Student Name: Chan Ka Wai Student ID: 07510868G MODULE: MM579-International Marketing Date: 8 April 2011

Article: Emerging Issues Related to Marketing and Business Activity in Asia Pacific
The author of this paper has illustrated the important of countertrade for the emerging countries and examined the five trends that are likely to affect the nature of trade and investment activity in the region, namely infrastructure upgrading, public sector reform, increase military procurements, massive capital inflows as well as foreign debt build-up. According the latest economic forecast from EIU, Asia will remain the worlds fastest growing region in the world. Asia Pacific (excluding Japan) grew strongly in 2010 at an average of 8.2%, in which China and India are the highest growth countries in the region which is estimated at 10.3% and 9.1% GDP growth. Due to this, it is no wonder that Asia Pacific has captured interest and is always the growth initiative for business corporation, witnessed by the increasing capital inflow, foreign direct investment, manufacturing facility set up etc. Infrastructure spending in Asia every year is also the highest across all regions which require $400 billion every year according to CIBC forecast. The majority of the money was put forward to build transport networks, telecommunication systems, power generation, health care and education services, housing. It is believed that the importance of infrastructure is the major driver for growth and poverty reduction. Lack of adequate transportation, water and energy facilities can adversely affect the development of existing industries and may likewise preclude new entrants from coming in. Rising infrastructure demand in the region implied a strong demand for long-term bonds financed by Asian infrastructure entities. Build-Operate-Transfer (BOT) was commonly promoted as an option to outsource public projects to the private sector. Philippines was the first country in Southeast Asia to enact and use it

to solve the critical power problem in 1990s. Given the already large and expanding budget deficits and massive infrastructure requirements for emerging countries in Asia, foreign suppliers and corporations who resort to drive business growth through expansion in emerging Asia has to be flexible and accommodate the rising requests for financing mechanisms such as countertrade. Second trend is the public sector reform. According to some studies, they stated out that in some emerging countries like China and India, a large percentage of existing industrial and technical equipment is antiquated; approximately one third of stated-run enterprise are reportedly unprofitable, another one third are just break-even. The situation is also similar in more developed countries like Malaysia, South Korea and Thailand. To boost productivity and increase export competitiveness, those countries will generate a enormous demand for state-of-the-art capital good and high technological equipments which require non-debt-generating financing methods to raise funds for support the ambitious modernization and development plans. Thirdly, military expenditure in the Asia Pacific region has show an significant increase over years, in line with substained economic development and export growth. Chinas military build-up, Taiwans defense upgrade, Japans military re-emergence, major disruptions to vital shipping lanes and political uncertainty continued to fuel the regions military expenditure and modernization plans. The large scale procurement of defense equipment also drive to requests for offset arrangements and technology transfers like Russia paid off a portion of total ounstanding debt to South Korea with military hardwares such as tank, armoured vehicles, anti-tank missiles, missile systems etc. Another study also suggest that Asia Pacific will be the worlds fastest growing air travel market over the next 15 years which incur a enormous investment to be required to purchase the new aircrafts. No doubt, this conditions are the most favourable for greater offset and technology transfer demands. Next, capital inflow towards the emerging countries is undergoing as high cost export-oriented manufacturing will continue to move towards low-cost destinations, like China, India or Vietnam. While this sustained inflow will support the nations economic growth and development, however, it could also pose a long term financial difficulties for the host country by enlarging the investment income deficits, interest and dividend payments to the foreign investors. And this will increase the burden of already ballooning current account deficits which would severely impact the

countrys creditworthiness. Although most of Asian countries has a relatively high international credit ratings than other emerging regions such as Eastern Europe, Latin American and Middle East etc, the combination of rising interest rate, Asian financial crisis, political instability, increasing debt collection problem has already heightened the nervousness towards those investors pouring money into the emerging countries. On the other hand, this issue could be resolved by the proper government policy and implementation such as establishment of sound legal and financial system, deepening economic reforms, further easing of inward direct investment barriers and stronger Intellectual property rights protection and enforcement would help boosting the economy, attract successive foreign direct investment through joint venture or BOT projects and in returns enhance the quality of the product and competitveness which would increase the export capacity. This will adverse the previous short term potential negative impact on capital inflow. The last trend highlighted by the author is the increasing tendency of foreign debt built up for Asian countries, rose 57% from US$294 billion in 1988 to US$461 billion in 1995. For some export oriented countries like China and South Korea, the outstanding debt could easily satisfied by the foreign exchange earnings through the sustainable strong exports of goods and services. However, in some low-income, poor resource, developing countries like India, Indonesia, Pakistan and Thailand, the growing foreign debts, exacerbated by the infrastructure development, has posed a significant risk of financial repayment problem which will negatively impact the country credit rating and in returns an even higher cost of borrowing. As such, those countries are likely to impose countertrade obligations to imports in order to conserve scarce foreign exchange, to alleviate the foreign debt built up and help lessening the loan repayment. From the authors perspective, non-traditional financing is playing a very important role on those emerging countries, particularly low growth, low income, resources poor ones. Without such flexible financing tool, the country couldnt cope with the increasing demand of infrastructure development, increasing interest payment due to the rise of interest rate, soaring oil and energy prices. It may be the only way of expanding business in Asia Pacific in the future. There are a variety of ways in which organizations can enter foreign markets, The three main ways are by direct, or indirect export or production in a foreign country. Direct exporting to agent, distributor, or overseas subsidiary, is the most traditional and well established form of operating in foreign markets. Advantages of exporting

are manufacturing is home based, as a result , it mean less risky than overseas based; gives an opportunity to learn overseas market before huge investment in setting up plants and infrastructure facility. It also reduces the potential risks of operating expense. However, one of the key drawback is that one can be at the mercy of oversea agents and thus lack of control eventually which often results in decision on pricing, certification and promotion being in the hands of others. Indirect methods of exporting include the use of trading companies, piggybacking and countertrade. A number of advantages of indirect methods are 1) contracts in the operating markets, 2) high motivation is generated by the commission sales. 3) Manfacter/exporter needs little expertise and 4) credit acceptance takes burden from manufacturer. Piggybacking is the method that the organization with little exporting skill may use the services of one that has. Countertrade is by far the largest indirect method of exporting. Conservative estimate on counter trade accounts for about 20-30% of world trade, involving over 100 nations and between US$100-150 billion in value. It can take many forms such as barter, counter purchase (buyback), offset, compensation trading and switch trading. Barter is the least complex and oldest form of bilateral countertrade which refer to direct exchange of good or services between two parties. Although no money is involved in the deal, both parties would set an approximate shadow price for products flowing in each direction. One of the well-known example is Pespsi Co which has done business in Soviet and post-Soviet market over 20 years. In the Soviet era, Pepsi bartered soft drink syrip concentrate for Stolichnaya vodka which was in turn exported to the United States by its wine subsidiary and being marketed. Counter purchase, or buyback, is where the customer agrees to buy goods on condition that the seller buys some of the customer's own products in return (compensatory products). In counterpurchase, two separate contracts has to be signed. In one the supplier agree to sell products for a cash settlement; in the other, the supplier agrees to purchase and market unrelated products from the buyer. Offsets involves an arrangement whereby the seller is required to assist in or to arrange for the marketing of products produced by the buying country or to allow some portion of the exported product to be assembled or manufactured by producers located in the buying country. Offset may be distinguished from counterpurchase because the latter is characterized by smaller deals over a short period of time. For example, the Chinese government requires Boeing to spend 20 to

30% of the price of each aircraft on purchases of Chinese goods. Its against the GATT but its a fact of life and have been commonly used in places like Canada or UK, particularly for the aviation or aerospace & defense industries. Buyback or compensation trading is where the supplier agrees to take the output of the facility over a specified period of time or to a specified volume as payment. China has used counter purchase or buyback trading extensively. For example, an overseas company may agree to build a plant in Zambia, and output over an agreed period of time or agreed volume of produce is exported to the builder until the period has elapsed. The plant then becomes the property of Zambia. Switch trading refers to a switch in the country of destination goods. A professional switch trader, switch trading house or banks step into a simple barter or other counter trade arrangement when of the parties is not willing to accept all the goods received in a transaction. International countertrade continues to be a major form of direct, business-to-business marketing strategy in the increasingly global world markets. International countertrade transactions are prevalent (Hammond 1990), with more than one-half of the Fortune 500 firms reporting such non-monetary trade. Firms that do not export will lose out on huge opportunities for growth and cost reduction. There are a number of reasons that drive companies to adopt countertrade. First, thye need to expand or reach foreign market and in returns to increase the overall sales. Sidestep liquidity problem, repatriate blocked finds, clean up bad debt situation, build customer relationships, keep from lost markets to competitors, find lower cost purchasing sources are all enabling factors to countertrade. It, can be an effective and excellent mechanism to gain entry into new markets. The party receiving the goods as a mode of full or partial payment of exported goods or services may be instrumental in opening up new international marketing channels and ultimately expanding the market for mutual benefit of both exporter and importer. Yet, countertrade remains essentially a reactionary trade practice for many companies.

Due to the ample resources and experts, large corporations react relatively proactive in seeking foreign opportunity and evaluate all kinds of exporting strategies and choose the most appropriate one. Lockheed Corporation is one example of a firm heavily involved in such transactions with annual countertrade sales exceeding $1.3

billion. Lockheed has countertraded its wares for products as diverse as textiles, food, and automotive parts (Sales and Marketing Management 1987). Another example of international countertrade involves Tyson Foods, which sold 8500 tons of chicken to a company that sold the meat to the Commonwealth of Independent States in exchange for crude oil (New York Times 1993). Countertrade is the attractive to huge multinationals that they can use their worldwide networks of contacts to most profitably dispose goods. At the same time, they have to realize that selling a product does not necessarily bring in a currency of choice. It may bring in other commodities, grains, or other forms like advertising space. Countertrade can be a valuable marketing tool. IBM and Boeing are reluctant to engage in countertrade because they feel that the quality of their products should command a premium price without any attached strings. By providing a service that other will not will help a company differentiate its product from those of the competition. This is particularly true when the price, technology and quality are comparable; willingness to countertrade will become the key to separate winner from losers. It is not saying that countertrade is not without pitfalls. After signing countertrade contracts, many companies have lost money. Those that are inexperienced with countertrade have run into problems with pricing, recognizing appropriate products, and marketing the countertraded goods. Approximately 130 out of 192 countries in the world require countertrade, one form or another, in their procurements. The annual global market size for countertrade is estimated to be between US$200 to US$500 billion. No one really knows what are the correct percentages are and how large the true market size is. The potential for its growth is so large that efforts were made by some countries to curb the growth of certain forms of countertrade at the World Trade Organization (WTO). If a company strives to expand its business into emerging market, there are a few things they need to keep in mind when they enter the game. Before making decision of which market to be penetrated, it is essential that companies establish whether they want to handle some or all of a countertrade transaction themselves. Companies that do not have a suitable organizational structure to deal with countertrade, a large enough volume of countertrade to justify the cost, should hire expertise. Or they could find trading companies to handle which may cost 1-2% over the variable cost of in-house trading unit. Adversely, small and medium size exporters should avoid countertrading unless they have no other options because countertrade is a very complex time

consuming and expensive way of doing business globally Secondly, build the cost into the price. As countertrade always requires a long time to negotiate and involve, unless companies build those costs into their product price setting, countertrade quickly will become a losing business. Many companies selling in Indonesia in 1982 underestimated the time involved in negotiating the contracts and the discount required to sell the products. As a result, margins were squeezed and profitable deals turned into losses. Third, understanding the country policy, politics and regulations is essential to complete a deal. Internal political problems cause many countertrade deals to fall apart early on. Insensitivity to those problems could be very costly. Four, the company have to do extensive research to know the product before counter trade. Many companies doing countertrade suffer losses because they are stuck with products of poor quality or with the wrong specifications. Also, the quality of good for every shipments may be different that will constitute a value loss to the exporter. Last but not least, inexperience companies make commitments early in negotiations that they regret later. Most aspects of countertrade are negotiable. While a country may at first insist on firm commitments backed by penalties, let says countertrade 100% of sales with a 100% penalty. In most cased, it can be reduce to 10% to 15%. Although some companies view countertrade as a bad business due to violation of public trade policy and free trade, or unprofitable business due to higher cost involved, it is unquestionable that countertrade business activities has been growing over the last decade with more and more countries and firms involved. To do international trade and expand business beyond local market, flexibility of doing business is deemed as more important as the quality of goods and services. Countertrade is also used to be a shortcut as to overcome the entry barrier of export market, particularly for those countries with limited funds or nonconvertible currencies. The best example to illustrate is China. Despite of its strong protectionism of local industry, technology offset, a form of countertrade is frequently being adopted and opened to firms with high technological know how and equipment to bringing into the country. It is often as a route to import substitution. Moreover, Countertrade can be beneficial for large firms with extensive trade operations for large complex products, firms that are vertically integrated or can accommodate countertrade take backs etc.