Dan West On Countertrade

By Dan West

For the past 56 years, since the end of World War II, countertrade and its derivatives have become a part of international trade. Countertrade has allowed developed countries to finance their exports in developing countries. It has also become a tool in the competitive arena.

What is countertrade? Countertrade is listening to the international customer�s needs and helping them to meet their needs. These needs could be credit deficiencies, technology needs, management expertise needs, world-market information needs or hard currency shortage. Countertrade is a marketing tool�a creative marketing tool.

Why Countertrade?
Countertrade enables an exporter to gain new customers that they would not ordinarily have. It is a way of expanding international business and securing payments where credit is difficult or nonexistent. Countertrade also opens new avenues of communication with these customers. These additional avenues and relationships make expansion of business easier.

Company Countertrade Organization
There are several different ways a company can organize to efficiently and effectively conduct countertrade. The countertrade organization is like an internal trading company. It may report to the treasury department, the international sales department or the market development department. Where is the best place to put the countertrade organization? This question was asked of members of the American Countertrade Association in a survey several years ago. The consensus was to place the countertrade organization in the department that had the most entrepreneurial leaders in the highest corporate reporting position.

Types of Countertrade Company Organizations
Countertrade company organizations can be chartered to conduct countertrade in different ways. The four most common organizations are: service centers, profit centers, reactive organizations and pro-active organizations.

Service Centers, or facilitator organizations, have the charge to bring the parties together. The parties are the seller and the purchaser of the countertraded product. In this type of department, the countertrade organization has very little power; it acts only as an advisor.

Profit Centers are the second type of organization. As the name suggests, profit is the main goal of this type of organization. This is the most difficult type of organization to manage from the countertrade aspect. If the countertrade organization is put in a position to make a profit, the company may pass up countertrade opportunities because of the inability to sell the countertraded products at a profit. Thus, they will not be interested in performing the countertrade and may be unable to sell the company�s products. There is also another problem: Why be concerned with the company�s own product line when it could make more money by selling other products?

Reactive Organizations are every countertrader�s nightmare. It is very difficult and costly to perform because the countertrader is at the mercy of the customer and his/her own company. The countertrade organization is brought into the negotiation process in the later stages, after everything has been set and told to perform. This is often done after the company has resisted countertrade throughout the negotiation and only agreed to countertrade as a last negotiating point. This can very well be the most expensive type of countertrade fulfillment.

Pro-Active Countertrade Organizations cost the least, and in the long run are the most cost-effective. It is best to use countertrade as a sales tool on the front end of the sales negotiation rather than being caught off guard with the following line: �Oh, by the way you must countertrade to get the contract.� In doing this, a countertrade organization can negotiate for better quality terms, ask for more products to be included in the countertrade contract and try to reduce the number of restrictions imposed by the countertrade contract. The most effective companies in countertrade have a central person to direct the countertrade symphony so that everything is organized and centralized. The salesperson should not also take on the role of the countertrader. These two jobs have different goals and functions. At this point, the countertrader�s job is like that of a purchasing agent, getting security of supply at the best price and the best quality. The salesperson�s job is to make the sale at the best price. If the salesperson is also acting as the countertrader, it places them in a difficult position, and neither job will be done to satisfaction.

How to Organize for Countertrade
There is really no single best way to organize for countertrade. The best way is dependent upon the company�s objective. Countertrade becomes effective when it permeates the mindset of everyone in the organization�when everyone realizes it needs to be considered as an alternative method of doing business. Top management support is a must. Without that vital support, there are 1001 ways a countertrader can be blown off course. Countertraders need to know they have top management�s support if they countertrade pro-actively, not reactively. The countertrade initiative needs to come from top management. Top management must be made aware of the benefits of countertrading, so they can give their support.

Company Countertrade Policy
A company�s countertrade policy is made up of at least five elements: purpose, purchase priority, penalties or gains, type of product and speculative trade.

Purpose is the first thing to look at in countertrade. When pondering the purpose, consider whether it will lead to profitable and strategically desirable sales. Countertrade is not for all products. A company�s most profitable and strategically desirable products should be used in countertrade activities. To determine what products should support countertrade, ask these questions: Which products are going to be sold internationally on a long-term basis? What is the purpose of this transaction? What needs to be achieved? How can it be accomplished? The answers to these questions should support a product that has a long-term commitment to a profitable international business.

The second element is purchase priority. This answers the question of what is to be done with the products that are countertraded. Countertraded products can be moved or sold in three areas. The first area is a company�s raw material needs. If the purchasing department buys for the company�s raw material needs, why not use them as leverage to make a sale. The second area is a vendor�s raw material needs. A company may not be able to use the products, but some of the company�s vendors may be buying the countertrade product and converting it into a raw material for the company. If this is the case, it may make sense to have the countertraded product sent to the vendor for conversion into a company�s raw material. The third area, purchase priority, is other goods that can be sold. The countertrade profession calls these products �grass hats and door mats.� They are any products that can be sold for hard currency.

For the benefit of the accounting department, a penalties or gains on the countertrade transaction must be charged to the product line benefiting from the countertrade. If this is not done, then the true cost and resulting profit will not be known on the product sold.

The type of product countertraded (products taken back) must not compete with the company�s own products. Make sure the products taken back do not compete in the same industry or in the same line as the company�s products. If this occurs, countertrade will be more of a hindrance than help. A countertrader�s life can be made very difficult by taking back and selling products similar to those made by his or her company, or competing in the same market area as his or her company. In order to make a successful countertrade transaction, a countertrader must be familiar with the various product lines of his or her company and the inter-relationships within the company and its customers.

Countertrade enables an exporter to gain new customers that they would not ordinarily have. It is a way of expanding international business and securing payments where credit is difficult or nonexistent. Countertrade also opens new avenues of communication with these customers. These additional avenues and relationships make expansion of business easier.

A company should not engage in speculative trade. Always have a customer before the countertraded product is purchased. Do not take or purchase countertrade goods in anticipation that countertrade will be required. In fact, it is strongly recommended that a company take title to the countertraded goods but not possession. By doing this, the goods do not need to be inventoried or warehoused. Because the title of the goods is taken, the money does pass through the company�s hands and can be deposited correctly.

Proposed Countertrade Organization Charter
The countertrade organization is charged with supporting the marketing department in maintaining and developing business in those situations where customer needs cannot otherwise be met. It has the responsibility to establish and manage export programs at a dollar volume in balance with the company�s requirements for individual countries. It is also expected to meet these expanding countertrade requirements at an acceptable level of commitment. To satisfy this objective, the organization should be staffed with trade professionals capable of focusing the resources of the company.

Reluctance to undertake countertrade can be overcome by establishing a continuing dialogue with management. This eliminates the chance of surprise in both liabilities and opportunities. The countertrade organization needs to start and maintain an internal selling effort. This can be accomplished through several activities. Some of these activities include writing a monthly countertrade newsletter, attending and making presentations at various staff meetings, publishing articles in company newspapers and magazines, or by receiving mention in the company�s annual report. The countertrader can also organize internal informational countertrade meetings to get people�s innovative juices flowing. Schedule periodic meetings with the marketing, sales, manufacturing, technical and administration departments to keep them updated and to share information and status reports with them. All of these activities are designed with one purpose in mind: to let people know about countertrading and how it will benefit the company.

One word of caution�do not get caught up in the whirlwind of international trade. Some companies get so excited about getting into international trade that they forget rationality and common sense. For example, they forget the simple rule of using countertrade as a marketing support. Instead, they use countertrade as a speculation tool and become traders. Do not use countertrade to become a trader. Countertrade is a marketing tool that should only be used to ensure that the company�s products are sold in the international market.

Activities of a Countertrade Organization
Countertrade organizations can provide many services to a company in addition to facilitating export sales with an alternative to hard currency payment. They can also provide a positive balance of payment position in countries where a company wants to do business. This corporate positive balance of trade can be very beneficial when getting special governmental permits. The positive balance of trade sends the message that a company is interested in being a �good citizen.�

For example, there was a situation in a South American country where the border was closed. A US company could not import a raw material into South America because there was a local manufacturer producing the same product. Furthermore, the country was in need of hard currency and did not want to use what little reserves it had for importing a product that was made in the country. The US company presented a proposal to the foreign government that called for importing the needed raw materials into the country and exporting three times as much in value as imported. The government agreed to the plan, and it turned out to be a very profitable situation. It not only saved the country�s hard currency, it generated additional hard currency.

This is an instance where a countertrader had to listen carefully to his customer in order to identify the root cause of the problem and to help meet the need. The real issue was not the protection of the local manufacturer, but the country�s incapacity to generate adequate hard currency.

Another activity of the countertrade organization is to initiate a strategic presence. This can be accomplished by setting up a base of operation that will allow a company to work closely with the foreign government and the company within that country. A company is sending a message to the foreign government that they are not just selling and exporting to the country, but working with them. This will generate a more loyal following of customers, and the chances are better that the company will not be abandoned if a competitor comes in with a lower price. This strategic presence can also be used to develop a more positive country-marketing image, which, in turn, is another way to build a closer relationship with a company�s customers.

Conclusion
Countertrade organizations can be very positive forces in international sales when they are charged to conduct countertrade in a pro-active manner. Countertrade organizations must also have a policy statement that covers products to be countertraded as well as what happens to the profits and losses associated with each transaction. And possibly the most important point, the countertrade organization must report at the highest level possible and have the blessing of the president of the company.

Countertrade Golden Rule
Do not quote prices until the countertrade situation is clear.

Dan West is president of West Trade International, a corporation specializing in international trade consulting and countertrade. He can be reached at 314/727-5522 or via e-mail at danwest@prodigy.net .