Tainan Glass Manufacturing Company

The Tainan Glass Manufacturing Company of Taiwan (the name of the company is
disguised) produces large glass sheets for windows, display cases, and industrial uses.
It is one of two manufacturers in Taiwan.

Odd-sized pieces left over from cutting sheets to order are made into glass louvers for
use in jalousies. Jalousies, which are windows or doors made of slats that can be
rotated open to allow air to flow through or closed to keep wind and rain out, are very
popular in a number of countries with hot climates.

Unless made into louvers, the odd-sized pieces are scrap of no value. In effect, this
makes the raw material free, and the only additional cost of making the louvers is the
cost of cutting to exact size and polishing the edges. When demand for louvers is
exceptionally high, however, full-size sheets are sometimes cut into louvers. This
requires the use of full-cost raw material as well as labor, and the sales prices of the
louvers normally reflect total cost for glass as well as labor.

For a number of years Tainan’s major customers for the louvered glass had been
several importers in Nigeria. However, three years ago economic problems in that
African country had made it impossible for importers to arrange for foreign exchange
to pay for the glass imports, unless the importers had special arrangements with the
Nigerian government. None of the glass importers had been successful in making such
arrangements, so Tainan has had to suspend exports to Nigeria. Unfortunately, except
for some small buyers in the state of Hawaii in the United States, no other potential
customers appeared. Tainan continued to make the louvers from scrap, rather than
waste the odd-sized pieces of glass. They accumu- lated a large inventory of glass
louvers.

Recently Tainan received an order for 200 container loads of louvers from a trading
company in Nigeria. (Tainan ships the glass in ocean-going 20-feet long containers.
Use of larger containers is not economical since it is the weight of glass rather than its
volume that determines how much can be put in a container. Even a 20-feet container
cannot be filled to its volumetric capacity.) The order was so large that it would not
only use up the inventory, but also require some production from full-sized sheets.

Prolonged negotiations ensued, with the Nigerian company indicating that they could
not provide a letter of credit because of government regulations, and Tainan arguing
that without an L/C they would be running too large a risk of not receiving payment in
US dollars. Tainan was very anxious for the sale to be made because of their large
inventory, but did not let the Nigerian company know this. Tainan’s bargaining
position improved when representatives from some other Nigerian trading companies
arrived and offered to buy smaller amounts (two or three container loads) for cash, US
dollars paid in advance in Taiwan. This led Tainan to believe that there was a strong
demand for the louvers in Nigeria.
The large Nigerian customer finally agreed to provide an L/C drawn in US dollars on
a Hong Kong bank. The buyers did require that the invoice be undervalued because
they said the duty in Nigeria was very high. Since the Nigerian government required
that an independent firm certify the value of the shipment, Tainan had to pay an
additional fee to that firm in order that they would certify the value which the
Nigerian importer wanted.

The letter of credit did not arrive until two days before the shipment was due to be
made, but it did arrive, the sale was completed, and payment received.

Questions:

1. What are the possible credit risks that may affect the exporter and the importer
in the case?
2. Why did the Nigerian company arrange for payment from a Hong Kong bank
rather than a Nigerian bank?