Trade Intermediaries

Trade Intermediaries

There are different channels in which exports are distributed to overseas customers:

  • Direct Channels: Exporting directly to foreign distributors, retailers or trading companies. It can also be made through agents located in a foreign country. Direct channels provide the exporter more control over the export process, has the advantage of potentially higher profits and a closer relationship to the overseas buyer and marketplace.

It, however, entails a significant level of commitment by management to achieve maximum benefits since the firm handles every aspect of the export process ranging from market research to payment collections.

  • Indirect Channels: In this case, the firm uses the services of an intermediary to find overseas markets. It provides small firms with little experience in foreign trade access to foreign markets without incurring start-up costs. The manufacturer’s success is, however, largely dependent on the initiative of the chosen intermediary.

A substantial part of US exports is handled by export merchants and export commission agents.

Indirect channels

Manufacturer’s export agents

  • Handle direct marketing, promotion, shipping and sometimes financing of merchandise. The agent does not offer all services.
  • Take possession but not title to the goods. Works for commission; risk of loss remains with the manufacturer. Represent the manufacturer on a continuous or permanent basis as defined in the contract.

Export management companies

  • EMCs act as the export department for one or several manufacturers of noncompetitive products.
  • Provide manufacturers with extensive services that include, but not limited to, market analyses, documentation, financial, and legal services, purchase for resale, and agency services (locating and arranging sale).

Export trading companies

  • Trading companies offer more services and have more diverse product lines than export management companies. Trading companies are also larger and better financed than EMCs.

 

  • Trading companies are not exclusively restricted to export-import activities. Some are also engaged in production, resource development and commercial banking.

 

Export merchants

  • Take title to goods and export/sell in their own names

 

Direct channels

  • Sales representative of manufacturer overseas
  • Overseas Distributor: Takes ownership of goods and handles the necessary pre and post sales service.
  • Direct sales to retailer or end-user

 

Factors for evaluating foreign representatives or distributors

Size of sales force

Number of agents and/or distributors, expansion plans.

Sales record

Sales growth of representative over the years, sales objectives and basis for these objectives.

Territorial analysis

Areas covered, willingness to expand territory, offices in each area covered.

Product mix

Product lines, compatibility of these lines, potential conflict of interest, representation of other firms, product mix to accommodate the product, sales projections.

Facilities and equipment

Adequacy of warehouse facilities, method of stock control, communications, product servicing capability.

Marketing policies

Compensation of sales staff, incentive programs, monitoring of sales performance, training opportunities.

Customer profile

Profile of customers contacted, key accounts, percentage of key accounts in total gross receipts.

Principals represented

Number of principals represented.

Promotional Thrust

Market research, budget for promotion, level of contribution for representative’s promotion efforts, kinds of advertisement and other promotion efforts, website, product demonstrations etc.

 

MAJOR CLAUSES IN REPRESENTATION AGREEMENTS

Definition of Territory

The contract should define the geographical scope of the territory to be represented by the agent or distributor and whether the representative has sole marketing rights. The contract should also state whether the representative could appoint subagents or sub-distributors and the latter’s status in relation to the firm. It is also important to explicitly state the intention of the parties not to create an employer-employee relationship due to financial and tax implications.

 

Definition of Product

The contract should identify those products or product lines covered by the agreement as well as the procedures for the addition of successive products. It should also provide for the alteration or deletion of certain product lines based on the exporter’s continued production, representative’s performance or other events.

 

Representative’s Rights and Obligations

The agreement should state that the representative will do its best to promote and market the product and cooperate to attain the objectives of the exporting firm. It should also include (1) the representative’s commitment to periodically inform the exporter of all pertinent information related to market conditions and its activities;   (2) the parties’ agreement to provide due protection to each other’s confidential information as defined in the contract, which often includes seller’s patents, trade secrets and know-how, as well as the representative’s marketing information including customer lists; (3) a provision as to whose responsibility it is to arrange for all the necessary approvals, licenses and other requirements for the entry and sale of goods in the foreign country; and (4) the right of the representative to carry non-competitive and complementary products.

Distributor agreements should state clearly that the overseas distributor acts as a buyer and not as an agent of the seller. The agreement could require the distributor to maintain adequate inventories, facilities and competent personnel. The exporter could sometimes stipulate that orders representing a minimum value or quantity shall be placed within a fixed time. The agreement also defines the advertising and promotion responsibilities of the distributor, including an undertaking to advertise in certain magazines or journals a minimum number of times a year at its own expense.

Exporter’s Rights and Obligations

In agency contracts, the exporter is often required to provide the agent with its price schedules, catalogs and brochures describing the company, its product and other pertinent features. In distributor contracts, the exporter is required to provide the distributor and his/her personnel with training and technical assistance as is reasonably required in order to service, maintain and repair products. In both agency and distributor agreements, the exporter should only warrant that the product complies with the specified standards of quality and also state the party that will be responsible for warranty service.

Definition of Price

In agency agreements, all sales of products are made in accordance with the price list and discount structure agreed upon between the parties. However, the seller reserves the right to change prices at any time, usually upon a thirty-or sixty-days prior notice.

Renewal or Termination of Contract

In many countries, issues relating to appointment, renewal or termination of representatives are largely determined by local law. Many foreign representation agreements provide for a short trial period followed by a longer-term appointment if the representative’s performance proves satisfactory. It is important to state the duration of appointment and the basis for renewal or termination. Any renewal or termination requires an act of notification to the representative.

It is, however, important to set certain targets and objective performance criteria against which representative’s performance will be measured: sales volume, inventory turnover rates, advertising, and market share. It is also advisable to include other causes of termination, such as the following:

 

Right to Terminate Without Cause: A significant number of contracts allow for termination of the contract by either party with no prerequisite of action or omission by the other party upon giving advance notice.

Force Majeure

Most contracts state the occurrence of specific events beyond the control of the parties as a basis for termination of the contract. The enumerated actions or events fall into four major categories: (1) acts of God, (2) wars and civil disorder, (3) acts of government such as exchange controls, host government regulations, and (4) other acts beyond the parties’control.

 

Other Causes of Termination

Some contracts provide for termination of the contract in cases such as bankruptcy or liquidation of either party, assignment of contractual rights or duties, change of ownership or management, and non-exclusivity, or the firm’s decision to establish its own sales office or assembly operations.

Applicable Law and Dispute Settlement

The parties are at liberty to agree between themselves as to what rules should govern their contract. Most contracts state the applicable law to be that of the manufacturer’s home state. This indicates the strong bargaining position of exporters and the latter’s clear preference to be governed by laws about which they are well informed, including how the contract will function and its repercussions on the whole commercial and legal situation of the parties.

Many representative contracts also provide that any dispute between the parties shall be submitted to arbitration for final settlement in accordance with the rules of the International Chamber of Commerce.

 

MAINTAINING AND MOTIVATING OVERSEAS REPRESENTATIVES

Agents and distributors can be motivated in many ways to do the best possible job of marketing and promoting the firm’s product. This could be accomplished by, for example, developing good communications through regular visits from the home office, the organization of conferences, or providing inexpensive free trips for representatives during a given period. It is also important to inform representatives of company’s goals and principles and to keep them abreast of new developments in the product line, supplies, promotion strategies and to assist in training and market development. Firms could also motivate representatives through provision of better credit terms or price adjustments based on sales volume or other performance-based criteria.