International trade with Brazil

Words count-2535

2012
MODULE TITLE: MODULE CODE: INTERNATIONAL TRADE OPERATIONS BMK0118

MODULE LEADER: MRS GLYNIS JONES STUDENT NAME: ID: ALI SIAMI U1160107

SUBMISSION DATE: 17TH JANUARY 2012

The Business School, University of Huddersfield

Contents

1. Executive summary .................................................................................................................... 3 2. Introduction.................................................................................................................................. 4 3. Modes of payment and Credit management in Brazil ............................................................. 5 4. Modes of transport for international trade in Brazil .................................................................. 5 5. Risk assessment ......................................................................................................................... 6 5.1. An assessment of the payment and credit management risk .............................................. 6 5.1.1. Legal Concerns .................................................................................................................... 8 5.1.2. Buyer information ................................................................................................................. 8 5.1.3. Inventory ............................................................................................................................... 8 5.1.4. Payments .............................................................................................................................. 8 5.1.5. Language .............................................................................................................................. 9 5.1.6. Retention ............................................................................................................................... 9 5.1.7. Factoring ............................................................................................................................. 10 5.2. An assessment of the transport risks................................................................................... 11 6. Recommendation/suggestions ................................................................................................ 13 6. 1. Recommendation for dealing with payment risk ................................................................ 13 Cash in Advance ........................................................................................................................... 13 Open Account................................................................................................................................ 13 Letter of Credit............................................................................................................................... 14 Documentary Collection ............................................................................................................... 14 6.2. Recommendation for dealing with transport risk................................................................. 15 Scope of Coverage ............................................................................................................... 15 Transport Insurance .................................................................................................................. 15 Specialist Covers................................................................................................................... 16 Loss of Profits/ Consequential Loss Insurance .................................................................. 16 Seller's Buyer's Contingent Interest Insurance ................................................................... 16 References....................................................................................................................................... 17 Appendix A: CMA global sovereign debt credit risk report for the Latin America 2010 ..................... 19 Appendix B: ALTA group s activities and history ............................................................................... 20 Appendix C: Business Link ................................................................................................................ 20 Appendix D: The Latin-American Association of Credit Insurance (ALASECE) .................................... 20 Appendix E: The World Economic Forum ......................................................................................... 21 Appendix F: World Trade Organization, International Trade Statistics 2008 ..................................... 21 1

Appendix G: Documentary Collections vs. Letters of Credit .............................................................. 22 Appendix H: PAYMENT RISK DIAGRAM............................................................................................. 22 Appendix I: Financial system composition in Brazil ........................................................................... 23 Appendix J: Share of currency held by the public in the monetary aggregate in Brazil ...................... 23 Appendix K: Relative use of payment instruments 2008 ................................................................ 24

1. Executive summary

In economics, BRIC is one of the famous acronyms which refer to major advanced economic development countries. BRIC refers to Brazil, Russia, India and China which are all considered to be the newly advance economic development countries. These BRIC countries are also termed as BRIC economies or Big Four. The acronym was firstly presented by Jim ONeil (2001) in his research paper Building better global Economic BRICS. BRIC acronym has been spread rapidly worldwide to use it as a shift in global economic power away from the G7 countries towards the development. In many research papers, it was stated that BRIC economies may overtake the economies of G7 Countries by 2027 (O'Neill, 2001).

However, this assignment is about a medium sized manufacturing company, who want to develop markets in Western Europe using road transport and open account payment terms. So, in order to do that, this assignment divided into four parts. First part, discussed different types of payment and credit management in Brazil. Second parts showed various modes of transport for international trade in Brazil. Third parts are the most important part of this assignment. In that part, the operational manager explained the risk assessment about the payment methods and transport systems in the Brazil. Finally, the operational manager focused on some major

recommendations for improving the situation of payment and transport in international trade with Brazil.

2. Introduction

The Brazil is considered to be a sixth largest nominal GDP economy and eighth largest country in purchasing power equality. Recently, various economic reforms have been made which recognise the country in the modern international countries list. Brazil is one of the founding members of United States, the G20, CPLP, Latin Union, The organization of Ibero- American states, the organization of American states, Mercosul, and the union of South American States and finally one of the BRIC countries. Brazil got variety of natural and artificial resources to improve their economy. Some of the resources are diverse wild life for animals, natural environment and extensive natural resources to protect the rare species and habitats (www.state.gov, 2011).

Even, Brazil is one of the largest national economies in Latin America. According to International monetary fund and the World Bank, Brazil considered being a 7th largest economy at market exchange rates and 8th position in the purchasing power parity (PPP) (www.state.gov, 2011). Some researcher predicted that the Brazil economy will become 5th largest economy in the World in the succeeding decades. This prediction is based on the raising GDP per capita of the country and the standard of living of the people. The current GDP (PPP) per capita has been increased to $10200 which put the Brazil to 64th position according to the world data (www.state.gov, 2011). As previous mentioned, Brazil got huge resources which has developed the following sector effectively such as agriculture, mining, manufacturing and service sectors with the help of huge labour/human resources.

However, this assignment focused on the payment of risk and transport of risk for doing international trade in Brazil, and recommendation some way for dealing with those risks.

3. Modes of payment and Credit management in Brazil

Some major modes payment and credit management in Brazil for international trade are;
y y y y y y y y

Open Account Cash-in-Advance (Pre-Payment) Letters of Credit Down Payment Consignment Purchase Credit and Debit Cards Check, and Documentary Collections (Exim Guru, 2011)

4. Modes of transport for international trade in Brazil

Main major modes of transport in Brazil for international trade are;

y y y

Seaborne transportation Aviation, and land-based modes (www.epa.gov, 2011)

5. Risk assessment

A risk assessment is a vital step in protecting business, likewise as complying with the law. It helps business to specialize in the risks that basically matter in workplace those with the potential to cause hurt. In several instances, easy measures will readily management risks, for instance, making certain spillages are cleaned up promptly therefore individuals don't slip or cabinet drawers kept closed to make sure individuals don't trip. For most, meaning easy, low cost and effective measures to make sure that most worthy asset of workforce is protected. According to Baker (2007) argue that many new companies fail to assess the risk management but still some companies uses the old thumb rule approach due to lack of awareness on the new techniques. There are various problems which is associated with the enterprise risk management programmes due to their lack of operational relevance. In the modern business world, it is difficult for the business to connect the meeting discussion with the daily operational activities. However, the operation manager discussed an assessment of the payment and transport risks in the Brazilian market in below.

5.1. An assessment of the payment and credit management risk

According to Sherlock (2008) Credit risk is considered as major issues for all the countries due to current financial crisis. In the major developed countries, credit risk management process starts when people seek for money not at the time of collection the money. Sherlock (2008) stress that Credit risk should be the beginning at the process not at the end. Whereas, Colquitt and Joetta (2007) states that modern business uses in house risk taking approach rather than using the credit risk assessment. In house risk taking approach will focus on credit assessment and analysis to support the risk measurement rather than identification and assessment.

Even, globally, the international monetary system tries to eliminate the risk which is created artificially or government imposed exchange rates. The aim of currency exchange is to have free float in the market and the market forces of exchange rates may create risk and provide opportunity regarding the currency exchange. The United Nations Economic Commission for Latin America and the Caribbean (ECLAC) record which clearly depicts the exchange rates. Those datas has been analysed and presented fairly about the current currency fluctuations. This data will help the business to know about whether the currency is valuing or devaluing (Alta Group, 2004).

While selling the product, the seller or the selling company always have risk attached to it. When the buyer or the company deny paying the amount due to various reasons some of them are damage to the products while in transit, the products not delivered on time, agreed conditions about the product differ from the product received. All the above reasons are legal where the buyer wont make any payment to seller. Even the buyer can delay the payment mode when they receive products on delay or not received the product according to their conditions.

Alta group (2004) stress that while doing payment and credit risk analysis it is necessary for the company to assess the 3 Cs such as character, capacity and collateral. The company need to execute properly the payment and credit management system in all business areas. Small weak point in one area will disturb the whole function of the business. Therefore, some matters have to focus while, this company will do payment and credit risk assessment in the Brazil market for international trade is discussed below;

5.1.1. Legal Concerns

y y y y y

Understand about the detail knowledge of legal situation in the import country. Insurance the product against the political and economic risk Apply all national laws in the contract if applicable. Agree arbitration if the normal laws take too long of an ordinary court. Understand the legal rights under late payment legalisation

5.1.2. Buyer information y y Make sure that buyer is correct and legally bind for contract Make sure address of billing and delivery of goods are correct

5.1.3. Inventory

Providing list of products, quantities along with the sale price which will avoid misunderstanding in the inventory system.

5.1.4. Payments

The method payment and payment condition need to be clearly defined to the buyer and make sure that he/she has agreed up on it. y y y Method of payment need to be specified along with the discounts and offers Payment due date need to be mentioned. Set the normal due date as 30 days if the seller has not specified it.

5.1.5. Language

Language is considered as a barrier while signing the contract between the buyer and seller. The common language needs to use while defining the contract and both parties need to agree upon it. This will avoid future disputes in terms of interpretation.

5.1.6. Retention

This approach will create safer side for the seller where the seller can retain the ownership of the products or goods from until he/she pays for it .The selling company need to go for credit check for the customer to whom they are dealing. Customer bank details, credit referencing agencies and other details need to be verified before signing the contract. The buyer information can be taken from insolvency services, local newspaper, company website, registered company list.

If the terms and conditions are unsure, the business can use solicitor to check the legal documentation and insurance can be put on the legal terms when they are importing to risky countries (www.businesslink.gov.uk, 2011).

In Brazil, there are various agencies which help the business to run safe from credit risk and other risk factor. Some of the agencies are listed below in the table.

Source: www.alasece.com

In Brazil, various political risks for the business which make way for the business losses. Miller (2005) argues that many company faces political risk in order to avoid it is necessary for the company to take political risk insurance to mitigate those losses. Zurich (2010) Zurich is the first private company to provide political risk insurance policy after receiving approval from the Brazilian insurance regulator to provide those insurance to business.

5.1.7. Factoring

Factoring is the tool where it covers the risk of the exporter to cover the foreign debts. This was done through special organization where they take over the invoice from the exporter and pay certain percentage of their value. Most of the exporter use factoring options when they are dealing with South American countries. (Sherlock, 2008).

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5.2. An assessment of the transport risks

The business need to consider the transportation risk and to evaluate its performance if it is an international trade. The evaluation will be very helpful in terms of better financial stability of export business. In the modern business, 80% of the world major transportation of goods is carried by sea ways (Chaudhary, 2011). It carries huge risk factors while transportation. Some of the risk factor which is associated with the shipping or sea ways is cargo, vessel, people and financing. In order to avoid the risk, it is important for the government to take precautionary measures such as broad based security policy to cover all the risk (Rodrigue, 2011). If the policies are not strong or ineffective it may lead to huge financial cost and increase the burden of loss. While any goods transported for international trade some precaution need to be taken into consideration. They are; y In case of seaways, the product should be appropriate to containerization. It is necessary to have an eye on the order values equivalent to quantity loaded in the ship or container.

The shipment should be carried along with the international compliance in order to cover the loss of transit or damages (Chaudhary, 2011).

Proper communication channel need to be used between the people and the company who handle the goods. They can be equipped with phone, fax, email or internet.

Proper guidelines need to be provided to the transport company about the freight forwarder.
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While taking the cargo insurance necessary information need to be stated in the documents

Packaging to be in proper way since, huge risk is involved while many people involved in handling of goods (Chaudhary, 2011).

Based on the package and goods plans need to be framed by the company or government to decide the mode of transport and route.

The expected sailing date should be presented in the production programme which will be used for payment purpose. Letter of credit will be presented to get the payment within the specified time frame.

Road transport driver should be provided with peace of mind in case of disturbance the return load will affect pricing.

Balance sheet implications are on the choice of transport. The exporter will receive the payment when the goods have been dispatched or while in transit (Chaudhary, 2011).

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6. Recommendation/suggestions

6. 1. Recommendation for dealing with payment risk

Wells and Ron (2004) identified there are different factors which influence the company to improve the better credit management system. Even, there are various payment methods where the company can use with their clients according to their demands. Sherlock (2008) describes that most common method of payment is cash in advance, bill of exchange, letter of credit, and open account. The risk factor varies from each method of payment to another one of payment. The method of payment will be decided by the exporter based on the market and the competition which exist in the market. Some methods for avoiding payment risk with Brazil are discussed below.

Cash in Advance: This method will avoid the credit risk for the exporter because the payment will be received when the goods have been dispatched even the ownership has been transferred. The most commonly used options by the exporters are wire transfer and credit cards. However it is the least option for the buyer, since it may create cash flow problem. But this type is should not use for importing good from Brazil, whereas cash in advance is very secure for exporting goods from Brazil.

Open Account: It is a sale where the goods are shipped and delivered before the payment is due. The transaction will be usually 30-90 days but the exporter got huge risk option. At the same time, the importer gets the benefit of cash flow and cost. Even, this company was using open account payment methods for their international trade transaction in Brazil, but this type is very secure for importing good from Brazil, whereas open account is least secure for exporting goods from Brazil.

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Letter of Credit: It is the most secure instrument available for the international traders. LC is a commitment provided by the bank on behalf of the buyer payment will be made by the bank to exporter based on the terms and condition stated in the LC. This method will protect the buyer from payment obligation and the payment made only the goods shipped. Compare to cash in advance and open account, letter of credit is not very suitable for international trade, if those two methods are not available then, company can consider LC for payment method. Documentary Collection: The transaction takes place between the exporter bank and the importer bank. The exporter bank sends the documents to collect the payment for the importer bank. The document will also include the instructions of payments. This method is generally less expensive than the LCs. Compare to cash in advance and open account, documentary collection is not very suitable for international trade, if those two methods are not available then, company can consider LC for payment method.

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6.2. Recommendation for dealing with transport risk

Some major recommendations for reducing transport risk on the international trade with Brazil are discussed in the following order.

Scope of Coverage

Transport Insurance

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Specialist Covers

Loss of Profits/ Consequential Loss Insurance

Seller's Buyer's Contingent Interest Insurance

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References
Alta group report on Managing the risk of doing business in Latin America [online] available at : <http://www.thealtagroup.com/files/Managing_the_risks_LAR.pdf > [Accessed on 10th January 2012] Baker. C, 2007 Spending on credit risk management systems remains at the top of the corporate agendaCredit Control Vol: 28 Issue: 3 [online] available at: <summon > [accessed on 14th January 2012] Chaudhary, S. (2011) 'Information on Export-import, [online] Available at: < http://www.scribd.com/doc/51166911/7/Export-International-Trade-Transport-Risk > [Accessed 21th-December-2011] Colquitt, JoEtta. (2007) Credit Risk Management: How to Avoid Lending Disasters and Maximize Earnings. Ebrary [online]. Available at : < http://site.ebrary.com/lib/uoh/docDetail.action?docID=10196924> [Accessed on 10th January 2012] Dias, Y., Morales, J., and Sandoval, R. (2009) Opportunity in diversity: Insights from McKinseys Latin American Payments Map [online] available at: <http://www.mckinsey.com/clientservice/Financial_Services/Knowledge_Highlights/R ecent_Reports/~/media/Reports/Financial_Services/LatAm_Payments.ashx> [accessed on 12th January 2012] Exim Guru (2011) 'Methods of Payments in Import, [online] Available at: < http://www.eximguru.com/exim/guides/how-toimport/ch_13_methods_of_payment_in_import_trade.aspx> [Accessed 29thDecember-2011] Miller, S. (2005), Risky business: political risks still abound for foreign companies in Latin America, and insurers are there to profit. [Online] available at: <http://findarticles.com/p/articles/mi_m0BEK/is_8_13/ai_n15370694/> [accessed on 3rd January 2011]

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O'Neill, J. (2001) 'Building Better Global Economic BRICs, [online] Available at:< http://www2.goldmansachs.com/our-thinking/brics/brics-reports-pdfs/build-betterbrics.pdf > [Accessed 112th-December-2011] Robert, (2010) popular payment methods in international trading [online] available at: <http://resources.alibaba.com/article/44/Popular_payment_methods_in_international _trading.htm> [Accessed on 7th January 2012] Rodrigue, J. (2011) 'Transportation, Globalization and International Trade' , [online] Available at: < http://people.hofstra.edu/geotrans/eng/ch5en/conc5en/ch5c2en.html > [Accessed 9th-January-2012] Sherlock, Jim, Reuvid, Jonathan, (2008) The Handbook Of International Trade: A Guide To The Principles And Practice Of Export. London: GMB Wells, Ron. (2004) Global Credit Management: An Executive Summary. Ebrary [online]. Available www.alasece.com (2011) 'PRESENTACIONES DE LA ASAMBLEA' , [online] Available at: < http://www.alasece.com/espanol/miembrosac.htm > [Accessed 28thDecember-2011] www.businesslink.gov.uk (2011) 'International Transport and Distribution' , [online] Available at:< http://www.businesslink.gov.uk/bdotg/action/detail?itemId=1082043729&type=RESO URCES > [Accessed 27th-December-2011] www.epa.gov (2011) 'Trade, Transportation and Environment' , [online] Available at: < http://www.epa.gov/international/trade/transport.html > [Accessed 22th-December2011] www.state.gov (2011) 'Background Note: Brazil, [online] Available at: < http://www.state.gov/r/pa/ei/bgn/35640.htm > [Accessed 22th-December-2011] Zurich, (2010) Credit and Political Risk team launches Latin America growth strategy [online] available at: < http://www.zurichna.com/internet/zna/SiteCollectionDocuments/en/Products/politicalr isk/EMSLatinAmericaGrowthStrategyArticleFIN.pdf > [accessed on 3rd January 2011]

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Appendix A: CMA global sovereign debt credit risk report for the Latin America 2010

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Appendix B: ALTA group s activities and history

Appendix C: Business Link

Appendix D: The Latin-American Association of Credit Insurance (ALASECE)

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Appendix E: The World Economic Forum

Appendix F: World Trade Organization, International Trade Statistics 2008

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Appendix G: Documentary Collections vs. Letters of Credit

Appendix H: PAYMENT RISK DIAGRAM

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Appendix I: Financial system composition in Brazil

Appendix J: Share of currency held by the public in the monetary aggregate in Brazil

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Appendix K: Relative use of payment instruments 2008

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