Chapter 14 Pricing for International Markets

2. Price escalation is a major pricing problem for the international marketer. How can this problem be counteracted? Discuss. The key to counteracting the problem of price escalation centers on any method that will reduce the price of the product, tariffs, or any other cost in marketing the product. Some of the more frequently used methods are: (1) offsetting tariffs and transportation charges by the net price for goods sold in foreign markets. A problem which may arise here however is the possibility that the importing country will consider this move as dumping. (2) Modify the product in a way that tariffs are reduced. For example, assemble in the foreign country which may lower the tariff and transportation costs. The foreign trade zone is especially useful in this process. (3) Manufacture within the country thereby eliminating tariffs and perhaps also benefiting from lower labor costs. (4) Shorten the channels of distribution especially in those countries that have value added taxes or turnover taxes. (5) Eliminate costly functional features on the product thereby reducing the overall cost and price. For U.S. products this is a reasonable alternative since for many markets U.S. products have unwanted or unnecessary functional features. In addition, depending on market needs, the overall quality of the product may also be lessened in order to lower the cost of goods. In all of these situations the main thrust is to lower entry cost of the product thereby lowering the tariffs and the transportation cost which are the two major contributors to price escalation. 3. Regardless of the strategic factors involved and the companys orientation to market pricing, every price must be set with cost considerations in mind. Discuss.

This statement is true, as all products must be priced with cost considerations in mind. However, most firms overplay this aspect of pricing and dont rely enough on pricing to the market. The latter is usually a higher price; therefore, manufacturers lose by not taking advantage of market pricing. 4. Price fixing by business is not generally viewed as an acceptable procedure (at least in the domestic market); but when governments enter the field of price administration, they presume to do it for the general welfare to lessen the effects of `destructive competition. Discuss.

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This statement typifies the general viewpoint of the public (unknowledgeable public), but the statements implications are invalid. The statement implies that price setting is good if done by the government and bad otherwise. This is not always the case. Companies are forever entering into some form of price setting which affects the economy either positively or negatively. Governmental price setting can also be either good or bad. However, government knowledge and research usually results in better forms of action. 5. Do value added taxes discriminate against imported goods? Typically, value added taxes are applied within the country to all products. As a consequence these taxes do not directly discriminate against imported goods. However, imported goods frequently have a higher cost due to tariffs and additional transportation costs and thus may have to pay higher value added taxes. When compared with the lower amount charged to locally produced and nonimported goods, the value added tax may increase the price to the point that the market will not buy the product. However, relatively speaking, value added taxes do not discriminate against imported goods. 6. Explain specific tariffs, ad valorem tariffs, and combination tariffs. Specific tariffs are fees charged at a flat rate per physical unit imported. Ad valorem tariffs are duties levied as a percentage of the value of the goods. Combination tariffs include both of the above. 7. Suggest an approach a marketer may follow in adjusting prices to accommodate exchange-rate fluctuations. Prices may be quoted in the currency of the home country or in terms of some stable monetary unit, such as the U.S. dollar. Hedging (the process of selling or buying foreign currencies in such a manner as to offset exchange fluctuations) may be employed. 8. Explain the effects of indirect competition and how it may be overcome. Indirect competition is competition from goods which are substitutes for a certain product but which are not exactly the same. For example, indirect competition for coffee might come not only from other coffee manufacturers but also from tea manufacturers. This type of competition may be overcome by the same processes that overcome any type of competition: good advertising, fair prices, good services rendered, and achieving a strategic position in the market. 9. Why has dumping become such an issue in recent years? The growing importance of world trade to individual companies has combined with saturated domestic markets, overproduction and increased competition to encourage dumping in many product areas. Procedures are looking to the marginal revenue contribution which can be gained when products are sold above direct cost into markets not normally sold. In recent years the number of dumping complaints in the United States has exploded and interest in antidumping enforcement and legislation has grown apace. 10. Cartels seem to rise phoenix-like after they have been destroyed. Why are they so appealing to business? Cartels are appealing to business because they allow participating companies greater power by taking over the selling function (pricing, types of goods produced, licensing agreements.) Cartels put industry in a position to promote rationalization and specialization; consequently, technical progress results. Cartels are similar to monopolies in that they benefit at the expense of consumers. Thus, wherever it is politically acceptable, cartels tend to spring up.

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11. Discuss the different pricing problems that result from inflation versus deflation in a county.

Inflation causes consumer prices to escalate and the consumer is faced with ever rising prices that eventually exclude many consumers from the market. On the other hand, deflation results in ever decreasing prices creating a positive result for consumers but both put pressure to lower costs on everyone in the supply chain.
The Japanese economy has been in a deflationary spiral for a number of years. In a country better known for $10 melons and $100 steaks, McDonalds now sells hamburgers for 52 cents down from $1.09, a flat screen 32 inch color television down from $4000 to $24001 and clothing stores compete to sell fleece jackets for $8, down from $25 two years earlier. 2 Prices have dropped to a point that consumer prices are similar to those they once found only on overseas shopping trips. The high prices prevalent in Japan before deflation allowed substantial margins for everyone in the distribution chain. As prices continued to drop over several years, those less able to adjust costs to allow some margin with deflated prices, fell by the way side. Entirely new retail categories 100-yen discount shops, clothing chains selling low-cost imported products from China, and warehouse-style department stores have become the norm. Sales at discount stores grew by 78% from 1995 to 2000. Discounting is the way to prosper in Japan, which again helps fuel deflation. While those in the distribution chain adjusted to a different competitive environment or gave up, Japanese consumers were reveling in their newfound spending power. Japanese tourists used to travel to the U.S. to buy things at much cheaper prices, but, as one consumer commented, Nowadays, I feel prices in Japan are going down and America is no longer cheaper. When she used bring back suitcases of bargains on trips to U.S., on her last trip she returned from a two-week vacation and limited her purchases to one fanny pack. 3 In a deflationary market, it is essential for a company to keep prices low and raise brand value to win the trust of consumers. 4 Whether deflation or inflation, an exporter has to place emphasis on controlling price escalation. 12. Discuss the various ways in which governments set prices. Why do they engage in such activities? Governments set prices in various ways: a. By requiring middlemen to mark up their goods by a governmentally dictated margin. Some manufacturers may have margins governmentally controlled. b. Setting price limits (floor and ceiling) on actual prices. c. Restrict price changesgovernment allows no deviation from original price settings unless officially requested. d. Governments may compete in the market to control prices. e. Governments grant subsidies to companies if they lower their prices. f. Government monopolies and monopsonies. g. Governments are now forming international agreements in relation to pricing.

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Brian Bremner and Irene M. Kunii, Deflation Nation, BusinessWeek, May 26, 2003, . 22. At least one exception in Japan is Louis Vuitton brand of handbags, leather and other luxury goods that has managed to raise prices twice on one year despite Japans severe deflation. See: Philippe Ries, French Luxury Goods Hold Their Own in Japan Despite Euros Rise, Agence France-Presse, March 2, 2003. 3 James Brooke, Japanese Consumers Revel in Deflations Silver Lining, New York Times, December 7, 2001. 4 Kenichi Murakami, Nippon Lever Gains Ground Through Focus On Strong Brands, Nikkei Report April 15, 2003.

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Governments engaged in such activities to better control the economic standards of their countries. They can combat inflation or deflation to some extent through price setting and can also control monopolizing situations or economically unhealthy ones. 13. Discuss the alternative objectives possible in setting prices for intracompany sales. Maximizing profits for the corporation as a whole. Facilitating parent-company control. Offering management at all levels, both in the product divisions and in the international divisions, an adequate basis for maintaining, developing, and receiving credit for their own profitability. The problem of pricing is complex and awareness of the variations in local conditions should be taken into account when determining a strategy. Maintaining market initiative of the international divisions is a prerequisite of the pricing strategy. 14. Why do governments so carefully scrutinize intracompany pricing arrangements? The tax and financial manipulation possibilities of transfer pricing have not been overlooked by governmental authorities. As multinational firms gain increasing prominence in the world marketing scene, national governments are becoming increasingly restrictive and paying special attention to transfer pricing in tax audits. 15. Why are costs so difficult to assess in marketing internationally? Elements complicating international cost assessment: a. Taxes and tariffs b. Middleman costs c. Transportation costs d. Financing and risk costs These elements vary greatly in the international marketplace and due to the additional problem of currency conversion are complicating the cost assessment of the international firm. 16. Discuss why countertrading is on the increase. There has been a significant increase in countertrading transactions during the late 1960s and 1970s. This is primarily the result of shortages of hard currency available to industrializing nations. For Communist countries, purchase from non-Communist suppliers must be made with monies earned from Western nations; in less developed countries (LDCs), inflation ridden or weak currencies are reserved for top priority purchases while an increasing dollar volume of goods of less importance are being purchased through some form of countertrading. 17. Discuss the major problems facing a company that is countertrading. The critical problems confronting the seller in a countertrade negotiation is having the expertise to determine the value and the potential demand of the goods offered. Frequently, there is inadequate time to conduct a market analysis. In fact, it is not unusual to have sales negotiations almost completed before countertrade is introduced as a requirement. Barter houses, specialized in trading goods acquired through barter arrangement, are the primary outside source of aid for companies beset by the uncertainty of a countertrade. Barter houses, most of which are found in Europe, can find a market for bartered goods, but the time it may take can put a financial strain on a company which has to have its capital tied up for a longer period than normal. In the long run, if companies are going to be involved in countertrades, they should establish personnel who can effectively evaluate the products to be traded.

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18. If a country you are trading with has a shortage of hard currency, how should you prepare to negotiate price? If a customer you are trading with is in a country with a shortage of hard currency an astute marketer should have an understanding of countertrade methods. The request for countertrade is increasing in both developing and developed countries. Every international marketer should include in his/her pricing skills some knowledge of countertrade. This is especially important if there is any indication that countertrades are a part to trade with customers in that country. One of the difficulties firms have in countertrade is not being prepared when a countertrade offer is made. If a countrys trade practices are studied, you can determine what products typically are offered for countertrade. Then you can determine the market price of the products offered and also get some idea of how the products can be disposed of. Such information will enable the marketer to reach a more profitable countertrade agreement should it arise. 19. Of the four types of countertrade discussed in the text, which is the most beneficial to the seller? Explain. Of the four types, the buyback may be the most beneficial since the seller receives products that can be sold in the sellers regular marketing program. In a buyback arrangement, the seller agrees to take back the goods produced by the process as total or partial payment. However, a problem arises if the goods in the buyback arrangement are in competition with the marketers own produced merchandise. Of the other three, the counterpurchase is probably the most beneficial to the seller. The advantage of the counterpurchase is that the seller gets payment up front but then agrees to offset or counterpurchase other goods from the country over a period. Generally, there is a list of goods the seller can select from. The seller has time to seek markets for the goods on the list. The seller is then in a better position to effectively plan for the disposition of goods received in a counterpurchase. 20. Why should a knowledge of countertrades be part of an international marketers pricing tool kit? Discuss. This is important because countertrades are a growing part of international business and if the marketer does not have any knowledge of countertrade and is confronted with a countertrade proposal, he/she may be dissuaded from consummating the deal or make costly mistakes. The biggest problems in a countertrade transaction are knowing how to place value on the goods received and successful disposition of the goods received. Without knowledge of countertrades, these two decisions are difficult to make during a price negotiation that includes countertrade. 21. Discuss the various reasons purchasers impose countertrade obligations on buyers. There are a variety of reasons purchasers impose countertrade obligations on the seller. The most important being a shortage of hard currencies. This is the most prevalent, however, when a country produces a product in large quantities in which there is a low market demand, the country may offer products in counterpurchases as a means of getting rid of excess supply. Generally speaking, goods are offered for countertrade when there is a low or minimal market for the goods. Another reason that products may be offered in countertrade is because the country does not have an established international market in which to dispose of the goods. There may be a world market for the goods but the country does not have the ability or access to the market and thus may force products in countertrade. 22. Discuss how FTZs can be used to help reduce price escalation. A common use for foreign trade zone or free trade zone is to reduce price escalation. A foreign trade zone allows a marketer to store products in quantity for later distribution and forgo import taxes while goods are within the FTZ. This obviously allows the marketer to save part of the cost of financing the import taxes that would be required if the goods had to be kept in storage and taxes paid while in

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storage. Another more common use of the FTZ to help reduce price escalation is to import unassembled goods for assembly in the foreign trade zone using lower cost labor. This can result in lower tariffs as well since unassembled goods frequently are subject to lower tariffs than are assembled goods. The result is that import tariffs are reduced and the final cost of the product is also reduced by using the foreign trade zone. In addition, there may be savings that are derived from shipping costs since typically it is more costly to ship fully assembled goods than unassembled goods since shipping rates are determined on weight plus volume. This too may enable the marketer to reduce the cost basis for the product and thereby reduce price escalation. 23. Why is a proactive countertrade policy good business in some countries? A proactive countertrade strategy probably will be most effective for global companies that market to exchange poor countries. Economic development plans in Eastern European countries, the Commonwealth of Independent States (CIS), and much of Latin America will put unusual stress on their ability to generate sufficient capital to finance their growth. To be competitive, companies must be willing to include some countertraded goods in their market planning. Companies with a proactive strategy make a commitment to use countertrade aggressively as a marketing and pricing tool. They see countertrades as an opportunity to expand markets rather than as an inconvenient reaction to market demands. Capital poor countries striving to industrialize will account for much of the future demand for goods companies not prepared to seek this business with a proactive countertrade strategy will miss important market opportunities. 24. Differentiate between a proactive and reactive countertrade policy. A company that waits until a customer suggests a countertrade has a reactive countertrade policy. Whereas, the company that enters the marketplace with countertrading as part of its pricing toolbox and has planned to make a countertrading offer as part of the price is practicing a proactive countertrade policy. 31. One free trade zone is ZFM of Montevideo. Visit http://www.zfm.com and discuss how it might be used to help solve the price escalation problem of a product being exported from the United States to one of the Mercosur countries. The following was excerpted from the ZFM Web site in 2001. The many advantages offered by ZFM, its infrastructure, services, or its advanced technology, make it an exclusive promotional tool, born to become an ideal Distribution Center. Its strategic location in the very heart of the Mercosur makes it even more attractive. After the Worlds latest historical changes, the present trend to group regional economies has obtained favorable results, to the point that today, the most important multinational corporations are looking at these markets with great interest. In order to understand the attraction of the Mercosur for these companies, we only need to remember that it groups over 200 million consumers. ZFMs particular location in a country such as Uruguay, with its natural attributes and its stability known internationally and historicallyadd even more incentives for the great investors. On its path to political and economic consolidation, Uruguay has conquered many achievements, and it is today a very interesting financial market due to its advantages.

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Among these advantages, we must mention the following: its natural port with exceptional characteristics, and efficient services offered by private companies. its modern and agile banking system, permanently updated according to the trends in the main financial centers. deregulation of insurance monopolies, and free competition among international companies. its tradition of respect and fulfillment of local and international commitments.

The countrys legislation on free trade zones is another pillar on which ZFM bases its many benefits. As an example, let us mention the following: 100% tax and Customs exemption deregulation of state monopolies exemption of social security payments for foreign personnel for companies with 25% or less foreign personnel.

32. Select, What are FTZs and What are benefits of FTZs from the Web page of the national Association of Foreign Trade Zones www.naftz.org and visit the home page of a FTZ in McAllen Texas www.medc.org on the border between the United States and Mexico. How does the description of this FTZ differ from the discussion in the text? Discuss how an exporter from the United States could use this FTZ, to lower distribution costs. What is MEDC? MEDC stands for the McAllen Economic Development Corporation. It is a not-for-profit corporation under contract with the City of McAllen to create jobs for McAllen by attracting new industry and helping existing companies to expand. It is also the grantee and operator of the McAllen Foreign Trade Zone. How is MEDC managed? As a corporation, the MEDC consists of its Board of Directors and its Officers. The Board of Directors is made up of leading business leaders such as manufacturers, bankers, attorneys, business executives, owners of small businesses and city officials who oversee the activities of the MEDC. The Officers are Senior Staff Members responsible for the day-to-day operations of the MEDC. Who works for MEDC? Currently, MEDC has a staff of 27, MEDCs President, Mike Allen, is responsible for the coordination and supervision of all the activities of the organization. Other professional staff works with prospective industrial clients, handles marketing and public affairs, and provides corporate support to existing manufacturing and supplier companies. Who are Industrial Clients? These clients are people who represent companies or industries looking for a site to expand or relocate their plant or service operation. They include the full realm from suppliers to manufacturers. Does MEDC promote business location in Mexico? Labor availability and cost, strategic location for distribution, turn-key operations and land availability have promoted companies around the world to view Mexico as an attractive alternative in their relocation decision-making. Many of the companies that have moved to Reynosa, Mexico have also established offices in McAllen; and, almost all of them have key employees who live on the U.S.
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side of the U.S./Mexico border. This location decision creates a win-win situation for both Reynosa and McAllen. MEDC offers information and assistance for industrial relocations to Reynosa, Mexico. There is no charge for the services provided by the McAllen Economic Development Corporation. What is a Foreign-Trade Zone? A foreign-trade zone is a free port that is regulated by U.S. Customs. Raw materials and/or finished goods may be brought into the Zone from another country duty-free and then may be stored, assembled, repackaged, graded, manufactured, or re-exported without payment of U.S. Customs duties. Where is the McAllen Foreign-Trade Zone? The McAllen Foreign-Trade Zone is a 783-acre industrial district on the southwest side of McAllen, located on West Military Highway (FM 1016) between South 23rd Street and South Ware Road. Approximately $1.2 billion of products move in and out of the Zone annually. This volume of business is due primarily to the companies relocating in nearby Reynosa as a part of the Maquiladora program. McAllen Foreign-Trade Zone # 12 includes Sharyland Business Park, which is owned and operated by Hunt/Woodbine Development. Sharyland Business Park is a 900-acre, manufacturing, distribution and other business use sites in McAllen and Mission, Texas. This development is part of the larger development area known as the McAllen CrossPort, which includes an international airport, McAllen Foreign-Trade Zone # 12, two international bridges, rail and freight outlets, countless land and building options, the Center for Advanced and Applied Technologies facility to assist in product design and development, and much more. McAllen Foreign-Trade Zone #12 also has an air-cargo facility for in-bound merchandise located at McAllen-Miller International Airport. Additional information can also be found at www.naftz.org 33. Visit Global Trading, Inc. (a division of Minnesota Mining and Manufacturing Company) at http://www.mmm.com/globaltrading/edge.html and select the competitive edge and who are we, and write a short report on how Global Trading, Inc. could assist a small company that anticipates having merchandise from a countertrade. The following was excerpted from the 3M Web site on May 5, 2001. The competitive Edge: Companies of every size are looking for ways to capitalize on opportunities in international trade and expand their business across borders. If these are your companys objectives, then 3M Global Trading offers the solutions to your needs. As an international trading company backed by 3Ms financial strength and worldwide business expertise, we offer importers a broad range of sourcing and financial services. For companies interested in purchasing products from developing countries, we also provide an attractive alternative to traditional banks and trading companies by offering flexible programs that are custom-designed to meet your specific requirements. 3M Global Trading offers the following advantages to meet your companys business needs and sharpen your competitive edge. We offer you: Global Strength and Expertise: A Full Range of Services If youre looking for a reliable business partner with extensive international expertise who can offer a broad range of services, look to 3M Global Trading.

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Services As an international trading company backed by 3Ms financial strength and worldwide business expertise, 3M Global Trading, Inc. offers importers a broad range of sourcing and financial services. Our programs are flexible and custom-designed to meet your specific requirements. We offer the following services: Credit Services Customs Clearance Financing for Buyers Financing for Suppliers Sales and Marketing Services Sourcing State-of-the-Art Communications Network Transportation and Competitive Freight Rates

Credit Services Using the services of 3Ms credit professionals, we can provide you with additional sources of credit information and analysis on your potential customers. Customs Clearance We can provide customs clearance as needed to save you time and money. Financing for Buyers We will work with you to develop the best financing program for your company. For creditworthy buyers, we offer payment terms of 30 days up to 120 days. If you have a relatively new or smaller company that is selling to major accounts, it may be possible to base our credit decisions on bona fide orders from these major accounts. We can also issue Letters of Credit to suppliers on your behalf or make other forms of payment to suppliers as required. By eliminating the need for you to open Letters of Credit, your banking costs will be reduced and bank credit lines will be freed up for other purposes. Import costs, including the cost of the product, freight, and duty, can be financed, allowing you to purchase on a landed, duty paid basis. Financing for Suppliers Our involvement in the import transaction also benefits your suppliers. It may be possible to arrange for financing to qualified suppliers through one of 3ms local subsidiaries at terms that are competitive with their local banks. In some instances, preshipment payments can be made to suppliers to allow them to purchase needed raw materials and components for your order.

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