International shipping takes more
than just putting your product on a truck and sending it across the border.
Here is an eight-point guide to getting
it there without any troubles.
It's 10 p.m. Do you know where your shipment is? If you've exported your company's
perishable goods to Brazil during Carnivale, it may be still sitting on the
dock ... leaking.
'If you're shipping into Brazil, don't do it the week before Lent,' advises Paul Murphy, professor of business logistics at John Carroll University, 'because it will impact the efficiency and effectiveness of your export.'
But culture is only one factor that needs to be
considered.
Tariffs, duties, customs and other issues may make the whole process intimidating for the novice global exporter. To aid in navigating these foreign business waters, experts in various facets of international commerce share their expertise in this eight-point guide to international shipping.
1. Do your
homework
Understanding the basic concepts of an international transaction is critical, says David Yen, the World Trade Center Cleveland's deputy director and regional manager for Asia.
As outlined in Incoterms 2000, a publication of the International Chamber of Commerce, these internationally recognized terms of sale determine where the shipper's title, risk and responsibility ends and the buyer's begins. Especially important to sales and marketing departments, these rules often impact pricing and logistics, making them critical to everyone who touches the international transaction.
'It's been my experience that many U.S. companies do not have as good an understanding of the subtleties of those terms as foreign buyers,' Yen says. 'Therefore, they commit to costs and responsibilities that they don't anticipate.'
For example, Yen says, if a Cleveland company sells a machine to a buyer in Hamburg, Germany, it could quote the price 'CFR (cost and freight) Hamburg, Germany.' By using the cost-and-freight option, the Cleveland company commits to a price that includes the product, the pickup and delivery to a U.S. port, loading onto a vessel, and prepaid freight to Hamburg. However, cargo insurance is not included in the price.
The buyer is responsible for unloading the product and risk transfers when the cargo passes the ship's rail, not before.
'A company's greatest pitfall is that they are not certain what agreement they have with the buyer in reference to shipping,' says Steve Demirjian, president of Worldwide Express in Middleburg Heights.
After you add up all the costs of transportation and customs clearance, you may get a bill for $400 that wasn't anticipated, diminishing your profit margin, he adds.
Thus, use of Incoterms 2000 must be specified in the terms of any purchase
agreement. Information is available online (www.iccwbo.org/index_ incoterms.asp)
through the International Chamber of Commerce. The U.S. Department of Commerce
addresses sales and distribution channels, communicating overseas and receiving
payment for your exports in its 'Basic Guide to Exporting,' also available online.
Other resources include the Cleveland World Trade Center, the Department of
Commerce's regional office, or the international department of your bank.
2. Get help from the experts
Before you treat global shipping as 'business as usual,' connect with a freight forwarder, logistics expert, customs broker, lawyer and financial adviser. These entities can navigate the complexities of air and water transport, while understanding the terminology, regulations and required forms.
'There are so many countries with different rules and regulations, that the customer cannot be aware of all of them,' says Worldwide Express' Demirjian.
Professional logistics companies handle international shipments and can explain foreign tariffs, duties and customs. Many have relationships with carriers that handle international orders. Businesses can work with steamship and air carriers directly, but logistics companies consolidate freight and ship in bulk for better pricing.
Freight forwarders vary in the size and level of service they offer. Cleveland has no lack of them, so ask for references to be sure the one you select has the appropriate level of expertise and commitment to service.
Check with the Federal Maritime Commission to ensure that any ocean transportation intermediary you employ is licensed and has filed a $50,000 bond, which they are obligated to do under the Shipping Act of 1984, says Karen Booth, partner in Thompson Hine LLP's Washington, D.C., office.
Therefore, Leslie W. Jacobs, chair of Thompson Hine's international practice
committee, suggests retaining a law firm with an international trade group that
can obtain the entire package, including the financing and contractual arrangements
for complicated transactions of significant value.
3. Provide sufficient packaging
and labeling
From truck to warehouse to dock-side pallet, your shipment will be handled extensively. 'Be sure that you have proper packaging for the specific product that you manufacture,' reminds Demirjian, who once shipped an entire nuclear power plant to Austria over a five-year period.
Sturdy domestic packaging may suffice for most products, but foreign countries offer different shipping challenges. For example, shipments to India will encounter a different road and railway infrastructure than those to Canada. If hazardous goods are being shipped, strict United Nations-certified packaging requirements are stipulated.
Many countries require that the product be labeled in the language of final destination. English may be the world's most-used business language, but it may not be understood by those who handle shipments in another country.
JCU's Paul Murphy, cites the story of a U.S. shipment of toxic pesticide to China in 55-gallon drums. Rusting and puncture holes caused the containers to leak. While 'poison' was printed in English on the drums, several Chinese longshoremen who didn't understand the language died after coming in contact with the contaminant.
A reputable freight forwarder can explain import-labeling rules.
4. Evaluate and understand
payment options
Payment options for overseas shipments include wire transfer, prepayment, letter of credit or site draft.
The safest of these methods is an irrevocable, confirmed letter of credit, which guarantees that the buyer's bank must pay even if the buyer defaults. If the seller's bank confirms an irrevocable letter of credit, the seller is still paid even if the buyer's bank refuses to release the funds or defaults. Such an agreement cannot be altered or revoked without the seller's approval.
Most experts suggest avoiding the use of revocable letters of credit.
An alternative is a site draft, whereby a foreign bank collects payment from the buyer when the freight arrives overseas, then transfers the funds to the seller's account. Or export companies can establish an open account, whereby payment is due within 30 days.
But all of this may depend on how well you know the customer and the political and economic conditions of the foreign market.
'In certain countries, you may want to collect the money right at the border,' says Ronald DeBarr, executive director of the Northeast Ohio Trade & Economic Consortium, which focuses on improving market access in Northeast Ohio. Otherwise, once the product reaches foreign shores, there is no guarantee of payment.
International banking firms can help with the letter-of-credit process, DeBarr
says.
5. Involve an international
banker early
Exporting firms should involve a financial institution that specializes in such transactions early in the selling process. But too often, that's not the case, according to industry experts.
'The client who is new to this business dives into the transaction before they've covered the to-do list,' says David Verhotz, senior vice president and manager of KeyCorp's international department. 'The buyer and seller are anxious, but they don't have their banking needs in line.'
In fact, the transaction structure should be considered in the product- pricing structure, Verhotz says. For example, if an overseas buyer negotiates selling terms that don't include payment upon delivery, cash-flow problems can ensue.
Verhotz says the banks need to be involved in the early stages to not only arrange financing but inform clients about Ohio and Export-Import Bank of the United States programs that assist exporters in producing and manufacturing equipment to be sold overseas.
'Throughout my whole career, I've been shocked at how many manufacturing entities
could be selling overseas but have never explored those markets,' says Verhotz,
who encourages clients to leverage their financial institution's knowledge and
contacts. 'They may not fully appreciate those opportunities because they don't
understand the international issues of doing business overseas. People seem
to make it more complicated than it really is.'
6. Learn about overseas
documentation requirements
Typically, three copies of commercial invoices are required, depending on the country. Most countries require packing lists. However, some require certificates of origin certified by the Chamber of Commerce stating that the goods were made in the United States.
In addition, Middle Eastern countries require legalization of the documents, meaning that the documents must be sent to the country's consulate office in Washington, D.C., where they will be stamped, legalized and returned to the shipper. This results in additional costs that vary based on the size and destination of shipment.
The 'International Chamber of Commerce's Uniform Customs & Practice for Documentary Credits' booklet contains information on the documents used in international shipping. 'There can be extraordinary complications and delays in generating cash, particularly where you have documentary letters of credit, if the documents are not picture perfect,' says Thompson Hine's Jacobs.
Seemingly inconsequential exports can damage your bottom line if you're not in compliance with regulatory practices of overseas shipping.
While seminars, consultants and the government offer assistance, it remains your responsibility to be diligent. 'It depends on what you export and to what destinations,' says Peter Martin, partner at Vorys, Sater, Seymour & Pease LLP's Washington, D.C., office. 'An occasional transaction will be different than if you have a frequent and stable level of exports. It's fairly easy to have an attorney or consultant set up a program that ensures you are operating in accordance with U.S. regulations.'
Saving the outsourcing fees and assuming the risk of noncompliance can become costly. A re-enactment of the Export Administration Act is working its way through Congress and will impose significant new penalties for violations. If you consistently fail to keep records correctly or fill out paperwork, it can result in multiple penalties for the same violation.
'If you reiterate the same error over and over again, the government has reach-back
authority,' says Martin. 'They look for patterns in violations because that's
how they can collect the most money.'
7. Get insurance
'Look at it from a risk-management perspective,' says Sandra Billow, vice president, large accounts specialty unit of Acordia of Ohio Inc.
As a shipment leaves your door, how do you protect it until the customer accepts financial responsibility? Make educated business decisions about what could go wrong and then use operational or contractual tools to avoid it. For a limited number of shipments, cargo insurance can be obtained from freight brokers who have the contacts.
However, the most economical way is to invest in marine-cargo coverage. When your shipment is transported via truck, rail or air, consider inland marine transit coverage that applies to domestic shipments in Canada and the United States. Both can be obtained from most midsized insurance agencies or brokerage firms.
'Make sure that you know the terms of your shipping contract, and that your insurance coverage matches those terms,' says Billow. This insurance is generally affordable, and terms and conditions are flexible.
Cargo insurance is not the only risk protection that international shippers should consider. If the goods have to be stored en route, be sure that is also covered. Especially in the case of sophisticated equipment, insurance should also cover your financial interest until it is installed, tested and operable.
Beyond physical assets, certain kinds of product liabilities also exist. The
most familiar case is the Ford and Firestone scenario. But the laws in this
country are very different from those overseas, Billow says. 'If you have more
of your products used overseas, it would behoove a smart businessperson to know
what laws apply to them,' she says. 'I would refer them to a good business attorney
in combination with an insurance agent.'
8. Track It
Whether it's a freight forwarder or steamship line, whoever provides your freight transportation should be able to offer electronic tracking of shipments via the Internet.
Where is your shipment? Is it lost or rerouted? Technology, with a few clicks of the keyboard and mouse, can now help assure you that everything is going according to plan.
It sure beats just crossing your fingers when your shipment leaves the dock.