          
                 METHODS OF EXPORTING AND CHANNELS OF DISTRIBUTION
          
          
          The most common methods of exporting are indirect selling 
          and direct selling. In indirect selling, an export 
          intermediary such as an EMC or an ETC normally assumes 
          responsibility for finding overseas buyers, shipping 
          products, and getting paid. In direct selling, the U.S. 
          producer deals directly with a foreign buyer.
          
          The paramount consideration in determining whether to
          market indirectly or directly is the level of resources a
          company is willing to devote to its international marketing
          effort. These are some other factors to consider when
          deciding whether to market indirectly or directly:
          
          *    The size of the firm.
          *    The nature of its products.
          *    Previous export experience and expertise.
          *    Business conditions in the selected overseas markets.
          
          DISTRIBUTIONS CONSIDERATIONS
          
          *    Which channels of distribution should the firm use to
               market its products abroad?
          
          *    Where should the firm produce its products and how
               should it distribute them in the foreign market?
          
          *    What types of representatives, brokers, wholesalers,
               dealers, distributors, retailers, and so on should the
               firm use?
          
          *    What are the characteristics and capabilities of the
               available intermediaries?
          
          *    Should the assistance of an EMC or ETC be obtained?
          
          INDIRECT EXPORTING
          
          The principal advantage of indirect marketing for a smaller
          U.S. company is that it provides a way to penetrate foreign
          markets without the complexities and risks of direct
          exporting. Several kinds of intermediary firms provide a
          range of export services. Each type of firm offers distinct
          advantages for the U.S. company.
          
          Commission agents
          
          Commission or buying agents are finders for foreign firms
          that want to purchase U.S. products. They seek to obtain
          the desired items at the lowest possible price and are paid
          a commission by their foreign clients. In some cases, they
          may be foreign government agencies or quasi-governmental
          firms empowered to locate and purchase desired goods.
          Foreign government purchasing missions are one example.
          
          Export management companies
          
          An EMC acts as the export department for one or several
          producers of goods or services. It solicits and transacts
          business in the names of the producers it represents or in
          its own name for a commission, salary, or retainer plus
          commission. Some EMCs provide immediate payment for the
          producer's products by either arranging financing or
          directly purchasing products for resale. Typically, only
          larger EMCs can afford to purchase or finance exports.
          
          EMCs usually specialize either by product or by foreign
          market or both.  Because of their specialization, the best
          EMCs know their products and the markets they serve very
          well and usually have well-established networks of foreign
          distributors already in place. This immediate access to
          foreign markets is one of the principal reasons for using
          an EMC, since establishing a productive relationship with a
          foreign representative may be a costly and lengthy process.
          
          One disadvantage in using an EMC is that a manufacturer may
          lose control over foreign sales. Most manufacturers are
          properly concerned that their product and company image be
          well maintained in foreign markets. An important way for a
          company to retain sufficient control in such an arrangement
          is to carefully select an EMC that can meet the company's
          needs and maintain close communication with it. For
          example, a company may ask for regular reports on efforts
          to market its products and may require approval of certain
          types of efforts, such as advertising programs or service
          arrangements. If a company wants to maintain this type of
          relationship with an EMC, it should negotiate points of
          concern before entering an agreement, since not all EMCs
          are willing to comply with the company's concerns.
          
          Export trading companies
          
          An ETC facilitates the export of U.S. goods and services.
          Like an EMC, an ETC can either act as the export department
          for producers or take title to the product and export for
          its own account. Therefore, the terms ETC and EMC are often
          used interchangeably. A special kind of ETC is a group
          organized and operated by producers. These ETCs can be
          organized along multiple- or single-industry lines and can
          represent producers of competing products.
          
          Export agents, merchants, or remarketers
          
          Export agents, merchants, or remarketers purchase products
          directly from the manufacturer, packing and marking the
          products according to their own specifications. They then
          sell overseas through their contacts in their own names and
          assume all risks for accounts.
          
          In transactions with export agents, merchants, or
          remarketers, a U.S.  firm relinquishes control over the
          marketing and promotion of its product, which could have an
          adverse effect on future sales efforts abroad. For example,
          the product could be underpriced or incorrectly positioned
          in the market, or after-sales service could be neglected.
          On the other hand, the effort required by the manufacturer
          to market the product overseas is very small and may lead
          to sales that otherwise would take a great deal of effort
          to obtain.
          
          Piggyback marketing
          
          Piggyback marketing is an arrangement in which one
          manufacturer or service firm distributes a second firm's
          product or service. The most common piggybacking situation
          is when a U.S. company has a contract with an overseas
          buyer to provide a wide range of products or services.
          Often, this first company does not produce all of the
          products it is under contract to provide, and it turns to
          other U.S. companies to provide the remaining products. The
          second U.S. company thus piggybacks its products to the
          international market, generally without incurring the
          marketing and distribution costs associated with exporting.
          Successful arrangements usually require that the product
          lines be complementary and appeal to the same customers.
          
          DIRECT EXPORTING
          
          The advantages of direct exporting for a U.S. company
          include more control over the export process, potentially
          higher profits, and a closer relationship to the overseas
          buyer and marketplace. These advantages do not come easily,
          however, since the U.S. company needs to devote more time,
          personnel, and corporate resources than are needed with
          indirect exporting.
          
          When a company chooses to export directly to foreign
          markets, it usually makes internal organizational changes
          to support more complex functions.  A direct exporter
          normally selects the markets it wishes to penetrate,
          chooses the best channels of distribution for each market,
          and then makes specific foreign business connections in
          order to sell its product. The rest of this chapter
          discusses these aspects of direct exporting in more detail.
          
          Organizing for exporting
          
          A company new to exporting generally treats its export
          sales no differently from domestic sales, using existing
          personnel and organizational structures. As international
          sales and inquiries increase, however, the company may
          separate the management of its exports from that of its
          domestic sales.
          
          The advantages of separating international from domestic
          business include the centralization of specialized skills
          needed to deal with international markets and the benefits
          of a focused marketing effort that is more likely to lead
          to increased export sales. A possible disadvantage of such
          a separation is the less efficient use of corporate
          resources due to segmentation.
          
          When a company separates international from domestic
          business, it may do so at different levels in the
          organization. For example, when a company first begins to
          export, it may create an export department with a full- or
          part-time manager who reports to the head of domestic sales
          and marketing. At later stages a company may choose to
          increase the autonomy of the export department to the point
          of creating an international division that reports directly
          to the president.
          
          Larger companies at advanced stages of exporting may choose
          to retain the international division or to organize along
          product or geographic lines. A company with distinct
          product lines may create an international department in
          each product division. A company with products that have
          common end users may organize geographically; for example,
          it may form a division for Europe, another for the Far
          East, and so on. A small company's initial needs may be
          satisfied by a single export manager who has responsibility
          for the full range of international activities.  Regardless
          of how a company organizes for exporting, it should ensure
          that the organization facilitates the marketer's job. Good
          marketing skills can help the firm overcome the handicap of
          operating in an unfamiliar market. Experience has shown
          that a company's success in foreign markets depends less on
          the unique attributes of its products than on its marketing
          methods.
          
          Once a company has been organized to handle exporting, the
          proper channel of distribution needs to be selected in each
          market. These channels include sales representatives,
          agents, distributors, retailers, and end users.
          
          Sales representatives
          
          Overseas, a sales representative is the equivalent of a
          manufacturer's representative in the United States. The
          representative uses the company's product literature and
          samples to present the product to potential buyers. A
          representative usually handles many complementary lines
          that do not compete. The sales representative usually works
          on a commission basis, assumes no risk or responsibility,
          and is under contract for a definite period of time
          (renewable by mutual agreement).  The contract defines
          territory, terms of sale, method of compensation, reasons
          and procedures for terminating the agreement, and other
          details.  The sales representative may operate on either an
          exclusive or a nonexclusive basis.
          
          Agents
          
          The widely misunderstood term agent means a representative
          who normally has authority, perhaps even power of attorney,
          to make commitments on behalf of the firm he or she
          represents.  Firms in the United States and other developed
          countries have stopped using the term and instead rely on
          the term representative, since agent can imply more than
          intended.  Any contract should state whether the
          representative or agent does or does not have legal
          authority to obligate the firm.
          
          Distributors
          
          The foreign distributor is a merchant who purchases
          merchandise from a U.S. exporter (often at substantial
          discount) and resells it at a profit. The foreign
          distributor generally provides support and service for the
          product, relieving the U.S. company of these
          responsibilities.  The distributor usually carries an
          inventory of products and a sufficient supply of spare
          parts and maintains adequate facilities and personnel for
          normal servicing operations. The distributor typically
          carries a range of noncompetitive but complementary
          products. End users do not usually buy from a distributor;
          they buy from retailers or dealers.
          
          The payment terms and length of association between the
          U.S. company and the foreign distributor are established by
          contract. Some U.S. companies prefer to begin with a
          relatively short trial period and then extend the contract
          if the relationship proves satisfactory to both parties.
          
          Foreign retailers
          
          A company may also sell directly to a foreign retailer,
          although in such transactions, products are generally
          limited to consumer lines. The growth of major retail
          chains in markets such as Canada and Japan has created new
          opportunities for this type of direct sale. The method
          relies mainly on traveling sales representatives who
          directly contact foreign retailers, although results may be
          accomplished by mailing catalogs, brochures, or other
          literature. The direct mail approach has the benefits of
          eliminating commissions, reducing traveling expenses, and
          reaching a broader audience. For best results, however, a
          firm that uses direct mail to reach foreign retailers
          should support it with other marketing activities.
          
          American manufacturers with ties to major domestic
          retailers may also be able to use them to sell abroad. Many
          large American retailers maintain overseas buying offices
          and use these offices to sell abroad when practicable.
          
          Direct sales to end users
          
          A U.S. business may sell its products or services directly
          to end users in foreign countries. These buyers can be
          foreign governments; institutions such as hospitals, banks,
          and schools; or businesses.
          
          The U.S. company should be aware that if a product is sold
          in such a direct fashion, the exporter is responsible for
          shipping, payment collection, and product servicing unless
          other arrangements are made.  Unless the cost of providing
          these services is built into the export price, a company
          could end up making far less than originally intended.
          
          Locating foreign representatives and buyers
          
          A company that chooses to use foreign representatives may
          meet them during overseas business trips or at domestic or
          international trade shows. There are other effective
          methods, too, that can be employed without leaving the
          United States. Ultimately, the exporter may need to travel
          abroad to identify, evaluate, and sign overseas
          representatives; however, a company can save time by first
          doing homework in the United States.
          
          Contacting and evaluating foreign representatives
          
          Once the U.S. company has identified a number of potential
          representatives or distributors in the selected market, it
          should write directly to each. Just as the U.S. firm is
          seeking information on the foreign representative, the
          representative is interested in corporate and product
          information on the U.S. firm. The prospective
          representative may want more information than the company
          normally provides to a casual buyer. Therefore, the firm
          should provide full information on its history, resources,
          personnel, the product line, previous export activity, and
          all other pertinent matters. The firm may wish to include a
          photograph or two of plant facilities and products or
          possibly product samples, when practical. (Whenever the
          danger of piracy is significant, the exporter should guard
          against sending product samples that could be easily
          copied.)
          
          A U.S. firm should investigate potential representatives of
          distributors carefully before entering into an agreement.
          See table 4-1 for an extensive checklist of factors to
          consider in such evaluations. In brief, the U.S. firm needs
          to know the following points about the representative or
          distributor's firm:
          
          *    Current status and history, including background on
               principal officers.
          
          *    Personnel and other resources (salespeople, warehouse
               and service facilities, etc.).
          
          *    Sales territory covered.
          
          *    Current sales volume.
          
          *    Typical customer profiles.
          
          *    Methods of introducing new products into the sales
               territory.
          
          *    Names and addresses of U.S. firms currently
               represented.
          
          *    Trade and bank references.
          
          *    Data on whether the U.S. firm's special requirements
               can be met.
          
          *    View of the in-country market potential for the U.S.
               firm's products. This information is not only useful
               in gauging how much the representative knows about the
               exporter's industry, it is also valuable market
               research in its own right.
          
          
          A U.S. company may obtain much of this information from
          business associates who currently work with foreign
          representatives. However, U.S. exporters should not
          hesitate to ask potential representatives or distributors
          detailed and specific questions; exporters have the right
          to explore the qualifications of those who propose to
          represent them overseas. Well-qualified representatives
          will gladly answer questions that help distinguish them
          from less-qualified competitors.
          
          In addition, the U.S. company may wish to obtain at least
          two supporting business and credit reports to ensure that
          the distributor or representative is reputable. By using a
          second credit report from another source, the U.S. firm may
          gain new or more complete information.
          
          Commercial firms and banks are also sources of credit
          information on overseas representatives. They can provide
          information directly or from their correspondent banks or
          branches overseas. Directories of international companies
          may also provide credit information on foreign firms.
          
          If the U.S. company has the necessary information, it may
          wish to contact a few of the foreign firm's U.S. clients to
          obtain an evaluation of their representative's character,
          reliability, efficiency, and past performance. To protect
          itself against possible conflicts of interest, it is also
          important for the U.S. firm to learn about other product
          lines that the foreign firm represents.
          
          Once the company has qualified some foreign
          representatives, it may wish to travel to the foreign
          country to observe the size, condition, and location of
          offices and warehouses. In addition, the U.S. company
          should meet the sales force and try to assess its strength
          in the marketplace.  If traveling to each distributor or
          representative is difficult, the company may decide to meet
          with them at U.S. and worldwide trade shows.
          
          Negotiating an agreement with a foreign representative
          
          When the U.S. company has found a prospective
          representative that meets its requirements, the next step
          is to negotiate a foreign sales agreement. The Department
          of Commerce district offices can provide counseling to
          firms planning to negotiate foreign sales agreements with
          representatives and distributors.
          
          The potential representative is interested in the company's
          pricing structure and profit potential. Representatives are
          also concerned with the terms of payment, product
          regulation, competitors and their market shares, the amount
          of support provided by the U.S. firm (sales aids,
          promotional material, advertising, etc.), training for
          sales and service staff, and the company's ability to
          deliver on schedule.
          
          The agreement may contain provisions that the foreign
          representative
          
          *    not have business dealings with competitive firms
               (this provision may cause problems in some European
               countries and may also cause problems under U.S.
               antitrust laws);
          
          *    not reveal any confidential information in a way that
               would prove injurious, detrimental, or competitive to
               the U.S. firm;
          
          *    not enter into agreements binding to the U.S. firm;
               and
          
          *    refer all inquiries received from outside the
               designated sales territory to the U.S. firm for
               action.
          
          
          To ensure a conscientious sales effort from the foreign
          representative, the agreement should include a requirement
          that the foreign representative apply the utmost skill and
          ability to the sale of the product for the compensation
          named in the contract. It may be appropriate to include
          performance requirements such as a minimum sales volume and
          an expected rate of increase.
          
          In the drafting of the agreement, special attention must be 
          paid to safeguarding the exporter's interests in cases in 
          which the representative proves less than satisfactory. It 
          is vital to include an escape clause in the agreement, 
          allowing the exporter to end the relationship safely and 
          cleanly if the representative does not work out. Some 
          contracts specify that either party may terminate the 
          agreement with written notice 30, 60, or 90 days in 
          advance. The contract may also spell out exactly
          what constitutes just cause for ending the agreement (e.g.,
          failure to meet specified performance levels). Other
          contracts specify a certain term for the agreement (usually
          one year) but arrange for automatic annual renewal unless
          either party gives notice in writing of its intention not
          to renew.
          
          In all cases, escape clauses and other provisions to
          safeguard the exporter may be limited by the laws of the
          country in which the representative is located. For this
          reason, the U.S. firm should learn as much as it can about
          the legal requirements of the representative's country and
          obtain qualified legal counsel in preparing the contract.
          These are some of the legal questions to consider:
          
          
          *    How far in advance must the representative be notified
               of the exporter's intention to terminate the
               agreement? Three months satisfy the requirements of
               most countries, but a verifiable means of conveyance
               (e.g., registered mail) may be needed to establish
               when the notice was served.
          
          *    What is just cause for terminating a representative?
               Specifying causes for termination in the written
               contract usually strengthens the exporter's position.
          
          *    Which country's laws (or which international
               convention) govern a contract dispute? Laws in the
               representative's country may forbid the representative
               from waiving its nation's legal jurisdiction.
          
          *    What compensation is due the representative on
               dismissal? Depending on the length of the
               relationship, the added value of the market the
               representative has created for the exporter, and
               whether termination is for just cause as defined by
               the foreign country, the U.S. exporter may be required
               to compensate the representative for losses.
          
          *    What must the representative give up if dismissed? The
               contract should specify the return of patents,
               trademarks, name registrations, customer records, and
               so on.
          
          *    Should the representative be referred to as an agent?
               In some countries, the word agent implies power of
               attorney. The contract may need to specify that the
               representative is not a legal agent with power of
               attorney.
          
          *    In what language should the contract be drafted? An
               English-language text should be the official language
               of the contract in most cases.
          
          The exporter should also be aware of U.S. laws that govern
          such contracts. For instance, the U.S. company should seek
          to avoid provisions that could be contrary to U.S.
          antitrust laws. The Export Trading Company Act provides a
          means to obtain antitrust protection when two or more
          companies combine for exporting. In any case, the U.S. firm
          should obtain legal advice when preparing and entering into
          any foreign agreement.
          
          
          
                 FACTORS TO CONSIDER WHEN CHOOSING A FOREIGN
                     REPRESENTATIVE OR DISTRIBUTER
          
          The following checklist should be tailored by each company
          to its own needs. Key factors vary significantly with the
          products and countries involved.
          
          Size of sales force
          
          *    How many field sales personnel does the representative
               or distributor have?
          
          *    What are its short- and long-range expansion plans, if
               any?
          
          *    Would it need to expand to accommodate your account
               properly? If so, would it be willing to do so?
          
          
          Sales record
          
          *    Has its sales growth been consistent? If not, why not?
               Try to determine sales volume for the past five years.
          
          *    What is its sales volume per outside salesperson?
          
          *    What are its sales objectives for next year? How were
               they determined?
          
          
          Territorial analysis
          
          *    What territory does it now cover?
          
          *    Is it consistent with the coverage you desire? If not,
               is it able and willing to expand?
          
          *    Does it have any branch offices in the territory to be
               covered?
          
          *    If so, are they located where your sales prospects are
               greatest?
          
          *    Does it have any plans to open additional offices?
          
          
          Product mix
          
          *    How many product lines does it represent?
          
          *    Are these product lines compatible with yours?
          
          *    Would there be any conflict of interest?
          
          *    Does it represent any other U.S. firms? If so, which
               ones?
          
          *    If necessary, would it be willing to alter its present
               product mix to accommodate yours?
          
          *    What would be the minimum sales volume needed to
               justify its handling your lines? Do its sales
               projections reflect this minimum figure? From what you
               know of the territory and the prospective
               representative or distributor, is its projection
               realistic?
          
          
          Facilities and equipment
          
          *    Does it have adequate warehouse facilities?
          
          *    What is its method of stock control?
          
          *    Does it use computers? Are they compatible with yours?
          
          *    What communications facilities does it have (fax,
               modem, telex, etc.)?
          
          *    If your product requires servicing, is it equipped and
               qualified to do so? If not, is it willing to acquire
               the needed equipment and arrange for necessary
               training? To what extent will you have to share the
               training cost?
          
          *    If necessary and customary, is it willing to inventory
               repair parts and replacement items?
          
          
          Marketing policies
          
          *    How is its sales staff compensated?
          
          *    Does it have special incentive or motivation programs?
          
          *    Does it use product managers to coordinate sales
               efforts for specific product lines?
          
          *    How does it monitor sales performance?
          
          *    How does it train its sales staff?
          
          *    Would it share expenses for sales personnel to attend
               factory-sponsored seminars?
          
          
          Customer profile
          
          *    What kinds of customers is it currently contacting?
          
          *    Are its interests compatible with your product line?
          
          *    Who are its key accounts?
          
          *    What percentage of its total gross receipts do these
               key accounts represent?
          
          
          Principals represented
          
          *    How many principals is it currently representing?
          
          *    Would you be its primary supplier?
          
          *    If not, what percentage of its total business would
               you represent?
          
               How does this percentage compare with other suppliers?
          
          
          
          Promotional thrust
          
          *    Can it help you compile market research information to
               be used in making forecasts?
          
          *    What media does it use, if any, to promote sales?
          
          *    How much of its budget is allocated to advertising?
               How is it distributed among various principals?
          
          *    Will you be expected to contribute funds for
               promotional purposes?
          
               How will the amount be determined?
          
          *    If it uses direct mail, how many prospects are on its
               mailing list?
          
          *    What type of brochure does it use to describe its
               company and the products that it represents?
          
          *    If necessary, can it translate your advertising copy?
          
          
