International conferencing has helped accelerate international business expansion. Those of us involved with international business typically find that we cannot have as many face-to-face conversations with clients and partners around the world as would be ideal. Inevitably we turn to voice and video conferencing as a way to bridge the distance. It may have its technology glitches and communication challenges, but conferencing saves time and money for companies needing to coordinate international teams and service international clients.
Here are tips on how to make the most out of this communication medium while minimizing some of its risks:
Upgrade to a Better Technology Platform
Most of us have used Skype or GoToMeeting to communicate with a business associate or client overseas. If your business is very small and your budget even smaller, then this may be a good approach for you. If your company is growing and your brand is anything but the low-cost leader, then it's time to upgrade to a higher performing conferencing platform. Not only will this drastically reduce technology hick-ups and eliminate embarrassing dropped calls, locked screens, and garbled voices, it will improve the chances of smoother communications.
I have recently found a niche conferencing company that actually specializes in international conferencing services: Adigo. It delivers higher quality sound and video particularly for international calls than its low-cost/no-cost alternatives.
Use a Meeting Agenda
Casual meetings that flow from topic to topic may work in some face-to-face settings, but for international business they come across as disorganized and unimportant. Be sure to create a clear and focused meeting agenda that it sent out to all attendees ahead of the meeting.
Choose Your Words Carefully
A big mistake I have heard many business professionals make on international calls and video calls is to speak quickly and use lots of colloquialisms. Instead, you should always speak specifically to your intended audience. How will they interpret what you say? If your counterpart is from Germany, don't use baseball analogies. Speak a little slower with more care to word choice. Simpler words are better. And be particularly careful with using humor as it can often be misunderstood as you cross cultures.
Uncomfortable Conversations are Better in Person
International conferencing can be helpful in building relationships, advancing a sales process, or maintaining a business relationship. But what happens when the conversation is difficult because of issues in the relationship? If the client or strategic partner is important to your business, then it's time to pay a visit in order to have a face-to-face conversation. Trying to patch things up over the phone or video has a much lower success rate.
I hope these tips were helpful. For more information on doing business internationally, please visit my website: The International Entrepreneur. Good luck in all of your business dealings!
A number of years ago I worked with someone who grew up in Cuba. Since she spoke English as a second language, interesting nuances became apparent when we discussed letters of credit. I remember on one occasion I referred to a letter of credit as unconfirmed. She gently corrected me, "If a letter of credit is unconfirmed, that means a bank first confirmed it and then removed the confirmation, making it unconfirmed. But," she went on, "a bank cannot undo a confirmation once it has been made."
Was she right? She spoke grammatically correct, of course, but it raises an interesting question. Can a bank add its confirmation to a letter of credit and then, at a later date, notify the beneficiary that they no longer want to have their name, reputation and obligation attached to the letter of credit? Where can we turn to find an answer for a question such as this? The Uniform Customs and Practices for Letters of Credit (UCP), of course!
The removal of a confirmation requires an amendment. According to the UCP, "[A] credit can neither be amended nor cancelled without the agreement of the issuing bank, the confirming bank, if any, and the beneficiary" (Article 10 a). In summary, a bank can rescind its confirmation but only if the beneficiary agrees. While possible, it is not probable.
After that conversation, my co-worker and I agreed to refer to letters of credit as confirmed or advised. An advised credit implies a bank has not added their confirmation.
We were just acquired by a larger company, and they have advised us that they will be conducting a compliance audit of our international procedures and processes in January. They gave us a checklist of documents that we are to have available for the exports we've shipped during the past 12 months.
We asked them how they knew about our shipments in the past year, and they said with our management team's assistance that they had requested and received our Census data report. They gave us an extract from the report, but we only have our documents: the commercial invoice, packing list, and inland bill of lading.
We've identified the freight forwarders who filed the Shipper's Export Declaration (SED) with the Census Bureau. Do you think they will help us? What do we do?
Panic Stricken in Indianapolis!
Dear Panic Stricken in Indianapolis,
You are not alone in your predicament; there are many firms (large and small) who do not have the records they are to keep for five years on file at their offices.
Census released a notice to the trade community on October 30, 2013, regarding the retention of export information. (You'll find it on their blog.) Census advised that the record retention policies for the Census Bureau (15 CFR 30.10), Bureau of Industry and Security (15 CFR 762.6(a)), and the State Department (22 CFR 122.5) require keeping documentation for five years. The Census Bureau's record retention requirements do not relieve filers from adhering to other government agency's record retention policies.
All documents, correspondences and other relevant information to the export transactions should be maintained. These should include, but are not limited to, items such as:
Electronic Export Information (EEI)
Other documents relevant to the specific transaction
Your new owners deserve and need honesty from you and your team. There are several reasons; they include liability mitigation, determining if prior disclosure with Census is necessary, understanding the gaps in process and procedure at your firm, and the ability to assist you in obtaining the documentation required from the freight forwarders who filed the Electronic Export Information (previously the SED).
Many freight forwarders will want to charge you a fee or claim that they are not able to provide the relevant export records to you. Your new owner and their legal counsel may be able to persuade the forwarders to find and release the documents you need.
Exporters generally understand the protection they receive with a confirmed letter of credit. They know the confirming bank obligates itself to pay even if unable to collect from the issuing bank. However, some exporters do not fully understand how to effectively ask for a confirmed letter of credit. Let's begin by emphasizing one very important principle and then provide a right way and a wrong way to ask for a confirmed letter of credit.
An astute exporter understands the need to be proactive when dealing with letters of credit of any kind. Stressed in a number of the lessons in this series of articles, this strategy holds true for obtaining a confirmed letter of credit as well.
A second bank will consider confirmation of a foreign bank's letter of credit only if asked by the foreign bank. A bank will not confirm a letter based only on the request of the exporter. In order for the confirming bank to have any recourse to the issuing bank, the issuing bank must request another bank to add its confirmation.
It follows that a foreign bank will only request the confirmation if asked to do so by their customer, the buyer.
It further follows that the buyer has no motive to ask the issuing bank to request the confirmation unless the seller insists that the buyer do so; hence the need for the exporter to be proactive. Either party can offer to pay the fee for the confirmation.
Now, let's consider the wrong and the right way to ask for a confirmation. The wrong way is to instruct the buyer to send a confirmed letter of credit. An exporter recently did just that. They received a hard copy of a letter of credit issued by a bank in the Philippines, very prominently entitled, "Confirmed Letter of Credit." The advising bank gave no indication that they had confirmed the letter of credit because the issuing bank did not ask them to confirm it.
What did the exporter really have? Can a bank confirm their own letter of credit? No! It serves no purpose for a bank to confirm their own credit. It does not protect the exporter against the risk of default due to sovereign risk or the risk of the issuing bank not having the resources to pay. For an exporter to gain full benefit with a confirmed letter of credit it must carry the confirmation of a second bank in a second country.
To ask for a confirmed letter of credit, use the following wording: "The letter of credit is to be confirmed by (name of your favorite bank)," and fill in the blank. You may indicate you want the letter of credit confirmed "by a bank acceptable to us," or you may insert the name of a bank.
If you use a bank's name, contact them first to verify they will confirm the credit. They will want to know five factors: (a) the country; (b) the name of the issuing bank; (c) the dollar amount; (d) the tenor, e.g., sight, 30 days sight, etc. and (e) the expiration date. At that time the bank can also give you a quote for the price of confirming the letter of credit so you can build it into the price of your product.
If your company is doing business around the world, at some point you need to decide: How stable does a country need to be for us to do business there? Watching the U.S. Congress go through their puzzling brinkmanship last month over the federal government's budget and debt ceiling certainly left most Americans questioning our own country's economic and political stability. But the reality is that there is much more uncertainty in politics, market stability, regulations, exchange rates, armed conflict and/or inflation in places like Zimbabwe, Egypt, Turkey, Afghanistan, Syria and Venezuela.
There are many companies doing business in remote corners of the world. Here are some criteria that you should consider when assessing your company's international business risk tolerance:
Company as Risk Taker, Risk Avoider, or In Between
There are companies afraid to venture into ANY foreign market for fear of the unknown. These firms overlook any potential to make profits outside of their country's borders. This risk tolerance level would be considered extremely low. There are companies that will literally go anywhere in the world if there's a market or a raw material. Oil companies come to mind for this category. But most company cultures fall somewhere in between. The best way to gauge risk tolerance is to opening discuss risk versus opportunity with company leaders. How do they feel about international markets? Have they had positive or negative experiences in the past that color their perceptions? Without management support, international expansion usually fails at the first sign of internal conflict.
Level of In-Country Engagement with the Sale
What level of in-country resources do you need to have to make a sale, deliver the product or service, and follow up with customer support? If your company sells something that requires intensive in-person interactions, then a country's overall business risk tolerance may need to be lower. For example, if my company is in the commercial building construction business, then I have to employ many in-country workers to build my projects. I also need to rent or own many pieces of construction equipment. If there's a national worker strike or if inflation skyrockets, I have more operational challenges to stay profitable. On the other end of the spectrum are services delivered via the Internet. As a consulting firm, The International Entrepreneur can do business in relatively unstable countries with little or no operational risks. In-country customer engagement accounts for wide variance.
Ability to Mitigate Likely Risks
It would not be fair to discuss international business risks without also discussing a company's options to lessen some of the worst scenarios. First, international business insurance can ensure your in-country assets from damage or nationalization. It can also reduce damages from work stoppages. Security requirements increase in countries where your employees could be harmed. Financial transactions can be made in a neutral currency to help reduce currency fluctuation risks. Contracting at a future currency rate also allows the company to know the final sale price. And finally, having a solid international law firm and accounting firm can help spot risks before they become issues that threaten the company's success.
When boarding a plane recently I noticed a guy dressed in cutoff shorts and flip flops and mentally noted how times had changed. I am old enough to remember when flying in an airplane was an event for which one dressed up. With a "que sera, sera" mindset, I withheld judgment. That is until the guy stuck his overly ripe, flip-flop clad feet under my airplane seat. (Cough! Sputter!! Gasp!!!) I don't care how informal our culture has become; wearing flip-flops on a plane is just wrong!
Now my friends and family will tell you I am a bit of a snob, and you might be inclined to agree. I don't dispute that, but I would prefer to say I have a discerning sense of style. I prefer to dress nicely and live well. I am not uncomfortable in formal clothing such as a suit and tie or, if the event calls for it, a tuxedo. So when I learned that importing involved making formal entries, well, I was all in!
I've learned that dressing appropriately for an event is important. Showing up in a suit and tie at a family picnic can be a bit off-putting and can make the wearer uncomfortable. Likewise dressing in flip-flops and a cutoff shorts for a wedding is also not appropriate, unless that wedding is on a beach. That goes ditto for airplanes!
And so it is with importing. There are times it is appropriate to be formal and there are times one may be informal, at least in the type of entry that the importer files.
What am I talking about?
U.S. Customs and Border Protection (CBP) makes a distinction between the types of entries importers may file. Standard commercial entries exceeding $2,500 in value are referred to as formal consumption entries. This is noted by the code 01 within field 3 of the entry document (CBP form 3461) and field 2 of the entry summary document (CBP form 7501.)
Importers filing formal entries do not need to wear tuxedos or gowns. Rather they are subject to bonding requirements, and the entry remains open for approximately one year until it is liquidated. Formal entries are also subject to the full merchandise processing fee of 0.3464% with a minimum of $25 and a maximum of $485.
Informal entries are administratively simpler and are used primarily for shipments of $2,500 or less. Unlike the formal entry the importer does not have to post a bond. CBP also approves the declaration upon entry and liquidates it. Technically an entry form 3461 is not required, and the entry summary form 7501 can perform as both entry and entry summary. An informal entry is denoted by the code of 11 in the entry type filed. From a practical perspective informal entries are subject to a $2 merchandise processing fee if filed electronically, and customs brokers usually charge less for filing them.
So with a $2 merchandise processing fee and lower brokerage charges, who wouldn't want to wear flip-flops, I mean file an informal entry?
There are some restrictions on the use of informal entry procedures. The full details of goods eligible for informal entry are found beginning with 19 CFR Â§143.21. The regulations allow for informal entry in the following situations:
(a) Shipments of merchandise not exceeding $2,500 in value (except for articles valued in excess of $250 classified in Chapter 99, Subchapters III and IV, HTSUS).
(b) Any installment, not exceeding $2,500 in value, of a shipment arriving at different times.
(c) A portion of one consignment, when it does not exceed $2,500 or $250 if classified as per (a) above.
(d) Household or personal effects or tools of trade entitled to free entry under Chapter 98.
(e) Household effects used abroad and personal effects whether or not entitled to free entry.
(f) Books and other articles classifiable under subheadings 4903.00.00, 4904.00.00, 4905.91.00, 4905.99.00, 9701.10.00, 9701.90.00, 9810.00.05, imported by a library or other institution described in subheadings 9810.00.05 and 9810.00.30.
(g) Theatrical scenery, properties, and effects, motion-picture films, commercial travelers' samples and professional books, implements, instruments, and tools of trade, occupation, or employment, as set forth in 19 CFR Â§10.68.
(h) Products of the United States classified under heading 9801, when the aggregate value of the shipment does not exceed $10,000 and the products are imported
"¢ For repair or alteration prior to re-exportation, or
"¢ After having been rejected or returned by a foreign buyer to the US for credit.
It is this last provision that has caused some confusion for some importers and customs brokers. Not all U.S. goods subject to treatment under classification 9801 are eligible for entry under informal procedures. Informal entry is only allowed under the two situations detailed above. CBP may require additional documentation certifying that these two provisions apply.
Likewise, because an entry includes items detailed above does not mean the entire entry may be filed informally. If the value of the entire shipment exceeds $2,500 a formal entry will be required.
In other words, while flip-flops may be appropriate, sometimes a suit and tie is required.
With a population of 88.8 million, Vietnam is the 13th most populous country in the world. Economic reforms introduced in the 1980s have helped this Communist country achieve significant economic growth including a doubling of the size of its middle class during the past five years.
Like China, Vietnam's nominally communist one-party system crushes dissent, keeps its military under tight control, and changes government policies and leadership slowly. While Vietnam offers an attractive environment for investment, the country is not without its drawbacks. In addition to widespread corruption, red tape and high inflation, Vietnam's infrastructure is still underdeveloped.
Regulatory and Political challenges
In order to retain command and control over the economy, the ruling party uses Vietnam's state-owned enterprises. Mismanagement, corruption, bureaucracy, lack of audit system, and inefficiency are common. The country has experienced bouts of macroeconomic turbulence in recent years"”double-digit inflation, depreciating currency, capital flight, and loss of international reserves"”that erodes investor confidence.
Vietnam is now losing out to countries such as Indonesia in terms of efficiency and value for its money. Inflation is on the rise as the dong currency has weakened and untrimmed borrowing by the state-owned enterprises has put a strain on the banking system and left banks heavily indebted. The issues of surging inflation, repeated devaluations of currency, a deteriorating trade balance, and rising interest rates undermine investor confidence in recent times.
Corruption and Bribery
As in many developing countries, corruption remains a problem in Vietnam, which a recent report ranks as the fifth most corrupt country in Asia. The anti-corruption organization Transparency International ranks Vietnam 116th out of 178 countries in its annual corruption perception index. A survey by the Vietnam Chamber of Commerce and Industry showed that half of business people admitted bribing officials to win contracts.
Intellectual Property Right (IPR) Protection
In Vietnam, the regulatory system to protect intellectual property rights was first put in place in 2005 through the Law on Intellectual Property. However, over the years, inherent deficiencies and administrative loopholes have severely undermined the efficacy of the system and made it difficult for owners of IPR and authorities alike to take action against infringers. Since the enforcement of IPR is low, very few cases make it to the courts.
Many counterfeit products that find a way into Vietnam originate from China. Counterfeiters use this country's warehouses as a great big transit lounge before boarding ships and flights to other destinations. The goods involved are mainly milk, fertilizers, cosmetics, electronic products, copies of DVDs and CDs, vehicle parts and medicines. Additionally, Vietnamese private workshops also manufacture counterfeit products and market them as genuine branded products. The prices of these products are relatively high in keeping with recognized global brand name products, but the information about the origin of the products is vague.
Restrictions on Use of Communication Media
Government maintains strong control over media and social movements. The government does not allow independent or privately owned domestic media to operate, and it exerts strict controls over the press and internet. Criminal penalties apply to authors, publications, websites and internet users who disseminate materials that oppose the government, threaten national security, reveal state secrets, or promote reactionary ideas. For example, since September 2011, all internet service providers in Hanoi have been required to shut down internet transmission at all internet retail providers from 11:00 p.m. to 6:00 a.m.
Skill and Talent Shortage
Limits to Vietnam's talent, both in terms of English and technical talent, will continue to constrain the growth of segments where these skills are critical. A recent survey by Grant Thornton, a global accounting and consulting firm, found that companies are more worried about attracting and retaining critical staff in Vietnam than anywhere else in the world. Once workers are trained and educated by a multinational corporation they quit and find other jobs. Many young people under the age of 25 are poorly educated and lack professional skills and are, therefore, unemployed.
Distribution and Logistical Problems
Running about 1,000 miles from north to south, Vietnam is primarily a rural country. Distribution of products becomes a challenge and requires innovative strategies. Transportation is also an area of concern. There is only one national road running from the north to the south. During and after floods the road often cannot be used. The only running railway running from north to south is no substitute. The sea offers a less expensive substitute, but harbor capacity is limited. Vietnam competitiveness is also under threat because power generation has not kept pace with demand, logistical costs and real estate.
Since Vietnam is located in the tropical monsoon area in Southeast Asia, it is one of the most hazard prone areas in Asia Pacific Region. According to a 2012 World Bank report, major storms, flood events and other natural hazards result in annual economic losses equivalent to between one and 1.5 percent of gross domestic product (GDP). Seventy percent of Vietnamese people are estimated to be exposed to risk from multiple hazards, especially in rural communities. Businesses operating in these areas equally affected.
Human Rights Related Issues
The government of Vietnam continues to suppress political dissent and severely limit freedom of expression, association and public assembly. The government of Vietnam continues to expand control over all religious activities, severely restrict independent religious practice, and repress and arrests individuals and religious groups it views as challenging its authority. According to McKinsey Quarterly's Human Rights Watch Report (2011), Vietnamese courts remain under the firm control of the government and the Vietnam Communist Party and lack independence and impartiality. Vietnamese law continues to authorize arbitrary administrative detention without trial.
Despite many challenges identified in this series of articles, Vietnam is still quite attractive to foreign investors. Vietnam has replaced China and Taiwan as the newest favorite location of companies setting up overseas operations owing to open economic policies, geographical position, political and economic stability, abundant and cheap labor, and huge consumer market. Opportunities and challenges identified in these articles will help the potential investors and exporters to formulate appropriate investment and risk management strategies to achieve their respective goals.
This is the sixth part in my series of articles on country risk and customer risk assessment.
To recall, it is important to classify both countries and customers, because a rogue customer in a good (from a risk perspective) country is not a much better risk than a good customer in a rogue (from a risk perspective) country.
In my last article I discussed the remaining five categories of the Doing Business: Measuring Business Regulations project. In this article I will discuss the competitiveness data from the World Economic Forum, as at 1 October 2013. Remember these data are freely available publicly from the World Economic Forum website.
Whether you are a trader or a service provider, competitiveness considerations are highly important. Competition is what drives us to be more successful than others. Fair competition is good; unfair competition is not good. So called predatory behaviour is not a good approach to doing business as it typically works on the exploitation of the weak, who are typically disadvantaged and, consequently, victimised. This behaviour has questionable ethics, to say the least. It is important to remain human, even when engaged in business dealings.
The World Economic Forum (WEF) genesis dates to January 1971 when a group of European business leaders met under the patronage of the European Commission and European industrial associations. The initial meetings focused on how European firms may be able to catch up with United States management practices. The European Management Forum was set up in those early days and its name was changed to the World Economic Forum in 1987.
The activities of the WEF have gradually expanded to include a number of international projects including health and hunger issues. Importantly, in the context of this series of articles, WEF has developed a knowledge centre where freely accessible useful information and reports may be found. One of such reports is the Global Competitiveness Report, the latest one of which is the 2013"“2014 edition, available on the WEF website as a PDF file.
This reports measure the competitiveness of economies across 12 pillars, as outlined below
(WEF Competitiveness Report 2013-2014). Linking comments to business processes are provided, as appropriate, under each pillar.
"The institutional environment is determined by the legal and administrative framework within which individuals, firms, and governments interact to generate wealth" (p.4).
Issues that fall within this pillar include: regulations and bureaucracy (red tape), transparency, and government policies and their implementation.
"Extensive and efficient infrastructure is critical for ensuring the effective functioning of the economy, as it is an important factor in determining the location of economic activity and the kinds of activities or sectors that can develop within a country" (p.5).
Infrastructure is a critical component of the business environment and it processes as it affects things such as transportation, energy supply and distribution, and communication. These in turn affect the economic efficiency of a country.
3. Macroeconomic Environment
"The stability of the macroeconomic environment is important for business and, therefore, is significant for the overall competitiveness of a country" (p 6).
Government fiscal policies, interest rates, and inflation are issue that fall within this pillar"”with an obvious impact on business.
4. Health and Primary Education
"A healthy workforce is vital to a country's competitiveness and productivity. Workers who are ill cannot function to their potential and will be less productive. Poor health leads to significant costs to business, as sick workers are often absent or operate at lower levels of efficiency. Investment in the provision of health services is thus critical for clear economic, as well as moral, considerations. In addition to health, this pillar takes into account the quantity and quality of the basic education received by the population, which is increasingly important in today's economy. Basic education increases the efficiency of each individual worker" (p.6).
A poor health system negatively impacts on productivity, and a poor education system limits a worker's ability to be involved in more advanced processes and also limits their ability to be innovative.
5. Higher Education and Training
"Quality higher education and training is crucial for economies that want to move up the value chain beyond simple production processes and products" (p.6).
It is commonly accepted that a more highly educated workforce positively contributes to economic success for a nation overall and also for individual firms. Higher education levels enable workers to be part of more sophisticated and complex processes and be at the cutting edge of innovation. Research activities associated with future growth and development typically occur in nations with higher skilled workers. This has implications for foreign investment, sourcing opportunities, and developing/penetrating new sales markets.
6. Goods Market Efficiency
"Countries with efficient goods markets are well positioned to produce the right mix of products and services given their particular supply-and-demand conditions, as well as to ensure that these goods can be most effectively traded in the economy" (p.6).
Marketplace competitiveness, as reflected by the amount of regulation and competitive behaviour rules, is an important aspect of doing business. Within this pillar issues such as taxes, business ownership, and attitudes towards foreign direct investment (FDI).
7. Labor Market Efficiency
"The efficiency and flexibility of the labor market are critical for ensuring that workers are allocated to their most effective use in the economy and provided with incentives to give their best effort in their jobs" (pp. 6-7).
Mobility of labour between industries is a factor considered within this pillar. Ideally workers should be able to transfer across industries easily and with little wage fluctuation.
8. Financial Market Development
"The financial and economic crisis has highlighted the central role of a sound and well-functioning financial sector for economic activities. An efficient financial sector allocates the resources saved by a nation's citizens, as well as those entering the economy from abroad, to their most productive uses. It channels resources to those entrepreneurial or investment projects with the highest expected rates of return rather than to the politically connected. A thorough and proper assessment of risk is therefore a key ingredient of a
sound financial market" (p.7).
The global financial crisis has certainly highlighted the need for a banking sector that is trustworthy and transparent, one that operates in a prudentially controlled environment with adequate regulation on securities and other financial product. Finance is the lifeblood of any business.
9. Technological Readiness
In today's globalized world, technology is increasingly essential for firms to compete and prosper. The technological readiness pillar measures the agility with which an economy adopts existing technologies to enhance the productivity of its industries, with specific
emphasis on its capacity to fully leverage information and communication technologies (ICTs) in daily activities and production processes for increased efficiency and enabling innovation for competitiveness" (p. 8).
This pillar does not include innovation, rather it considers the ability of a nation to adopt technology and absorb it. This is often achieved through FDI through which new technologies may become available.
10. Market Size
"The size of the market affects productivity since large markets allow firms to exploit economies of scale. Traditionally, the markets available to firms have been constrained by national borders. In the era of globalization, international markets have become a substitute for domestic markets, especially for small countries. Vast empirical evidence shows that trade openness is positively associated with growth" (p. 8).
We know that globalisation has assisted in opening up markets, although barriers still exist. Foreign countries, however, remain good sources of potential additional sales (beyond domestic borders) and also provide opportunities for different sourcing options. Both of these aspects can be quite beneficial for firms.
11. Business Sophistication
"Business sophistication concerns two elements that are intricately linked: the quality of a country's overall business networks and the quality of individual firms' operations and strategies" (p. 8).
Clustering, that is the interconnection of firms from close-by geographically areas, allows for increases in efficiencies and optimisation of processes, whilst at the same time reducing barriers to entry.
"Innovation can emerge from new technological and non-technological knowledge. Non-technological innovations are closely related to the know-how, skills, and working conditions that are embedded in organizations and are therefore largely covered by the eleventh pillar" (p.18)
Technological innovation is where the biggest benefits come from. In order for this to occur, though, there needs to be investment in R&D from both public and private sectors. In the private sector this is typically through financing projects; in the public sector it is typically through the provision of higher education and the establishment of high-quality scientific research centres in, usually, universities.
Although there are 12 different pillars, some of these are linked. For example, it would be difficult to imagine how innovation (Pillar 12) could exist without financial investment (Pillar 8) in a nation where high levels of healthy well educated individuals can participate in the workforce (Pillars 4 and 5); where there is an efficient market (Pillar 6) that is able to absorb new technologies (Pillar 8).
What is the benefit of this information to an existing or would be exporter or importer? By combining the different data in the report, we can consider to what degree a nation meets certain requirements that we may seek as an exporter or an importer. For example as an exporter we would be interested to find out what sort of market mechanisms may be in place to ensure fair competition. If we are an importer we may be interested in the education of the workforce as this is likely to impact on the quality of supplies sourced from that nation. Innovation is important to both exporters and importers, as innovative ideas potentially generate ideas for different uses for existing products or the development of new products.
In my next article I will look at banks and their role in international trade finance facilitation and the notion of banks risk. However I will also be pointing out other areas where one can go to look for more information in subsequent articles as part of this series.
An exporter in Denver sold goods to a distributor in Brazil (and many other countries). After a long and satisfactory relationship with the Brazilian distributor, they agreed on payment terms of 150 days on an accepted draft basis. After shipment, the exporter's bank sent the documents to a bank in Brazil with instructions to release the documents after the buyer accepted the 150-day draft thereby obligating themselves to pay it at maturity.
Some traders refer to this method of payment as a documentary collection with a time draft, sometimes as Documents Against Acceptance, abbreviated DAA or D/A. (Send me an e-mail to request a flowchart for documentary collection.) For years this relationship worked well and the distributor always met their obligations.
In October of 1989, the exporter shipped goods valued at $76,000. The distributor in Brazil accepted the draft with the maturity date falling on a Monday in March of 1990. On the Friday preceding the maturity date the government of Brazil announced that at the end of business that day the old Cruzado would become invalid and a new currency, Cruzeiro, would be introduced on Monday.
On Monday, the due date, the distributor authorized their bank to pay $76,000. The bank informed them they could not transfer the funds until the central bank set a new rate of exchange for the new currency and implemented new regulations relative to wire transfers.
Days and weeks elapsed before they implemented the new regulations. The distributor then discovered that, according to the new regulations, they could only wire $1,200 a year out of the country. It doesn't take a calculator to figure out collection of the $76,000 would take some time!
This illustrates sovereign risk"”the government intervened to prevent payment from being made. The distributor had the capacity and willingness to pay, but due to government controls, could not pay.
The exporter in Colorado informed the distributor that they would suspend future shipments until they received the $76,000. The distributor in Brazil, however, depended on receiving these goods for their livelihood. In order to keep their reputation clean, they arranged for payment from an account that they happened to have at a bank in Miami. Subsequently, payment terms for all future shipments were letter of credit only.
As a left-handed American, I rarely think about my dominant hand. Sure, the world is set up for right-handers, but we lefties have learned to adjust. In Italian, the word for left is sinistra. While I've never found bias against my left-handedness in Italy, there are many places in the world where I could stop traffic or invite disgusted looks from an entire restaurant for openly flaunting my left-handedness.
So what's the problem with being left handed? The main issue is one of hygiene. In parts of the world, including much of Asia and Africa, the left hand is designated for toilet-related responsibilities. Therefore, anything else the left hand touches is considered unclean. In such cultures, those born left-handed are retrained at an early age to use the right hand. So what's a lefty to do when traveling to India or Qatar or Morocco for business?
Watch What You Do With Your Hands
Before a trip or even a meeting where I know my left-handedness may be an issue, I try to pay attention to how I use my left hand for normal activities. Writing and eating are the most important two activities. But beyond that, be sure to note what you normally touch in daily interactions. Do you pick up a book with your left hand? How about touching a door knob? Try training yourself to be aware of your hands and then consciously choose your right hand over the left. If you find this to be an annoying distinction, then think of it from the other side"”would you want to touch something that someone had previously touched if they used their left hand instead of toilet paper?
Sit on Your Left Hand While You Eat
I know it sounds stupid, but I have found that this works. If I allow my dominant hand to rest in my lap, then at some point in the meal I will forget and potentially cause embarrassment to myself and my hosts. The other thing I do before the visit or meeting is to practice eating right handed. It's tough at first, especially with chop sticks, but with practice it can look much more natural.
Upgrade Note Taking to a Tablet
It's much more noticeable when I write with a pen, but when I pull out my iPad for taking notes, no one notices my left-handedness because I use both hands. It also makes you look a bit more contemporary than writing hand-written notes.
I hope this helps my fellow southpaws to avoid scandal in your international business interactions. Please share this unexpected cultural difference with any of your left-handed colleagues!
It has been some mumbleteen years since I began leading trade compliance seminars. During that time I've had the opportunity to meet thousands of people"”some interesting, some not so much. Fortunately the former have been more numerous than the latter. I've also had a range of experiences"”some rewarding and others I would prefer to forget.
There was the time early in my career when I opened my mouth to make a point and a juicy housefly decided it would be the opportune moment to land on my tongue. Time stood still, as it often does in these instances, as I weighed the pros and cons of swallowing or spitting. Spitting won out. After a brief break and a rinse with mouthwash, class continued.
There are the occasional interruptions at seminars. In Independence, Ohio, smoke began pouring from the ceiling vents of the meeting room. Astonishingly the hotel manager stood in the hallway saying there was not a problem. We didn't stick around to find out.
Sometimes the interruption comes in the form of laughter from the neighboring meeting room. If the laughter continues I often ask the class to laugh back at them. There is no way I will allow a meeting of oncologists to have more fun than us, a happy-go-lucky crowd of trade compliance professionals.
On one occasion a group of guys dressed in athletic gear descended on my meeting room. They didn't look like my typical attendees. I asked if they were there for Export training. They insisted they were. After devouring the entire catering table the realized they were supposed to be two doors down attending employee training for the health club X-Sport.
I think I've experienced it all through the years:
I've been poisoned by the salad bar.
The hotel threw my books away. Fortunately the dumpster had not yet been emptied. Class proceeded with coffee-stained books.
Another hotel provided a table that was leaning at 60 degrees. When I tried to straighten it, it collapsed injuring my finger. Lest you worry, I can still offer up a fervent one-finger salute, albeit a crooked one.
I found a post-it note on my keyboard notifying me that my fly was down. (Blush!)
I've shown up for a seminar on the wrong day. Fortunately I was a day early.
I've destroyed more suits and ties schlepping books and moving tables than I care to admit.
The experiences are not all negative, although those are the more humorous stories.
After misplacing my books, the hotel had them reprinted by 10:00 a.m. Wow!
The same hotel printed my presentation for me when my projector fizzled. Go DoubleTree!
There was the catering captain who recognized I was developing laryngitis. The next morning I found honey and lemon at my table. (Thanks, Alex!)
And then there are the many of you I have met over the years. While I might be the instructor, you have taught me more about your businesses and your lives. I feel fortunate to have had this opportunity to get out from behind a desk and to have met each of you. But enough with the sentimentality!
With experience comes wisdom they say. Following are words to live by:
Always travel with a backup copy of your presentation and book.
Paying a little more for a good hotel is worth the expense.
With a population of 88.8 million, Vietnam is the 13th most populous country in the world. Economic reforms introduced in the 1980s have helped this Communist country achieve significant economic growth including a doubling of the size of its middle class during the past five years.
Previously China, Hong Kong and Taiwan were known for cheap labor, and many foreign companies chose to manufacture their products in these countries. In addition to a stable political environment, Vietnam today offers the global community a value proposition that is hard to ignore.
Vietnam is richly endowed with mineral wealth, holding some of the world's largest reserves of bauxite (seven percent of world reserves) and tungsten (expected to have seven percent of world production in 2013) and significant deposits of rare earths titanium and iron ore. Other mineral resources include copper, gold, nickel, lead, chromite and manganese. Resources are largely untapped as many remain unexplored.
Vietnam ranks third in Southeast Asia for petroleum resources. Vietnam is endowed with significant deposits of bulk and niche minerals including bauxite, rare earths, titanium, phosphate, coal and iron ore. With the exception of coal, the majority of current mining projects are small in scope, representing an untapped opportunity for development on a large scale. While Vietnam's mining industry has been growing at a rapid pace, the industry constitutes only 1.9 percent of Vietnam's GDP in 2010. Ownership for metals and minerals is highly fragmented. Opportunities for multinational corporations are ripe in this sector.
Vietnam's internet penetration rate of 29% ranks it as the 18th most active internet country in the world. 3G networks are currently available and 4G networks are emerging. From social networks to online gaming and commerce, the population is highly active online with broadband usage growing at 49% per year. Seventy-five percent of population has mobile phones. This offers opportunities for mobile payments, banking, gaming and other value added services.
Vietnam's demographics and rising income levels support strong continued growth in domestic consumption. With 68% of 92 million residents under the age of 40, the country's expanding workforce is expected to drive consumer spending over the next 10 to 15 years. With a young population entering the workforce, per capita consumer expenditure in Vietnam will continue to grow from 2012 to 2016.
Emerging Middle Class
Vietnam's emerging middle class is a primary driving force in its economy, pre-staging an increasingly affluent lifestyle and high discretionary spending. In 2012, there were eight million people responsible for $48 billion of consumption spending, which accounted for 51% of total private consumption. The demand for branded goods has been increasing rapidly in Vietnam and has led to the establishment of shops introducing themselves as the authorized distributors in Vietnam.
Middle class in Vietnam is made up of public servants, office employees, intellectuals, skilled craftsmen, traders and small landowners. The monthly income of the middle class group ranges from approximately $220 to $700 per month. Based on various studies, the number of people classified as middle class in Vietnam ranges from eight to 18 million people, which accounts for an estimated 20% of the population. Looking at Vietnam's per capita income of $1,600 in 2012, it is difficult for many foreigners to understand how Vietnamese can buy a Louis Vuitton bag or pair of Salvatore Ferragamo shoes for $1,500.
Vietnam's rising middle class exhibits increasing brand consciousness and is growing in numbers and in wealth. The middle class is driving growth; the rising affluence in this group accounts for the expansion in financial services and in basic sectors such as food and beverage, which will continue to account for more than 50% of total consumption. Large supermarkets such as Metro of Germany and Big-C of France are filled on weekends with shoppers buying goods in bulk.
The children of the middle class increasingly eat Western food, use mobile phones and the internet, and enroll at international schools that until a few years ago catered almost exclusively to expatriates. Car sales keep growing, although Vietnam is one of the most expensive places in the world to buy a vehicle with import tariffs of up to 90%.
This is the fifth part in my series of articles on country risk and customer risk assessment.
To recall, it is important to classify both countries and customers, because a rogue customer in a good (from a risk perspective) country is not a much better risk than a good customer in a rogue (from a risk perspective) country.
In my last article I discussed the first five categories of the Doing Business: Measuring Business Regulations project. In this article I will discuss the remaining five, with data as of 3 August 2013. Remember these data sets are freely available publicly from the internet.
This category may be useful if you are thinking of investing in a foreign enterprise. The only useful link to trade in goods is probably the structure of companies with directors' liabilities, shareholders' rights and investor protection.
I am reminded of the words supposedly said by Benjamin Franklin: "The only things certain in life are death and taxes." Yes, taxes are a necessary part of life and business; it is the system we have.
The interesting thing about taxes is that unlike duties that are an international matter, taxes are a domestic matter. Governments levy taxes primarily to raise revenue so public services that would otherwise not exist can be provided. Examples of these are infrastructure, security and welfare. You cannot tell a government how much to provide its citizens or how. That is part of sovereignty, and the government of the day will decide the standard of the provision of services.
The differences in tax rates are a significant consideration for anyone wanting to do business internationally. Pricing a product is not merely an exercise of cost recovery plus a bit of margin. Determing a sale price is a complex mix of decisions that take into consideration things like invoice currency, freight charges, delivery lead-times and delivery terms (Incoterms 2010), the security of payment, and the length of credit time given for that payment to materialise.
What is also important in this mix is the price competitiveness of your product at the end of the supply chain"”that is, at the consumption stage. This may be an end user, such as a retail customer, or a business client that may use the material for further manufacturing processes. Unless your product is competitive at the end of the cycle, you will not sell it.
How can domestic taxes be ignored? They can't.
I can now hear someone saying: "But we sell EXW so it is not our problem." Well it may be your problem once you discover that the price is not right, and you either miss out on the business altogether or you fail to realise the maximum revenue because you pricing model is wrong since you ignored the tax factor. It is important for you to know about taxes and other charges that occur during the distribution channels so you know what you can sell for or what you can buy at. This is very important advance information for successfully negotiating the deal.
If we compare the Value Added Tax (VAT) of the three countries I used as an example in my previous article we find that Madagascar has a VAT of 20%, Taiwan is 5%, and Singapore is 7%. Hopefully, this has convinced you that the application of taxes in international trade is an important consideration.
Trading Across Borders
The data in this set is of vital relevance and importance. As I will be speaking about regulatory issues in greater detail in another article in the series, I will limit discussion to other aspects at this stage.
There is a considerable amount of detail in this data set including the average time to export and import, the number of documents required, and the approximate cost to export or import per container. Additionally, data are provided for domestic related processes such as average times for port and inland transport and handling (in days) and customs clearance and document preparation.
From a logistics and costing perspective this information is excellent. I can now work out ahead of contacting my prospective buyer or seller what the average supply times are, and I have a reasonable idea about some of the border control costs. I can use all of this information to do some preliminary costing to see what parameters of the sell/buy price I can work with. Sure, things will change during the negotiation, but I have a better understanding of my cost drivers and, even more importantly, I also have an insight into the costs incurred in the foreign country.
Forewarned is forearmed!
Nobody looks forward to a legal wrangle, except perhaps lawyers. Enforcing contracts in foreign countries is notoriously difficult, exceedingly expensive and requires a lot of patience"”nothing is resolved quickly, as it typically takes a few years for full litigation to finish. The best approach is to avoid litigation and perhaps some of the available data will serve to convince the reader of just this.
In Singapore there are, on average, 21 procedures taking about 150 days at a cost of 25.8% of the value of the claim.
In Taiwan there are, on average, 45 procedures taking about 510 days at a cost of 17.7% of the value of the claim. It may cost less legally, but the process takes nearly three and half times longer. What is the cost of money? And the opportunity cost incurred? Is it really any cheaper? I doubt it; I would say the opposite.
In Madagascar there are 38 procedures taking about 871 days at a cost of 42.4% of the value of the claim. Are comments really required here? It takes about two and half years, but if you think Madagascar is bad, in India the average is 46 procedures, a cost of 39.6 % of the claim, and a time of 1420 days. That's nearly four years!
I should also point out that the Doing Business data set have comparison values from the previous year's ranking that can be used as quick check to see whether things have improved, remained the same, or deteriorated in the short term based on the parameters of this project.
In my next article I will look at the last of the four data sets that are publicly available on the internet. However I will also be pointing out other areas where one can go to look for more information in subsequent articles as part of this series.
University students who aspire to a career in international business often ask me, "How did you get into international banking?" My career path, I assume, took a route as different as anyone else's. As I look back at important happenings in my life, I can often identify three turning points that influenced the final results. Those turning points resulted from circumstances, fate or whatever you want to call it and were not of my own doing. I'd like to think of it as divine intervention. Who would have ever thought a shy, naive teenager who grew up on a farm in the upper Midwest would ever have had a career in international banking?
The first turning point remains very clear in my memory. As a teenager, I worked on the family farm as a duty. I neither received, nor expected, any pay for working on the farm. If I wanted some spending money, however, I would work for other farmers who needed help, usually during the harvest seasons. When harvesting a crop, a billowing cloud of crop dust would continually surround us. Unfortunately, I became allergic to the dust. I would sneeze, wheeze and cough all day, then go home and try to sleep. Sleep didn't come easily since I would continue the sneezing, wheezing and coughing through the night. But if I wanted the spending money, I had to get up the next morning and do it all over again.
I remember one hot summer day when I helped a farmer put up his hay on a flatbed. The misery of the heat, the dust and the humidity all got to me. I looked to the western horizon longing to see a single cloud that could eventually drift our way to provide some shade and relief from the sun and heat. I even dared to hope the cloud might have some rain, which would cause us to quit work early that day. However, no cloud appeared. At that moment I determined to have a job some day in an air-conditioned office. It was a major turning point that remains firm and clear in my mind.
Turning point number two occurred in the big city of Minneapolis and eventually led me into a banking career. As a teen, I tinkered with radios and TVs trying to figure out why they worked and trying to fix them if they didn't. I thought it would develop into an interesting career. I took my new bride to Minneapolis and enrolled in an electronics trade school. It didn't work out for me. In an effort to find work, I approached an employment agency that sent me on several interviews, including one at a bank. I decided to accept the job as a teller in the cash vault until something better came along. Nothing did and this first job started me on a 30-year career path in banking.
There was a position available in the international department. When I interviewed for that position my manager told me that after two years he and I would go to the Human Resources department to look for a job transfer. This seemed like a strange comment on the day I accepted the job, so I asked him to elaborate. He said this work would grow boring after about two years, and if it didn't, I shouldn't consider doing it in the first place.
True to his word, after two years, we went to human resources to inquire about open positions in the bank and turning point number three surfaced.
One available position existed in the international department. The head of the international department told me the position involved working with letters of credit. I asked, "What is a letter of credit?"
He answered, "I'll show you." He took me to the eighth floor of the bank and we entered a room containing about 15 desks with no partitions. Phones were ringing constantly and people were yelling to each other across the room. He exclaimed, "This is it!"
I viewed the chaos and replied, "I still don't know what a letter of credit is, and I don't think this looks like a very attractive place to work."
We went back to Human Resources to look into the other openings. Three weeks later when no other jobs materialized, the international manager called me again and told me he would like me to reconsider. He told me all the positive reasons why the international department seemed like a good place to work and why he thought I was the right person for the job. After sufficient stroking of my ego, I accepted.
I questioned his sincerity three weeks later when he resigned and left banking altogether. However, turning point number three placed me into international banking, and only after completing a frustrating training period (detailed in my next article) did I realize I wanted to continue my banking career in the international department.
Perhaps no typical pathway exists to any career and certainly not in international business. I relate this lesson to show what can happen when you follow your nose and take advantage of opportunities as they present themselves.
Joe is visiting his company's Japanese partner in Tokyo for the first time. He has been talking with his counterpart, Taro, at least once a week for six months ago. In Joe's opinion, Taro has done a great job supporting the company's Japanese clients. At the beginning of the visit, Joe meets with the partner's key staff including Taro in a conference room. Joe wants to show his appreciation and build some goodwill, so he praises Taro's dedication and skills in front of his peers. The mood in the room suddenly shifts. Taro seems visibly embarrassed. Everyone else looks uncomfortable too. What just happened?
As an American, Joe comes from a business culture where individual achievement is highly valued. The majority of business cultures around the world place a higher value on group membership and dynamics. Dutch Anthropologist Geert Hofstede researched the cultural traits and trade-offs between individualism versus collectivism. Business cultures around the world fit somewhere on the line with various proportions of each trait. The Americans are the individualistic culture in the world and the Japanese are the most collectivist. In Joe's situation, he singled out a group member. Regardless of whether it was for positive or negative recognition, Taro lost face in front of his team and the team shares his embarrassment. The Japanese have an expression for this: "The nail that sticks up gets hammered down."
The majority of the world's population lives and works in cultures that are more collectivist than individualistic. So as a Westerner working internationally, how can you not only adjust to work effectively with collectivist mindsets but use this cultural trait to your advantage?
Change I to We
The next time you find yourself in conversation with a key contact from Asia, Latin America or Africa, try to be conscious of how much time you focus on talking about individuals versus the group. While it makes sense to inquire after your contact's health, it is also smart to ask about how their team is doing, too. In the case of certain cultures that co-mingle work and private life, inquire about the health and well-being of their family as well. As you move forward in conversation, keep in mind the impact of potential decisions on other group members both in your organization and your counterpart's.
A crucial step beyond Your Team and My Team is to find ways to make it Our Team. In other words, you are looking for ways to create a joint sense of interdependence so that both sides are invested in the outcomes of your efforts. This builds the strong business ties to make your project or joint venture or client/vendor relationship successful.
Use Peer Pressure as a Disciplinary Tool
Since we can't single out an individual for punishment in front of their collectivist peers, how do we hold a person accountable for their actions? The answer is"”we don't. If someone on a Mexican assembly line is tasked with ensuring that the red units do not mix with the blue ones, then if they mix everyone knows whose fault it is. Instead of singling out the responsible party, it is better to gather the group and discuss the problem that was created in an indirect way. "The unit colors were mixed up." Then discuss the impact of this problem. "Now the units must be separated." "Now our order to the client is delayed and they will be upset." Then make it the group's responsibility to fix the problem. Even if left unspoken, the group's peer pressure will help to ensure greater work ethic moving forward because no one wants to be known as the person who doesn't meet the group norms. By not singling out the irresponsible individual, you will gain respect among your collectivist peers and be more effective in your ongoing interactions.
For more information about international business and cross-cultural communications, I invite you to visit my website: The International Entrepreneur.
With a population of 88.8 million, Vietnam is the 13th most populous country in the world. Economic reforms introduced in the 1980s have helped this Communist country achieve significant economic growth including a doubling of the size of its middle class during the past five years.
Foreign direct investment (FDI) in Vietnam was virtually nonexistent a decade ago, according to a report by the U.S. Department of State. However FDI has accounted for 8.3% of GDP during the last five years. Vietnam is on most lists of attractive emerging markets for foreign investors as per Economic Intelligence Unit Survey Reports (2010).
Upon opening its economy in 1986, Vietnam attracted investment and pursued growth based on its low wage rate. Manufacturing and processing attracted the lion's share of FDI, reaching $11.7 billion or 71% of the country's total capital. Much of the FDI flows into Vietnam from more developed Asian countries including Japan, Singapore and South Korea. Its exports markets include the EU, USA, ASEAN, Japan, China and South Korea. Industry and construction are the largest sectors for international investment. Some of the segments that have significant FDI inflows in recent years include banks, property and infrastructure. Other strong sectors include oil and gas, fisheries, forestry, transportation, communications, and hotels and tourism.
China remains the most popular destination for foreign direct investment in the world, attracting almost $83 billion in 2012 alone. However, a growing number of multinational companies are pursuing a strategy that is referred to as a China Plus One policy. Companies are using China Plus One to mitigate the risks of over dependence on factories in one country.
Multinationals Enter Vietnam
Vietnam has become a location of choice for multinational corporations to expand their manufacturing capabilities in electronics and semiconductor sectors. Companies such as Intel, Foxconn and Compal have built their largest plants in Vietnam. In 2012, Vietnam licensed 1,100 new projects and approved 435 existing projects registering to increase capital, bringing the total value of the newly licensed and added capital to $13 billion, equivalent to 84.7% of last year's total.
As of December 2012, the country is home to 14,522 valid foreign invested projects with capital totaling $210 billion. Manufacturing and processing are the most attractive industries to foreign investors. By December 15, 2013, 98 countries and territories had invested in 14,489 Vietnamese projects with a total registered investment capital of $213.6 billion. Japan was the largest investor in Vietnam, accounting for 13.6% of the total registered capital.
Some of the multinationals who have invested in Vietnam include:
Cannon is no longer building or expanding factories in China, but it is doubling its workforce at a printer factory outside Hanoi to 8000.
Nissan is expanding a vehicle-engineering center.
Bridgestone Corporation, the world's largest tire maker, has established manufacturing in this country.
Hanes Brand, the underwear maker company based in Winston-Salem, North Carolina, and Texhong Textile group from Shanghai are each setting up two new factories in Vietnam.
Anheuser-Busch, Starbucks, KFC, GE, Nike and Intel have all invested in Vietnam.
Several high-tech multinational corporations have established presence in Vietnam including Hewlett-Packard, IBM, Nokia, Samsung and Panasonic.
Nokia is still the dominant player in the Vietnamese mobile market, and Samsung contributes 10 percent of Vietnam's exports.
In year 2012, Samsung invested $11.3 billion in Vietnam and exported $12.5 billion worth of goods. Samsung's plants already provide work for 24,000 people and have created ecosystem of suppliers and subcontractors who employ more than 50,000 people.
Foreign banks have substantial presence in Vietnam, with 50 foreign companies operating via branch offices and five wholly-owned bank subsidiaries.
This is the fourth part in my series of articles on country risk and customer risk assessment.
To recall, it is important to classify both countries and customers, because a rogue customer in a good (from a risk perspective) country is not a much better risk than a good customer in a rogue (from a risk perspective) country.
In this article I will concentrate on one part of the third of four data sets available publicly from the internet.
A few years ago the World Bank started a project called Doing Business: Measuring Business Regulations. The result of this project is a set of data on virtually all the nations of the world that measure business regulation and, if you like, the ease of doing business in a globally inter-connected and inter-dependent world that paradoxically is not well inter-regulated.
I think we have all heard the words: "The job is not complete until all the paperwork has been done." Bureaucracy, or as I like to refer to it sometimes, bureaucrazy, is one of the banes of business processes. The less paperwork the better. I can almost hear the chorus of supporting voices from the corporate world who would probably wish for nothing better than no controls. Yet controls are needed at all levels and in many different ways to maintain a reasonably fair trading environment for all.
A lack of regulation is a contributing factor in global financial crises; unfair denial of market access; unwarranted duties on products; the spread of disease, drugs and weapons; and many other global issues. Sometimes we resolve these issues by international agreements, other times there are no such instruments to keep everyone honest. I will explore some of these issues in more detail in later articles.
In this article I will limit the discussion to the macro level assessment of a country's regulatory regime by concentrating on some aspects of the Doing Business project data. Remember that these data are freely available on the internet. It is searchable database with options to download these data to a spreadsheet. I will provide links as relevant.
Doing Business provides economy rankings of countries based on 10 categories, the most current rankings as of August 3, 2013, were published in June 2012. My comments all relate to this set of data. I have listed the first five categories below with some brief comments. I will discuss the last five categories in my next article in the series.
Starting a Business
This category may be useful if you are thinking of opening an office in a foreign country either as a selling or a buying office. Risks in doing this include staffing and associated labour laws such as who may be employed, on what basis, etc. There are typically government restrictions on employing expatriate labour and a quagmire of foreign regulations to contend with. Expert advice is required before embarking on this venture.
Dealing with Construction Permits
This category may be useful where bricks and mortar investment is required. The easiest example that I can think of is someone setting up a physical facility such as a factory or a testing laboratory. Because of its nature, this category may have less general relevance as it typically requires a large financial undertaking, and there are all sorts of risks in setting up a physical facility in a foreign country such as labour issues and the ability to own the land, which may require entering into a joint venture with a local partner. Strategic partnerships and the associated consideration are, however, beyond the scope of this series or articles, so I will not offer further comments here.
This category is linked to some of the comments above and only applicable to situations where physical presence is required.
For the purposes of this series of articles, this category is more interesting and applicable than some of the other categories available. By drilling down to the next level of data we can find a depth of credit information index. This is important because this index tells what sort of data is kept on firms and individuals:
Are data kept on the public credit registry or by private credit bureaus;
Is both positive and negative data are available;
Is credit information distributed by the registry on retailers, trade creditors and financial institutions;
Are more than two years of historical credit information available; and
Does the law guarantee that borrowers can inspect the data in the largest credit registry?
As you can see these issues go to the heart of credit information transparency. For any would-be traders in a particular country, this is useful information as it informs us as to how easy it is to get information about our trading partners in a foreign country.
In some countries there is virtually no credit information available. I chose three economies at random for the purpose of the discussion here: Madagascar (ranked 142), Taiwan (ranked 16) and Singapore (ranked one). For example, Madagascar has an index of 0"”no credit information is available at all. However, you need to be careful in making the assumption that there is a linear association between the overall ranking and each data subset. Variations are great. For example the index for Taiwan is 5, whereas the index for Singapore is only 4.
The other subset of data that is highly relevant is the strength of legal rights particularly in relation to secured creditors' rights. A seller should be interested to know beforehand what rights they may have in a case where their foreign partner becomes insolvent owing them money. This may influence the security of the method of payment used. A comparison of legal rights sees the legal index for Singapore at 10, Madagascar at 2, and Taiwan at 5. Intuitively this tells me that if I am doing business in Madagascar, I am more likely to be concerned about getting paid because my chances of recovering debt are comparatively less than in the other two countries.
Hopefully with these examples, the reader can see how we slowly start to build a picture bit by bit about a trading situation as we get data from different sources. I like to refer to this as the trading risk canvas. Just as a painter starts with the background and slowly adds different colours and paint strokes to achieve the final result, we are building a picture of potential risk.
I will discuss the next five data categories of Doing Business in my next article.
Many exporters become frustrated when they have shipped goods and then have to prepare documents to conform to the terms of the letter of credit. They suddenly realize they have to prepare or find certain documents that they did not anticipate, or they cannot meet other surprise requirements.
One frustrated exporter exclaimed, "Why would a foreign bank write a letter of credit with all these unacceptable terms and conditions?" What a great question to ask! Let's discuss it and find the answer.
Does a bank arbitrarily draw up the terms of a letter of credit? No! Then who tells them what to write into the letter of credit? The bank asks the buyer to complete an application for the letter. Where does the buyer get the information?
Since the buyer is the exporter's customer, can the exporter determine the terms in the letter of credit? The buyer will be very grateful to receive instructions from the seller about the preferred terms. If the exporter develops a complete and detailed proforma invoice, it should have all the information needed by the buyer to complete the application for the letter of credit.
Some exporters prepare a template of instructions to the buyer for opening a letter of credit. Many banks have a model, which an exporter can use as a guide. An exporter may prepare a customized template for each buyer. At a minimum, create a list of bullet points that includes important things such as the dollar amount, shipping and expiration dates, required documents, merchandise description, etc.
Some exporters have developed a proforma letter of credit. When they receive an order, they acknowledge the order and also send a copy of the proforma letter of credit.
Other exporters use a simple and effective technique. After receiving the instruction template mentioned above from the exporter, the buyer will complete an application for a letter of credit. With the completed application form, the buyer dictates to the bank the terms of the letter of credit as discussed above.
The exporter then requests each buyer to provide a copy of the completed application form to them before the buyer takes it to the bank. This allows the exporter to review the terms and provide feedback and suggestions, if necessary, to resolve differences at this stage in the process rather than waiting for the letter of credit to arrive and then go through a long and expensive amendment process.
The title of this article may be a bit misleading, which was my intention. Many people might think the most common error in a letter of credit has to do with discrepancies in the documents. However, the most common error occurs when the seller fails to be proactive early in the process. Being proactive will reduce or eliminate the discrepancies that can crop up during payment time. Similar to the computer adage, GIGO (garbage-in-garbage-out), good instructions sent to the buyer will result in a well-written letter of credit, which will result in efficient collection of payment.
To receive a sample proforma invoice or ta template of instructions for opening a letter of credit, send me an e-mail at firstname.lastname@example.org.
As an American woman, I think it's easy to forget that in many parts of the world my gender is professionally discounted. Women have come so far in many countries that it almost seems below our dignity to bring up this topic. Equity in the work place should be a non-issue by now, shouldn't it? And when something is said or done in another country that reminds us of our diminished role, we're often shocked and outraged.
Women in business experience this issue on every continent. It can be blatant, like someone telling you that you don't know anything or they want to work with your male counterpart. Or it can subtle, like being excluded from a key meeting that requires passage through a men's locker room. In my own experience, I've been told literally to "get back in your place, Girl." We probably disagreed about where that place exactly would be. While it is frustrating when it's happening, oftentimes the international business relationship is too important to abandon because of differing views on gender roles.
So here's my advice on how to tackle this tricky situation:
It's Cultural, Not Personal
If you're the only woman on the team, you may feel singled out in your indignity. You may even see women in-country accepting this lesser status. Keep in mind that even in the U.S. gender status has been evolving. Only one generation ago American women were given a small set of acceptable career options (before motherhood, of course): teacher, nurse, secretary and beautician. Even within those fields, no one assumed a woman would become school superintendent, physician, company executive or business owner. Getting sent for coffee may feel like something out of a 1950's movie. Showing your frustration will not help your situation. It will make you appear hostile and irrational.
Don't Let Yourself Get Pushed Out
A friend went on a trade mission to Mexico recently. She quickly realized that the men she was meeting in-country weren't as comfortable interacting with her as a female in their industry. So they ignored her at first. My friend stood up, went over and joined the conversations until finally they realized that she wasn't going away or accepting social exile. She never talked about it directly, but her professional assertiveness showed them that she meant business. They eventually gave up and included her.
Clue in Your Colleagues
If you are the only woman in your traveling team, your male colleagues may not notice cultural attempts to downgrade your professional status. It is often subtle. Before taking the trip to Asia, Africa, Latin America and parts of Europe, you may want to give them an informal notice about what would help you maintain your status. For instance, if you are being ignored a colleague can help bring you back into the conversation. A colleague can ask for your advice in front of others. This helps to convey inclusion and the value you bring to your team.
Use Non-Verbal Status Cues
Business cultures that are more likely to discount a woman's status are the same cultures with more hierarchy and formality in business. You can use this to your advantage. In Thailand, for instance, a visiting business team walks into a room in descending order of importance with the team leader going first. This helps your Thai counterparts to understand where you fit into your team's pecking order. Also, Americans typically prefer being called by their first name. In more formal business cultures, using Ms. and your last name can elevate your status. It's not unusual to be called by a higher title such as president, doctor, director, etc. If your title is a strong one, then use it to help anchor your status.
Status Letter from Your Boss
If all else fails have a letter ready from the president of your company or another high-ranking executive. The letter should state your title, your role and why you are important to the company. Sometimes seeing your status in written form can make it better understood, clearing the way for business.
I hope you found this information helpful to doing business internationally. Global markets present many opportunities so long as you can navigate through cultural challenges.
For more information about international marketing, operations and cross-cultural communications, please visit my company site: The International Entrepreneur.
Located on the east side of the Indo-China Peninsula, the Socialist Republic of Viet Nam (Vietnam) is bordered by China, Laos and Cambodia. It declared independence from France by Ho Chi Minn in 1945. Its current borders were established in 1975 following the merger of North and South Vietnam under communist rule.
With a population of 88.8 million, Vietnam is the 13th most populous country in the world. Most of its people live in the Southeast Asian sub-tropical climate zone. Its neighbors are China in the north, Laos in the northwest, and Cambodia in the west. Vietnam's coastline of over 2,300 kilometers in the heart of Asia provides easy access to world markets. Vietnam is a home to three major international airports. Tan Son Nhat is Vietnam's largest transport hub and currently handles 75% of Vietnam's passenger traffic. The country has been rapidly modernizing roads, seaports, airports, and its energy supply including oil refineries and hydroelectric facilities as well as planning for two nuclear power plants.
The agriculture industry today contributes approximately 22% of Vietnam's Gross Domestic Product (GDP) and employs nearly 50% of its workforce. Vietnam is a leading exporter of rice, seafood, coffee, pepper, textiles, footwear and furniture, and it is a major oil producer. It is the world's largest producer of cashew nuts and black pepper.
In 2010, approximately five million tourists visited Vietnam from all corners of the world. Vietnam offers a fascinating history, high culture, scenic panoramas both seaside and countryside, exotic plants and trees, a varying landscape from alpine mountains down to Mekong Delta, Christian churches, Buddhist pagodas, Cham temples, top quality hotels, and restaurants offering good food and service and friendly people.
Vietnam Joins the Global Economy
In a 2012 McKinsey Global Institute report, Vietnam has been one of Asia's economic success stories over the past quarter of a century. After a failed attempt at a socialist collective marketplace that nearly crash of the economy, the communist leadership started a cautious reform toward a market economy in 1980s. In 2007, Vietnam became a member of World Trade Organization (WTO). Political and economic reforms launched in 1986 have transformed Vietnam from one of the poorest countries in the world with per capita income below $100 to a lower middle-income country within a quarter of century with per capita income of $1,130 by the end of 2010. Even adjusted for real per capita DGP and purchasing power parity, income levels have increased six fold in the past 20 years from $560 in 1988 to approximately $3,354 in 2012. This has lead to a doubling of the size of the middle class over the past five years.
Market liberalization in Vietnam has helped Vietnam become one of the world's fastest growing economies in the region with an annual growth rate of 14.1% between 2007 and 2011. It enabled an economic boom with an average of 7% to 9% annual GDP growth. Even the recent global financial and economic crisis hit Vietnam less than most countries in Asia. Vietnam's economy recovered strongly in 2009 from the global financial crisis with real GDP growth of 5.3 percent per annum. The ratio of poverty has fallen from 58% in 1993 to 14.5% in 2008. Vietnam ranks among the world's top 15 countries in attracting foreign direct investment (FDI). In 2012, Vietnam recorded a trade surplus of $780 million. Looking forward, Vietnam is expected to achieve stable real GDP growth rate of 7.1% between 2011 and 2015.
In the remaining three articles of this series on Vietnam, I will detail the FDI that is occurring in the country, outline the opportunities available for companies interested in doing business in Vietnam, and list the challenges that still remain.
In the early 1900s as large New York banks became more involved in financing international trade and issuing letters of credit, they discussed the need for a standardization of the way banks process and interpret letters of credit. A committee formed to develop common rules and the banks agreed to standardization around 1915. Soon thereafter, banks in Europe saw the need to do the same.
As time passed, it became apparent that banks all over the world should process and interpret letters of credit uniformly. Again a committee formed, with representation from many countries, under the auspices of the International Chamber of Commerce (ICC).
The first universally accepted rules developed in 1935, entitled, Uniform Customs and Practice for Documentary Credits, usually referred to simply as the UCP. Since 1935 it has gone through several revisions, usually about every 10 or 12 years. The 2007 revision, International Chamber of Commerce Brochure No. 600, well written in plain English with no legalese, has become a guide for anyone who works with letters of credit.
Every letter of credit needs interpretation in light of the 39 articles of the UCP. Although one would not read the UCP for leisure, the document contains valuable information and anyone who works with letters of credit should have one close at hand. The ICC makes the book available on its website, and many local international banks provide copies for their customers.
While banks typically spearhead the drive for each revision, they consult many different interest groups who may also have a hand in its writing. These include shipping companies, insurance companies, exporters and importers.
I was having fun the other day rereading the Customs regulations. Yeah, you heard me correctly. Fun! Anyway, I was having fun reading the Customs regulations when I ran across the following in Section 111, the regulations relating to Customhouse Brokers.
19CFR Â§111.29(b) (b) Notice to client of method of payment"”
(1) All brokers must provide their clients with the following written notification:
If you are the importer of record, payment to the broker will not relieve you of liability for customs charges (duties, taxes, or other debts owed CBP) in the event the charges are not paid by the broker. Therefore, if you pay by check, customs charges may be paid with a separate check payable to the "˜"˜U.S. Customs and Border Protection'' which will be delivered to CBP by the broker.
(2) The written notification set forth in paragraph (b)(1) of this section must be provided by brokers as follows:
(i) On, or attached to, any power of attorney provided by the broker to a client for execution on or after September 27, 1982; and
(ii) To each active client no later than February 28, 1983, and at least once at any time within each 12-month period after that date. An active client means a client from whom a broker has obtained a power of attorney and for whom the broker has transacted customs business on at least two occasions within the 12-month period preceding notification.
If you are working in a brokerage firm are you aware if your company is meeting its obligations under this regulation? Importers, do you recall receiving this notification from your broker? More importantly, why would CBP include this requirement in its regulations?
The simple answer is money. CBP wants to be certain that it receives all revenue owed to the government. This regulation is also a reminder that customhouse brokers are not representatives of the government; they are business agents representing the importer.
This regulation reminds me of an event that occurred early in my career. I worked for an importer that used a local, reputable, family-run brokerage firm. Remember, dear readers, this was in the Stone Age, when large national brokerage firms were just beginning to emerge. Like many family firms, management was being passed along to the next generation, in this case to the grandson of the founder. As can happen in a family business, the third generation was not prepared to operate the company and drove the business into bankruptcy. (There is a longer, more colorful story here, the details of which are documented in multiple law suits that subsequently ensued.) In brief, the scoundrel absconded with sizeable duty payments and failed to pay Customs on our behalf.
Imagine our surprise when we received a call from our bonding agent that CBP had drawn against our customs bond for payment. Imagine our dismay as we had to dig deeply into the company coffers to make the duty payments a second time. Imagine my boss's discomfort when he had to explain to management why his hand-picked broker turned out to be a fraud.
What are the lessons learned from this experience?
Pay CBP directly.
You can issue a separate check as is suggested by the regulation above. Alternatively you could enroll in the automated clearinghouse (ACH) process that permits you to make funds transfers directly to the government. Details for enrolling in variations of ACH are available at the CBP website.
Pay your broker timely. Your broker must submit duties and fees by the 10th business day following the date of entry. If you are paying late, you are forcing your broker to use its own credit line to cover your debt. Brokers commonly charge a finance fee for this privilege that far exceeds your company's cost of capital. While your accounting department may think it is a good policy to pay on 30 or 60-day terms they are being short-sighted.
Remember that your broker has no regulatory obligation to pay your duty obligations on your behalf out of their own funds. They are doing so as a commercial courtesy and, perhaps, out of commercial expediency.
Monitor your payments through ACE.
Keep on top of your payments through your ACE portal account. While this is not a fool-proof method of ensuring payment, it should raise awareness of any payment irregularities sooner, rather than later.
Won't my broker be upset if I pay CBP directly?
On the contrary! Your broker should not feel slighted in any way. This is not an issue of trust; rather it's an issue of good business practice. Reputable brokers will be relieved not to have to be your banker. If you pay CBP directly, they might even be more flexible when it comes to negotiating their service fees. At the very least, they should drop their finance charges.
Consider this. It may be a warning sign to you if your broker resists your participation in a direct payment option. A cash-strapped broker might be using your duty payments as operating capital to run their own business. Worse yet, he could be hopping a plane to Vegas and gambling your payments away.
This is all fine and good, John, but we are no longer in the Stone Age. Brokers are much better funded and secure today.
Oh, so you've been monitoring your broker's balance sheet and routinely reviewing their credit report? Admittedly, your broker is financially sound today. That is not to say, however, that they are immune from the economic and business cycles that other businesses must navigate. A solid brokerage firm might deteriorate.
This is not intended, however, to be a critique of the brokerage industry's financial solvency. It is, rather, intended to pose the question: Why put your broker between you and your obligations to the government when a simple, more secure method of payment exists? Wouldn't you rather sleep more soundly knowing that your customs payments were made timely and in full by using a direct payment option? It makes sense for you and for your broker.
A successful business maximizes opportunity while minimizing risk. If your company's competitive advantage hinges on a key piece of intellectual property (brand name, patented technology, etc.) then there may be countries that you avoid for fear of having your intellectual property (IP) compromised. The problem with this approach is that side-stepping a market does not necessarily mean that the risk is actually avoided. Take for example China, the IP piracy capital of the world. If you have IP worth stealing, then IP pirates will try to steal it regardless of whether your company ever enters the Chinese market.
Here is an approach that can help protect IP while still taking advantage of what will soon be the largest market in the world:
Register Your IP Well Before New Market Entry
Chinese IP thieves often attend international industry trade shows. They will ask booth workers if the company is looking for distributors in the Chinese market. If the employee says yes, then the pirate goes home to China and registers the company's name and product names as trademarks and domain names. China is a first to file IP country, whereas the U.S. is first to use. A company that wants its brand back must pay the extortion to the IP thief"”all of which is legal in China because the thief now owns the rights.
It is important to register your trademarks and patents in China before the IP thieves do it first. This makes defending IP much easier because a company can actually appeal to the Chinese legal system. Beijing knows that they have an IP theft issue. Now even Chinese companies are complaining about this and the system is shifting towards better enforcement.
Take the IP Fight to China. . . with Back Up
We've all heard and probably seen counterfeit products coming out of places like China. A customer thinks they've bought your product only to find out that it was produced by someone else. Your brand name is tarnished as the counterfeit product breaks down. Chinese counterfeiters seek out companies with a Chinese market avoidance strategy. They want to continue to reap profits from product knock-offs without hindrance from the original company.
If the Chinese market is a large opportunity for your company, then use it as part of your IP protection strategy as well. A strong Chinese strategic partner will share your interest in fighting your counterfeiters and trademark squatters. Invest in a tight relationship and your Chinese partner will know how to effectively use formal and informal means to neutralize IP piracy in-country. Also, if your company invests in any manufacturing in China then relationships with local and regional government officials can also put pressure on IP pirates. These efforts will also help to reduce the amount of counterfeit products leaving a country like China for other export markets.
I hope you found this approach useful in how your company could approach international IP protection. For more information about marketing and operations for international companies, please visit my site: The International Entrepreneur.
During my first few months on the job in the international department of a bank, the department had open positions due to an unmanageable workload as a result of the conclusion of a U.S. West Coast dock strike. The release of pent-up shipments resulted in daily deliveries of mail and couriered packages containing shipping documents for processing for payment against letters of credit.
Doug, the letter of credit supervisor, had hurriedly promoted administrative assistants to document examiners.
He hired me, and 12 days later hired another employee and asked me to train him. Doug's availability to handle problems and answer questions was scarce because he was busily answering the telephone eight hours a day counseling customers whose lives were complicated by the dock strike. This was the environment for my entry into a long banking career.
On my first day Doug gave me a set of self-paced training manuals. After reading the books I felt I had a pretty good handle on the topic, from a textbook perspective anyway. But I quickly learned how the textbook differs from the real world.
The first assignment I received from Doug was to examine a set of documents against a letter of credit that our bank had issued to pay for an importation of giftware from Japan. I checked the documents and found about eight discrepancies in them.
Since the textbooks hadn't covered anything like this, I didn't know what to do next. I waited until Doug paused between phone calls and told him that I had encountered a rare occurrence"”eight discrepancies!
Since the importer had a high volume of transactions, Doug knew them well. He simply instructed me to call the treasurer of the importer and tell him all the discrepancies I had found in the documents. "He'll waive the discrepancies," Doug said.
I called the treasurer and, true to Doug's prediction, the treasurer said, "I don't care about the discrepancies, I just want the goods. Please make payment and send me the documents so I can clear the goods through customs." This illustrates normal bank operating procedure: to obtain the importer's approval prior to making payment when the documents contain discrepancies.
If the importer wants the goods, they'll authorize the payment. While a bank does have the right to refuse payment without consulting the importer, they normally will call the importer first. A bank does not want to stand in the way of international trade. If the buyer wants the goods, the bank will proceed with the transaction. A bank will only refuse payment if so instructed by the buyer or if the bank fears risk of the buyer becoming insolvent for some reason.
I went on to check my next set of documents and once again found a number of discrepancies that the importer also waived. I soon learned that I would probably find discrepancies in the majority of the documents I checked. If I didn't find discrepancies, I would check them again because I figured I must have missed something.
This lesson illustrates how a bank handles discrepancies. It acts in accordance with the guidelines set forth in the Uniform Customs and Practice for Documentary Credits (UCP) that says, "When an issuing bank determines that a presentation does not comply, it may in its sole judgement approach the applicant for a waiver of the discrepancies" (Article 16 b).
A bank does not want to stand in the way of trade, but it has an obligation to protect the buyer against risk. If the buyer approves, so will the bank in most cases.
As you know Customs and Border Protection (CBP) announced a proposal to require customs brokers to undergo 40 hours of continuing education every three years. This seems like a lot of work for those of us who already keep up on things. Why should we have to do this? It just seems like piling on one more burdensome regulation on an industry that is already overburdened and under compensated.
Instead of keeping up on my reading and studying the regulations I now have to find an accredited course or event, whatever that means.
It also seems like a lifetime employment opportunity for people like you who do training as part of your business. You must be overjoyed with this proposal.
I feel like I am in kindergarten again. Remember when we all had to put our heads on the table because there was one kid acting out in the room? Why doesn't CBP just go after the bad actors and leave the rest of us alone? It would be much more effective than what they are proposing.
And now I have to get my own ACE account simply to register my activity once every three years? Gimme a break!
What I would really like to see is CBP improving its level of professionalism and requiring that its own employees pass a broker exam equivalent before being let loose on the unsuspecting importing public.
I guess you know how I feel about this proposal. What are your thoughts?
Ima B. Roker
Whoa! Hold your horses! There has been no official rules promulgation process yet. CBP has merely floated an idea out to the community and, to their credit, they are listening carefully to responses like yours. Nevertheless they do seem intent on moving forward with this idea.
Allow me to address some of the issues you raise:
Why require ongoing training?
While they have not shared any statistics with the trade, CBP seems to believe there are a significant number of customhouse brokers that have not kept current with the regulations. They believe these individuals should get up to speed or risk losing their licenses. CBP believes the solution is to require ongoing training. I'm not sure how effective that will be as the training requirement will not guarantee any level of competency.
CBP has also stated that it would like to raise the professionalism within the trade. I don't think they mean to be insulting with that statement, but there is a less than complimentary connotation therein.
While I agree there are some brokers that should be booted out of the industry, making all of us go back to school may not accomplish the intended goal. It seems to me there may be a middle ground whereby CBP screens for incompetence. That screening could easily be accomplished by the import specialists in every port of entry. They already know who the problem brokers are.
What is accredited training?
CBP does not see itself accrediting courses or events. Instead, CBP foresees designating five to 10 private parties to accredit seminars and events. These could be organizations like the National Customs Brokers and Forwarders Association of America (NCBFAA) or the American Association of Exporters and Importers (AAEI). It might be customs brokerage firms, universities, private training institutes or law firms.
CBP foresees establishing minimum criteria for assessing content, and CBP anticipates these firms might charge for their services. CBP seems to think that competitive market forces will keep fees low. CBP also understands that it might have to play some sort of dispute resolution role.
The accreditation issue is one that will require much more discussion and thought before implementation. The folks at CBP admit this and are open to suggestions.
Unanswered are questions such as:
How do we protect ourselves against service providers that say their event is accredited, when, in fact, it is not? Will event providers receive a verifiable registration number that must be affixed to course advertisements or certificates of completion?
Will an accrediting firm also be able to offer training events?
There would seem to be an apparent conflict of interest and an inherent bias against any competing training companies.
Will an accrediting firm be able to certify its own or related firm's events?
Again, a conflict of interest seems apparent.
What happens if the event organizer chooses not to get the event accredited?
Many smaller organizations host related events but may be unaware or unwilling to go through the formality of registering the event and certifying participation.
Will events certified by other professional organizations receive credit?
The Institute for Supply Management, for example, holds top-notch events that might be applicable. Shouldn't their events automatically apply?
Could an attendee of an event have it certified after the fact?
This would be particularly helpful when attending an event sponsored by Canada, for example. The event would likely not be certified by the event organizer but might be applicable.
Full Employment for Instructors?
What this proposal promises it also takes away. CBP has committed to providing at least 40 hours of free instruction, mostly available through webinars or through its website. While I may gain some new students, I may lose others due to the free course offerings.
Of greater concern is the law of unintended consequences. Where CBP is hoping to raise the bar, I fear the opposite will be true. I have a concern that the market may be flooded with poor quality offerings attended by brokers merely fulfilling the requirement but not truly improving their skill set.
Registering for ACE?
CBP seems to be firm on the issue that all brokers should have an ACE account and make their triennial filing via ACE. For active brokers that do not file entries this may be a burden as it will require maintaining ACE passwords over a three-year period simply to file the triennial report. I suspect this part of the proposal may undergo some changes over time as CBP learns more about the various roles active brokers play in the trade beyond filing entries.
CBP also advises that it foresees developing a new module for ACE that will facilitate the triennial reporting processing, including recording the 40 hours of training.
You are correct. The proposal results in an additional regulatory burden to the individual broker to demonstrate participation in ongoing training. If you are already a professional in the trade, you are already participating in enough training to meet the 40-hour proposal. The additional burden of proof should be nominal.
You seem somehow surprised and somewhat indignant about this regulatory burden. Let me remind you that the profession of customhouse broker is born of the customs regulations.
At the end of the day the designation of a customhouse broker is defined by Customs and Border Protection. It's their game and their rules.
To learn more about the proposal and see a summary of the May 2 and June 6 webinars, visit the CBP website.
After reviewing this material you have a chance to have your voice heard. Feel free to contact CBP with your thoughtful suggestions at: RoleoftheBroker@cbp.dhs.gov.
CBP Professional Standards?
While you are welcome to your opinion, I am not touching that comment. I'm just packing my backpack to get ready for school.
Our company discovered that we can order a report from the U.S. Census Bureau with information about our export filings through the Automated Export System (AES) by visiting the Census website and downloading and completing the template letter and required certification.
We sent the letter to Census listing all our primary addresses and tax IDs (EIN) and those of our subsidiaries. Just last week we received a notice that the data was available to us to download; we downloaded the many Excel spreadsheets. Just three words: WHAT A MESS! We are faced with extracting the data from these reports, segregating the several lines of shipment data, then aggregating the data into reports for each subsidiary.
We have learned three hard lessons from examining the data:
We must provide clear, complete instructions to the forwarders completing the Electronic Export Information (EEI) in AES.
We must be proactive in auditing the EEIs they send us to ensure correct data is presented to Customs and Border Protection (CBP).
We may need to complete the filings in-house if the forwarders are unable to meet our accuracy standards and measures that we have adopted and submitted to them in either our Standard Operating Procedure or our Shipper's Letter of Instruction.
We also discovered that some forwarders have indicated some shipments as routed, when they weren't, and other forwarders have indicate some shipments as not routed, when they were.
Back to those reports; what do we do with all of this data?
Overwhelmed in Kansas City
What would I do? If you have an internal Excel or Access database expert that is willing to work with you to create formulas that can extract and merge data, go to them to seek time on their busy schedules to help you tackle the databases that were provided.
Here are some hints and tips that I have used to manage the data:
Save the files with a unique name, but have that name include the original Census file name.
Add a column to each Census spreadsheet that allows you to input a unique identifier for each line of data that allows you to cross reference any new spreadsheet; this allows you to verify that the data was moved with integrity to the new spreadsheet.
Forwarders sometimes file a firm's subsidiary's EEIs using the corporate tax identification number instead of the subsidiaries. If the subsidiary's address was used (instead of the corporate address), then the first sort will be to apply a sort by address to identify filings. Then it is possible to move those EEIs to two spreadsheets for each subsidiary:
Once the allocation of EEI data has occurred (a big task), it is time to take the next step; it is time to review the data against the shipment detail and data that you have.
Ensure buy-in from compliance, management and corporate legal counsel (internal or external) to place all results under attorney-client privilege in the event there is a need to make a disclosure of findings to Census. A disclosure is an official presentation of your finding of errors to the appropriate government agency, such as Census.
Select a sample of shipments to review based on destination, volume, value, classification and export controls.
Create an audit checklist for each EEI filing.
Develop an audit team that includes representatives from your subsidiaries and corporate office. (I call this sharing the opportunity for learning.)
Work together to review the documentation that is on file at your offices and those of your subsidiaries for the EEIs selected for review.
If the findings warrant a 100% review, then proceed with the 100% review.
Upon completion of the review, instruct the EEI filer, typically a forwarder, to correct the errors that you discovered by providing them with an Excel spreadsheet listing the errors that you found along with the corrections to be made.
Instruct the forwarder to provide you with a copy of the corrected EEI.
I am an optimistic person! It is my belief that compliance is possible, but it takes effort to establish processes, procedures and policies that internal and external partners will follow and embrace. Luckily, it doesn't take a magician pulling levers behind the curtain"”just some good old fashioned hard work and thoughtful coordination of your internal resources!
Few of us can successfully work long-term with a person who you feel constantly disrespects you. And yet the combination of words, actions and non-verbal cues that are interpreted as respect or disrespect vary greatly from culture to culture. In Thailand, the "wai" is a specific set of greetings and slight bow with folded hands. It shows respect and particularly respect for the elder of the two people. In Spain, a business contact may show respect by asking about your health and also inquiring about your family. In some places, it is respectful to haggle extensively over a purchase, while in other cultures consider this insulting. There are cultures where businessmen and women consider it respectful to be treated equally in all ways, while still other cultures show respect by acknowledging gender differences both verbally and non-verbally.
The trick is to know how your actions and words will be interpreted by important stakeholders to your international operations. Saying or doing the wrong thing could rip apart a fledgling business relationship. Here are some ways to stay out of hot water:
Do Your Cultural Homework
Before meeting with a new international contact, do some basic research on what is particularly disrespectful in your counterpart's culture. In Saudi Arabia, you should know not to show the soles of your shoes. In the Philippines, you should know not to treat a higher-ranking person in the company as your equal. And in the U.S., you should know never to assume that the oldest male in the room is the boss. In today's global business environment, there is no excuse for being unprepared.
Know Who to Ask
Even with preparation, sometimes a person's reaction conveys that he or she feels disrespected. In many cultures, particularly those who value emotional control, it may be hard to tell. It may be subtle changes like their tone might go flat when previously animated or high levels of eye contact that now express disinterest. It may be a negotiating technique, but to be on the safe side it is better to investigate the reason. In direct communicating cultures such as Australia, U.S., Netherlands and Germany, the most respectful approach is to ask the person if you have offended them in some way. But the direct approach will backfire in places like Japan, Ghana and Indonesia, where saving face is a cultural priority. To avoid embarrassment and show proper respect, you will privately want to consult with someone close to the potentially offended person and ask if something is wrong. Whether you need to ask directly or indirectly, quickly addressing the issue can snuff out the ignition before it reaches the gun powder.
Declare Mia Culpa
In most situations, being culturally self-righteous can risk ruining an otherwise promising business relationship. Instead of taking a cultural misunderstanding personally, it is normally better to apologize, forgive and move on for the sake of the deal.
Be Slow to Take Offense
When friction surfaces around respect issues, take pause before reacting. What is this person's intention? Normally people don't realize when they have crossed a cultural boundary. Entering international markets and forging new business relationships requires a thickening of skin and lots of diplomacy.
I wish you the best of success in all of your international business endeavors. For more information about international marketing and cross-cultural competency, please visit The International Entrepreneur.
This is the third part in my series of articles on country risk and customer risk assessment.
To recall, it is important to classify both countries and customers because a rogue customer in a good (from a risk perspective) country is not a much better risk than a good customer in a rogue (from a risk perspective) country.
In this part I will concentrate on the second of four data sets available publicly from the internet.
One of the many wonderful things the Organisation for Economic Co-operation and Development (OECD) does is to measure country risk. They do so using a specifically devised model called the Country Risk Assessment Model (CRAM).
All countries are categorised according to the credit risk they pose, consequently the categorisation is meant to reflect country risk. According to the OECD:
Country risk is composed of transfer and convertibility risk (i.e. the risk a government imposes capital or exchange controls that prevent an entity from converting local currency into foreign currency and/or transferring funds to creditors located outside the country) and cases of force majeure (e.g. war, expropriation, revolution, civil disturbance, floods, earthquakes) (Source: http://www.oecd.org/tad/xcred/crc.htm, Accessed 15 March 2013)
As a result of recent classification criteria changes a number of issues relevant to the OECD classification need to be explained, as shown below.
According to the rules of the Arrangement, two groups of countries are not classified. The first group is not classified for administrative purposes and is comprised of very small countries that do not generally receive official export credit support. For such countries, Participants are free to apply the country risk classification which they deem appropriate.
The second group of countries is comprised of High Income OECD countries and other High Income Euro-zone countries. Transactions involving obligors in these countries (and any countries classified in Category 0) are subject to the market pricing disciplines set out in Article 24c) and Annex XIII of the Arrangement.
All other countries (and a limited number of supranational multilateral/regional financial institutions) are classified into one of eight categories (0-7) through the application of a two-step methodology:
The Country Risk Assessment Model (CRAM) produces a quantitative assessment of country credit risk based on three groups of risk indicators (the payment experience of the Participants, the financial situation and the economic situation).
A qualitative assessment of the CRAM results by country risk experts from OECD members, considered country-by-country to integrate political risk and/or other risk factors not taken (fully) into account by the CRAM. Accordingly, the final country risk classifications are achieved through a thorough discussion amongst experts and a consensus-building process.
The country risk experts meet several times a year. These meetings are organised so as to guarantee that every country is reviewed whenever a fundamental change is observed and at least once a year. Although the meetings and details of the CRAM are confidential and no official reports of the deliberations are made publicly available, the list of country risk classifications is published after each meeting. (Source: http://www.oecd.org/tad/xcred/crc.htm, Accessed 15 March 2013)
CRAM adopts both a quantitative and a qualitative approach to arrive at the best possible classification. Current data and historical data is freely available on the OECD website.
Based on these data, users may be able to do their own country risk assessment, by grouping certain countries using their own criteria. One common approach is to group countries by geographical location, for example Southeast Asia or the ASEAN member nations. These groupings should detect patterns of risk that will reflect the economic status of the country and may also assist in gauging the risk levels of particular areas.
Whilst in these articles I make generalised statements, it is not unusual for certain geographical areas to share some risk commonalities. For example many countries in Africa are categorised a high risk according to CRAM. Consequently, it is likely that doing business in Africa will be comparatively more risky than doing business in parts of Asia or the Middle East. For sellers and buyers alike, the idea is to paint a picture about a country or an area; you may think of this as a quick reference guide or a short-cut to risk management.
Basically, if one knows that a particular area has high risk, you should approach these negotiations differently than negotiations in low-risk area, and your business solutions may also be different or more restricted in choice. For example in risky countries Delivered Incoterms 2010 (DAT, DAP and DDP) may not be desirable options and more secure payment methods may also be required.
Of course, part of the examination of CRAM data is exactly what is required to arrive at our own country or country grouping classification.
It should be remembered that CRAM data, like any other data, is only partially useful in the analysis because of two primary reasons:
Events in the world change quicker than the data can be published. For example, CRAM data is typically updated on a six-month basis, but events occur all the time.
CRAM data has limitations, as outlined above. The difficulty with relying on one data set alone is highlighted by the current crisis in Cyprus. CRAM does not report any data for Cyprus because they are an EU member, but this does not mean that Cyprus is currently a highly acceptable risk.
It is therefore important to compare a several sets of data to get a much more informed opinion"”a more balanced and rounded view, if you like"”of nations that we may be interested in doing business with.
I will review another set of data in my next article.
The Uniform Customs and Practice for Documentary Credits (UCP) states: "The description of the goods, services or performances in a commercial invoice must correspond with that appearing in the credit." (Article 18 c) What does this mean to an exporter? What does it mean to a bank?
Every letter of credit will indicate a description of the merchandise covered by the letter of credit. Does the bank expect to see the merchandise description on the invoice exactly as shown on the letter of credit? What about punctuation, capital letters and spaces?
In a workshop on letters of credit for a staff of commodity traders from a grain company, they said that they became frustrated by their bank's interpretation of a letter of credit. The letter of credit described the merchandise as "#2 Yellow Corn or Better." The company shipped #1 Yellow Corn and described it on the invoice as "#1 Yellow Corn."
Astonished, they said, "The bank rejected the invoice! Why would they do that?"
Bankers cannot develop expertise in all kinds of merchandise they see in the documents that come across their desks. In the first 10 minutes on the job, a commodity trader likely learns the grading system for corn. However, bankers have no expertise as commodity traders. How does a banker know #1 is better than #2? Maybe #3 is better than #2.
Since bankers can't possibly know everything about every type of merchandise, their limited role should include nothing more than precisely comparing the merchandise description on the invoice to that on the letter of credit. One insightful attorney advised me early in my career, "You are only required to compare, not interpret." Good advice.
What possible alternatives do the traders have? Since the invoice must match the letter of credit, traders might prepare an invoice that describes the merchandise with a caption identical to the letter of credit: "#2 Yellow Corn or Better." Then, below the caption the invoice might carry a notation: "merchandise actually shipped: #1 Yellow Corn." Since this is not in conflict, a bank should find it acceptable.
Regardless of the actual goods shipped, the merchandise description shown on the invoice must precisely match the description stated in the letter of credit in order for the exporter to receive payment. This principle is the cornerstone of strict compliance.
The UCP goes on to state, "Banks deal with documents and not with goods, services or performance to which the documents may relate." (Article 5) In other words, a bank does not care what goods might have actually been shipped or even if any goods have been shipped at all. An exporter must simply supply documents that strictly comply with the terms of the letter of credit to collect payment from it. The bank does not concern itself with the underlying sales contract and the shipment itself.
In our last installment, a NAFTA participant issued a lengthy diatribe berating his producers for poor NAFTA documentation. Upon receiving this letter the producers responded in kind. Following is a summary of the responses received.
Oh Exalted Client, Ruler of Our Universe, in Whose Presence We Dare Not Breathe the Same Air and With Whose Wisdom We Dare Not Trifle:
We are in receipt of your snarky letter and would like to point out just a few issues you may have overlooked you self-centered twits.
We are not stupid, thank you.
You have sent us a list of 250 items.
You have not purchased 180 of these items from us within the past 5 years.
Twenty of these included on the list are not items we stock or sell to you. Perhaps it is you, who needs to get your act together before proceeding with your solicitation.
If you are not placing commercial pressure on us, why have you charged us $10K for telling you the truth that one of our goods was imported from China? We outsourced this item to China at your request in order to meet competitive pricing pressures. This was done with full knowledge of and approval by your quality engineers. You can't have it both ways. You may have the low-priced Chinese product or the higher-priced NAFTA-eligible product. Please make up your minds and we will source accordingly.
You do realize that many of your finished goods and our components are already duty free in Canada right? Issuing a certificate of origin to you is not going to make them any freer. Can you please explain to us why you insist on proceeding with this senseless charade?
We also provide you the safety gloves and glasses used by your employees on the production line. These are considered indirect materials under the NAFTA and can be considered originating value regardless of any response from our company.
Without cooperation from your company we are unable to classify your proprietary components. As a result we are unable to identify the proper NAFTA rule of origin and to make a final determination. You help us with the HS codes and we'll help you with a more accurate NAFTA certificate. Deal?
We estimate that responding accurately to your request for NAFTA certification will require us to expend at least four hours per item. This request for NAFTA certification is beyond the scope of work currently detailed within our contracts with you. We therefore respectfully request you compensate us for that time. At a modest $25 per hour, $100 per item, 250 items we will issue an invoice for $25K. Upon receipt of payment we will release this year's NAFTA certificate to you.
Perhaps you are under some misconception that we need your paltry business. We are the single global supplier of the material for which you are requesting information. After some consideration we have determined that our business is not positively affected by participation in trade agreements. We therefore regret to inform you we will not be providing you a certificate of origin.
Your Soon to be Former Supplier
Obviously an intervention is in order.
As you read these letters you might recognize your own firm. You may find yourself identifying with one or both of the parties. Before resorting to either of these less-than-diplomatic letters, keep in mind the following the next time you send or receive a NAFTA solicitation.
NAFTA is voluntary. Even though there might be considerable commercial pressure to cooperate, there is nothing within the NAFTA that compels you to participate. Before resorting to sniping at each other, buyers and sellers should take a more collaborative approach. Buyers in particular should remember that their suppliers could choose to opt out of the program at any time.
NAFTA has rules. If you are going to play the game you have to play by the rules. Admittedly the rules are not intuitive. If the program is not clear to you, get yourself to a seminar before completing any documentation for your customers.
NAFTA has consequences. If you choose to ignore the rules, the regulators of Mexico, Canada and the United States have authority to get your attention. While the U.S. government can fine a U.S. company, the other governments have the authority to bar your participation in their countries.
NAFTA has benefits. Duty avoidance is the primary benefit of participation. As a non-importing supplier this may not be obvious to you. Your NAFTA originating goods, however, should be more competitive in the marketplace when compared with non-originating goods.
NAFTA is a process. The certificate of origin is the last step in that process. Prior to issuing a certificate of origin companies must first certify that their goods originate under the NAFTA. This requires them to classify their goods and any material inputs used in manufacturing those goods. It also requires them to solicit certificates of origin from their producing suppliers.
This brings us full circle. Solicitation, while a nuisance, is just one of several important steps in the greater NAFTA process. Without dependable statements of origin from producers of goods and materials, parties may not be able to achieve the duty avoidance benefit of the NAFTA. Instead they risk the consequences.