Export Risk Management

 

International sales management always involved lots of challenges. The circumstances and principles of a worldwide business are changing frequently, thus lack of knowledge in this field could harm exporters and impose losses; as a result, all the risks must be detected in depth and their consequences must be minimized. It should be noted that trading with different countries could end in various results with different risks. For example, selling a specific good to China would be different in terms of risks from selling it to Brazil.

 

Different types of export risk

-Political risk

-Legal risk

-Economic risk

-Quarantine risk

-Exchange Rate Risk

-Nonpayment risk

-Transportation risk

-Sales risk

-Rivalry risk

-Act of God risk

-Insurance risk

-Distribution risk

There are plenty of experts in different fields who offer you consultancy in export risks like: Bank Foreign Currency Experts – International Business Lawyers – Transportation Companies – Customs Clearance Experts and Insurance Consultants.

For more information please call our office.

After detecting potential risks different types of them will be written down on the Managing Export Risks matrix and the consequences would analyzed; then after bringing up some solutions, again the consequences would analyzed. This matrix should be updated daily and all the aspects should be studied in detail. For example, a new instruction could impact the buyer or the seller’s risk. This matrix will indeed help in the prioritizing of risks so that the best solution will be applied at the right time.

Generally Managing Export Risk is a complex and expanded subject which cannot be summarized in some pages and needs a meticulous analysis; however here it is decided to briefly analyze each one of them.

 

 

Political Risk

Political risk indicates a kind of risk that is the result of regional or national political changes like revolution, protest, closing borders of a country, goods prohibition because of political decisions, government sanctions, and foreign direct investment prohibition.

 

Some other important cases of political risk are as follows:

 

-Possible Changes in Government

-Administration and customs bureaucracy and goods clearance in the destination country

-Press freedom                           

-Goods import limitations

-Tariff system and preferred tariffs

-Adjusting market competition

-Inter-country trade agreements

-Governmental support of export

-Governmental support of exporting companies

-Support of SMEs and industrial towns

-Poor infrastructure

-Gross national product

-Foreign & domestic investment

-Business relationship with neighboring country’s people

-International & regional conflicts

-Business relationships with regional and Muslim countries

 

 Economic Risk

Economic risk is one of the important risks and currency exchange rate fluctuations play a key role in this kind of risk. Some other important factors in this category are as follows:

 

Three main indicators of interest rate:

A) High inflation and interest rate

B) High economic development rate is a good sign of investment

C) The possibility of canceling foreign investments in case of economic indices & market fluctuations :

-Strong Currency of a country

-Powerful and effective private sector

-Government support of the private sector

-Government & private sector coordination

-Systems and customs affairs efficiency

-Powerful financing systems such as Stock Exchange and its trend, Banks, Finance Companies, Leasing Companies

-Employment rate

-Monetary Policy

-Unemployment trend

-Workforce costs

-And other factors which determine the economic stability of the target market

 

Legal Risk

There are some important items when studying legal risks such as origin and destination customs affairs and procedures, import and export regulations in the origin and destination country, required certifications and standards, and obligations and limitations; so here the acceptance of international laws or origin country’s laws in the destinations country is of great importance.

It is very common to do trade based on Proforma Invoice & Commercial Invoice but it is more rational to make a sales contract or other usual contracts in order to better manage the export risks. When binding a contract there should be a selected country’s rule under the title of “The Ruling Law” for decision-making in case of any disagreement.

As mentioned studying the destinations country’s customs affairs is very important; for example in some countries – such as India, UAE, Malaysia, Singapore, Indonesia, Russia, Bangladesh, Algeria, Egypt, Morocco, Libya, Fiji, Brazil, and Uruguay – which free zones are not counted as customs territory, the goods cannot enter the customs without buyer’s permission and sometimes the buyer will cleverly misuse this. So it is suggested to clear all the mutual accounts before transferring goods to these countries. Sometimes the process of goods clearance could be done by a copy of the bill of lading, and the seller will carry on by delivering a copy.

Regarding Iran & Iraq’s trading affairs, there has established a specific courthouse to solve related business issues which simplifies their mutual commerce.

Concerning Legal risk, notice that the more the rules and regulations in a country, so the less will be the rate of risk and investment.

 

Transportation Risk

To manage the risk of transportation it is more logical to use a transportation company on the seller’s side or at least a transportation agent in Iran. The expansion of services of the transportation company is very important and the different services of forwarder companies must meticulously analyze.

The seller must bind a written contract with the transportation company; you are suggested to study the “Transportation Arrangement” section and the “Bill of Lading” section in order to get a deep view of the transportation risk subject.

Nonpayment Risk from Customer Side

Sometimes the buyer causes some payment troubles; during these decades when a lot of sanctions hit Iran’s market, nonpayment of the buyer will burden a huge loss to the seller and maybe even international complaints and cases will not be possible because of a lack of an agency in other countries. So it is strongly advised to make a prior validation of the buyer’s credit situation and use an advance payment method or consult with the export guarantee fund.

For more information please call our office.

                

Goods Sales and Distribution Risk

A smart exporter will analyze their goods position in the destination country’s market which will help to a better export decision. Concerning this, there are some important matters as follows:

-The quality of other rivals

-Import volume of other rivals

-Goods delivery timing to customer

-The quality of after-sales services

-Society’s view toward imported goods

-Consumer behavior

-Required standards for the goods

-If the goods have any kind of agent, branch, or distribution center in the target market

-Purchase behaviors

-Changing possibility in the goods or packaging if required

-Providing updated materials

Safety of the Goods Risk

Because of different potential challenges, it is better to handle the transportation of goods and involved people from the warehouse to the destination in detail; it is possible that the stowage and loading are done without enough precision so there should be an agent during loading. If the transportation type is by land, then the containers which are equipped with GPS are the best option. Also, try to choose a route that minimizes the possibility of any kind of environmental harm to them; for example, the transfer of fruit products by a tropical route requires more attention and arrangements with the transportation agents. In sea routes try to choose ships with classification certificate which acts as a technical inspection certification. In some cases, using ships without this certificate will prevent you from receiving any compensation.

The export packaging is also very important and its accordance with the good itself and transport route should be checked with the buyer. In some cases, using inappropriate packaging will prevent you from receiving any compensation.

 

The Origin & Destination Country’s Customs Affairs

Being informed of customs affairs and procedures regarding time risk management and current costs is necessary; because there are different procedures in different ports.

 

Insurance Risk

Nowadays for an exporter, it is better to use a domestic insurance company based on the Central Bank’s and customs regulations; so in case of any damage, it is easier to receive compensation. For more information read the export insurance section.

*Notice that in case of using an Iranian Insurance company make sure the issuing bank will accept it.

 

Act of God Risk

Some cases like natural disasters, contagious diseases, and other happenings which are out of control should be mentioned in the Force Majeure section of the contract and the mutual responsibilities should determine between the two parties.

 

Last Point

International trade includes so many great opportunities. However, SEMs and amateur traders will face more risks and they should better get involved in businesses that have more opportunities than risks. Besides, try to analyze every single risk with its importance rate and make a difference between noticeable and little risks.

 

For more information please call our office.