(Reprinted
from BarterNews issue #36, 1996.)
Countertrade--An
Innovative Approach to Marketing
By:
Dan West, Chairman American Countertrade Association
Countertrade
re-emerged as a significant marketing tool in the late 1970s, and Monsanto
has been actively involved in countertrade since that time. However
much to the surprise of many people, Monsanto's first countertrade transaction
actually occurred in 1935.
We
sold saccharin to a company in northern China. They were unable to pay
for the saccharin in currency, but what they did have to offer was frozen
mackerel. Not being a company that was willing to miss a sale, we took
the mackerel in trade. From this beginning, Monsanto has grown to a
point where it now supports in excess of $200 million a year.
Definition
When
I first became involved in countertrade in the early 1980s there was
not a lot of lexicon for countertrade. Countertraders had difficulty
communicating with each other. In fact, there was not an agreement as
to whether counter trade was one word or two words. We have now agreed
that countertrade is one word, and several lexicons have been written.
However,
since countertrade is an ever expanding field, the definition of countertrade
continues to change and broaden. I view countertrade in it's broadest
sense. It is nothing more or less than listening very closely to your
international customers' needs and meeting those needs. It can take
several different forms, such as generating hard currency for them to
buy your products; or the sharing of information-- either marketing
or technology. In today's quality environment, countertrade is a total
quality activity.
I
view countertrade in its broadest sense. It is nothing more
or nothing less than listening very closely to your international
customers' needs and meeting those needs. |
The
actual countertrade can take many different forms. The first form is
barter. This form of countertrade has received a lot of press; however,
it is the least practiced. Barter is a simultaneous two-way trade. In
other words, I'll give two glass beads for your one shell. This is one
of the oldest forms of countertrade...the least practiced, but the most
written about.
The
second type is offsets. They pertain mostly to military and commercial
aircraft sales. The name comes from the fact that part of the cost of
the product is offset by purchasing products in the country where the
goods are being sold.
Offsets
are divided into two parts. First, direct offsets: McDonnell Douglas
sold MD 82 mid-size passenger aircraft to China. The contract included
provisions for the Chinese to manufacture aircraft components such as
doors to be used for landing gears, passengers, and cargo.
The
second form of offsets is indirect offset. These are goods that are
not used in the products sold to that country. A good example: the price
of DC-9s sold to Yugoslavia was indirectly offset by the purchases of
Elan skis.
The
third type of countertrade is clearing accounts. This form normally
occurs between Eastern European countries and the LDC's (less developed
countries). The LDC ships products to one East European nation, creating
an accounts payable entry on that country's trade books (country A owes
US$ for this product).
Country
A can then satisfy the entry with either its own products or it can
be satisfied by another country that comes along and buys country A's
debt. For example, we may sell product to Brazil and receive payment
from one of Brazil's trading partners. Sometimes it is part cash and
part products from that country.
The
fourth type of countertrade is compensation--also known as cooperation
or buy-back. In an effort to promote an understandable lexicon, I prefer
to call it compensation. This is where a company agrees to build a plant
or to sell technology into a country. The company then gets compensated
for technology or capital with exported products produced by that plant.
The
last type of countertrade is counterpurchase. Counterpurchase is an
agreement between two business units to buy from each other in carrying
amounts over varying periods of time. This transaction creates hard
currency that is then used in turn to purchase products.
The
Use Of Countertrade
Now
that we have laid a foundation to communicate with each other on the
different forms that countertrade can take, the next questions that
get asked are, "How big is it?" and "What is its size?" Forecasting
the size of countertrade is very difficult because countertrade information
is not collected and recorded in any one place.
There
have been many estimates put forth by the U.S. government, the United
Nations and various independent studies. The general consensus is that
countertrade is somewhere between 10% and 20% of all world trade.
A
recent study at the Center for Advanced Purchasing Studies found that
in the companies that answered the survey, countertrade rose 74% as
a portion of sales agreements. (The survey covered a four year period
ending in 1989.)
In
other words, in 1985, 5% of the sales contracts involved countertrade;
and by 1989, 9% of the sales contracts involved countertrade. In terms
of total dollar volume, countertrade grew 30% from $13.6 billion in
1985 to $17.7 billion in 1989. This study also had some other very interesting
findings:
- A majority
of companies participate in countertrade due to a requirement of
a foreign government or customer. Countertrade therefore is not
being utilized as an aggressive marketing tool.
- Those companies
that have utilized countertrade have found it to be an effective
way of expanding sales and improving efficiency in operations.
- Companies
can avoid the pitfalls of countertrade by involving countertrade
experts and their purchasing departments early in the negotiation.
- The purchasers
surveyed reported 71% more advantages than disadvantages, indicating
that their experiences with this form of trade practices have been
largely positive. From another point of view, Elderkin & Norquist,
in their book "Creative Countertrade," say that companies countertrade
in order to:
-
Expand or maintain
foreign markets by using online tools, such as foreign exchange
programs.
- Increase sales
- Sidestep liquidity
problems
- Repatriate
blocked funds
- Clean up bad
debt situations
- Build customer
relationships
- Keep from
losing markets to competitors
- Gain foreign
contracts for future sales
- Find lower-cost
purchasing sources
With
all these positive vibrations, why is countertrade not used more often?
There is a lot of misinformation in the press, and this colors the image
of countertrade. The press seems to focus on the situations that went
bad, rather than on the positive aspect. How many times have we read
references to the "Polish hams" being served in the company cafeteria?
The
press seems to focus on the situations that went bad, rather
than on the positive aspects. |
I
spent a great deal of time in an interview with a national financial
newspaper explaining the benefits of countertrade, only to have the
headline writer title the article, "The Shadowy World of Countertrade."
Another
newspaper headline read, "Barter Makes an Unwelcome Comeback on World
Trade Scene." The entire article was on countertrade; however, the headline
writer thought the two terms were synonymous. This article goes on to
state, "From being an almost clandestine way of doing less than real
business, countertrade is now involved in anywhere up to 10% of world
trade."
As
you can see, the business press has a difficult time seeing the advantages
of countertrade versus the advantages seen by companies that are involved
in countertrade. Many of the difficulties and problems in countertrade
can be solved, or in fact never even arise, if countertrade is offered
in a proactive form rather than the "Oh, by the way" form.
The
"Oh, by the way" occurs after the sale has been made and the customer
says, "Oh, by the way, I don't have the money to pay for your product--we
are going to countertrade."
The Growth Of Countertrade
The
growth of countertrade is fueled by several factors. First, in addition
to looking at the advantages for the company that countertrades, one
must also look at what advantages a country gets from countertrade.
These are:
- Additional hard
currency generation.
- Marketing expertise
that they may not otherwise have. This point is brought out in a recent
Wall Street Journal article which describes how McDonnell Douglas
had helped to bring a foreign-based snack food product to Spain.
- Technology advances
that the country would not otherwise have.
The global demand
for international credit is the second growth factor. The need for credit
is increasing at a time when banks are less willing or able to finance
these transactions. This forces many purchasers and exporters to turn
to countertrade to finance the business transaction.
However, international
banks are short of capital to meet standards set by the bank for International
Settlement in Basel, Switzerland. By 1993, international banks were
required to have a minimum capital to risk asset of 8%. Europe's 12
largest banks already have met this 8% target, versus only three of
the Japanese top 12 banks, and 11 of the U.S.'s 12 largest banks.
John Reed, Chairmen
of Citicorp, said in a letter to share holders that banks "are cutting
back and there is a global reduction of credit and liquidity." As a
result, there is less money for trade finance.
The next growth
factor is that the demand for consumer goods has increased with the
opening of Eastern Europe and the government changes in Latin America.
The demand for consumer goods far outstrips many countries' ability
to generate hard currency to pay for these goods.
And last, convertibility
will not diminish the growth of countertrade since convertibility does
not necessarily mean availability of the hard currencies. Country advantages,
bank credit crunch, growing demand for consumer goods, and convertibility
will push the demand for countertrade to new heights.
Country advantages,
bank credit crunch, growing demand for consumer goods, and convertibility
will push the demand for countertrade to new heights. |
All of these things--country
advantages, bank credit crunch, growing demand for consumer goods and
convertibility--will push the demand for countertrade to new heights.
The Future Of Countertrade
The countertrade
profession is in its infancy in corporations. It can be equated to where
the distribution and freight departments were 15 years ago versus where
they are now, when they are referred to as the "corporate logistics
departments."
Frank Horwitz of
UniSource Global Corporation in New York said it best when he said,
"In the future the in-house countertrade organization will become the
coordinating point for the business team, assuming responsibility for
all activities other than the sale itself."
The countertrade
organization will utilize internal assets such as corporate purchasing,
future investments, licensing and technology transfers to get their
job done. In other words, the countertrade department becomes a "basket"
of assets. We will also see an increased professionalism in countertrade,
as it is now beginning to be taught as a means of market success in
business schools.
Countertrade is
being promoted through corporate newsletters, company magazines, and
staff meetings as a way to gain market access. Countertrade, along with
superior quality, financing and pricing, is the key element in international
contracts.
Countertrade
Help
If you would like
to explore the areas of countertrade or you are currently having a countertrade
situation, you can get help from the American Countertrade Association
located in St. Louis. The purpose of the association is countertrade
education and networking, for the benefit of international sales.
Countertrade Examples
Finally, a few examples
of countertrade. The first is the well known Pepsi/USSR trade whereby
Pepsi-Cola delivers syrup that is paid for with Stolichnaya Vodka. Pepsi
has the marketing rights of all Stolichnaya Vodka in the U.S.
Recently Pepsi has
made another innovative step by taking 17 submarines, a cruiser, a frigate,
and a destroyer in payment for Pepsi products. In turn, this rag tag
fleet of 20 naval vessels will be sold for scrap steel, thereby paying
for Pepsi products being moved to the Soviet Union.
In another instance,
Fisher Controls International, a subsidiary of Monsanto, counterpurchased
ball bearings and chair frames to be sold in Western E urope in a countertrade
opportunity for control valves sold to Romania.
This countertrade
purchase activity set Fisher apart from its competitors, and enabled
it to be awarded the contract. In another case, Monsanto is helping
one of its customers in Argentina gain increased exports goods of finished
goods. The exported goods contain Monsanto products, which results in
increased sales.
When countertrade
is used in a proactive manner, it becomes a total quality activity of
"meeting your customers needs." We all know this results in increased
sales and profits.
|