated and now we are three or four times worse off, and probably past some point of no return.
The issue is security for the banks and no one else. If and when this worldwide system comes down, with today Japan leading the way, then we may have to go back to the future and resume the currency control procedures manifest in the use of letters of credit.
I of course never have any idea what is next, only to say whatever they cook up, we'll have to endure and work around that too.
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