Exporting

Exporting - Transcript

Presentation Group 3 Saturday 17 February 2007
Read the following with letter of credit established by Bank Malaysia and address the case questions that follow
It was Wednesday evening and Rohit and Robin his best friend since school days were playing the brainy game of chess with Robin s uncle Mr Rohit Malhotra at their South Delhi home Rohit and Robin were both very good at chess because of their ability to think strategically and their love of risk taking As the game was progressing Robin s uncle casually asked Are you aware of any sources for auto components I have a friend in Malaysia who needs to purchase 12000 units He was aware that the young men were intensely interested in automobiles
Rohit and Robin exchanged blank glances They were not exactly sure what Uncle Malhotra was talking about but they instinctually recognised that this could be a golden opportunity to start exporting It did not matter that Rohit was working with a reputed auto ancillary firm and Robin a recent graduate from Indian Institute of Foreign Trade was working as Management Trainee with an exporting company Neither has any experience running a business It did not matter that at that moment they did not know of a likely source They still sprang into action
The very next day Rohit contacted his friend engaged in exporting for three years Through his friend s contact Rohit set out to convince both the manufacturers and the buyer that he was a credible businessman Doing so presented some challenges particularly since all his contacts were over the telephone or Internet
For example when asked which company he was representing Rohit spontaneously replied Super Trading Company Rohit represented himself and Robin as business associates
Rohit enrolled himself for a crash course on Export Import Management to understand intricacies of terms like EXW FOB letter of credits documentary collections export financing export pricing risks in exporting etc He also learned quickly from friends and from Robin who had recently graduated with business degree He never showed his lack of knowledge to his clients
Since he had a limited access to capital Rohit convinced his buyer to issue an L C directly in the name of Super Trading Company through his bank Model Bank New Delhi Rohit was planning to raise pre shipment finance arrange back to back L C in favour of supporting manufacturer s for sourcing auto components and export bill receivable finance using the LC as security Only after he obtained the firm export order from his first buyer Universal Auto Components Malaysia did Rohit and Robin set down to finalise in writing with the manufacturers suppliers of auto components
After a month of dealings Rohit trusted his instincts and came out a winner Rohit and Robin netted 24 per cent margin on their first deal
Rohit may have been willing to take chances partly because he has relied on himself for a number of years He studied in a boarding school away from his family from the age of 12 His father was in business for 15 years His goal was to become the exclusive distributor for the leading manufacturers of auto components He must therefore increase his sales volume To accomplish this objective Rohit has reinvested the proceeds from the first deal and purchased some additional auto components
While looking for the next big deal he has landed two smaller contracts to supply auto components to local businesses These contracts yield about Rs 60000 a month which he uses to expand the business He has moved the operation into a corner of his uncle s office and has hired one full time and three part time employees Part time employees are his friends and like Rohit employed with auto firm One answers the phone and others comb the Internet looking for leads for buyers
Rohit spends about three hours a day following up on leads sending out samples and negotiating prices constructing cost sheets etc His work usually begins around 9 p m since he contacts potential buyers by fax or phone all over the world During the day he is busy networking supporting manufacturers Robin who works full time still handles some of the paperwork and is developing company s homepage on the Internet
The business remains a gamble The auto components market has been flooded with cheap products of inferior quality and Rohit has lost some money as prices have fallen He is wagering however that prices will turnaround in the future as companies merge and unprofitable ones exit Competitive manufacturers offering him lower prices have also wooed him However he has decided to bet on the firm which has faith in him originally
Letter of Credit
Sender Bank Malaysia Overseas Branch Kuala Lumpur Malaysia
Receiver Model Bank 6 Bank Lane Karol Bagh New Delhi 110 005 India
20 Documentary credit number BM 78546
31C Date of Issue January15 2007
31D Date and place of expiry March 15 2007 India
32B Currency code amount USD 24 000 Twenty four thousand
U S Dollars
40A Form of documentary credit Irrevocable
41D Available with by Any Bank by Negotiation
42C Drafts at At 60 days from Bill of Lading date
drawn on Bank Malaysia
43P Partial shipments Permitted
43T Transhipments Prohibited
44A On board disp taking charge JNPT Mumbai Port India
44B For transportation to Port Penang Malaysia
44C Latest date of shipment February 28 2007
45A Description of goods 12000 units auto components
CIF Port Penang Malaysia
46A Documents required
Signed commercial invoice in three 3 copies indicating the buyer s Purchase Order No UAC 102 dated January 03 2007
Packing list in three 3 copies
Full set 3 3 clean on board ocean bill of lading plus two 2 non negotiable copies issued to order of Bank Malaysia Overseas Branch Kuala Lumpur Malaysia notify Universal Auto Components Kuala Lumpur Malaysia marked freight Prepaid and showing documentary credit number
Insurance policy in duplicate for 110 CIF value covering Institute Cargo Clauses A Institute War and Strike Clauses evidencing that claims are payable in Malaysia
Certificate of Origin Issued by Chamber of Commerce
Pre inspection Certificate issued by Fair Inspection Inc
47A Additional conditions
Draft s drawn under this credit must be marked Drawn under documentary credit No BM 78546 of Bank Malaysia Overseas Branch Kuala Lumpur dated January 15 2007
This credit is subject to the Uniform Customs and Practice for Documentary Credits 1993 Revision ICC Publication No 500
48 Period of presentation Documents must be presented for payment
Within 15 days after the date of shipment
49 Confirmation instructions Add your confirmation
50 Applicant Universal Auto Components
No 3 Jalan Kencana 24
56100 Kuala Lumpur Malaysia
52A Issuing bank Bank Malaysia
Overseas Branch
54200 Kuala Lumpur Malaysia
57D Advise through bank Model Bank
6 Bank Street Karol Bagh
New Delhi 110005 India
59 Beneficiary Super Trading Company
87 Bank Street Karol Bagh
New Delhi 110 05 India
71B Charges All charges outside Malaysia are for the
Account of the beneficiary
78 Instruction to pay accept negot Documents to be forwarded to us in one
Bank lot by courier

Questions
Did you find Rohit s story interesting or inspirational and why
Did Rohit take a rational approach to exporting or was he just lucky
Putting youself in Rohit s place map the exportability of Super Trading Company in the coming three years On the basis of your observations comment if there are solid seasons for Rohit for pursuing exporting
How did Rohit plan financing his first export transaction Explain the nature specific purpose and steps of procedure involved in availing identified export credit facilities
Would you recommend formulation of well articulated credit payment policy to Rohit Why
Using diagrams
Outline the mechanics of letter of credit arrangement at the Issuance and Utilisation stage in respect of LC No BM 78546 dated January 15 2007 You should clearly mention the nature of agreements arrangements entered into between contracting parties and banks under above LC
Do you think Super Trading Company also faces some risks under L C arrangement If so what would enable them to protect from such risks