ARCHIVED  December 1, 1996

Glitches can clog international pipelines

Many companies have found that international trade is not a panacea. In fact, without expert guidance, many pitfalls await the novice exporter.

Tariffs, bills of lading, customs duty, merchandise processing fees, insurance, letters of credit, import/export broker fees, warehouse handling, shipping fees and various other items can cause products to get stuck along a trade route and customers and manufacturers to lose sleep trying to fix glitches along the way.

Setting up international-trade deals for a company just entering the market may require the expertise of a business that specializes in establishing trade routes and handling tariffs or an agency that helps companies with international-trade issues.
“It takes time to establish relationships with international customers,” said Dan Benavidez, president of the International Trade Association in Longmont.
Benavidez started his company three years ago to help companies find clients for imports and exports, establish transportation routes, find trade brokers, negotiate letters of credit and act as consultants where their services are needed.
Most of ITA’s clients are in Mexico, the United States and Canada, where the North American Free Trade Agreement has lowered or done away with most tariffs among the three countries.
ITA helps fruit and vegetables growers in Mexico connect with wholesalers in the United States and Canada, or they help breweries and tequila distilleries find vendors and arrange shipping across the border. Producing products is never the problem, but shipping is often fraught with problems.
“The growers in Mexico are very sophisticated,” Benavidez said. “They have elaborate drip-irrigation systems, and they have wonderful produce. But transportation is a big factor for us. If you bring a load of melons to the border in refrigerated trucks, we have to change over to American trucks at the border, because the Mexican trucks usually don’t meet OSHA standards, or we store the produce in warehouses at the border and then ship it out in American trucks. The warehouse owners are the middlemen, and they charge a lot of money, which can vary from day to day.”
Benavidez said it is important for anyone importing and exporting products to hire a trade broker. In some cases, a trade broker must be hired on each side of the border to handle all the paper work, tariffs, duties, etc.
The broker is the client’s advocate; they are licensed in their country, and they handle the paperwork. The papers must be in order for the product to cross borders, or it will stop at customs and be delayed.
Paperwork usually includes an export invoice from the shipper listing the price paid for the product, which must be accurate; the bill of lading; shipping documents listing the number of items and amount per item; insurance on the product; customs duties; Internal Revenue Service taxes on items such as alcohol; importer record fee; broker fee and others.
The price for the merchandise must be negotiated by taking all the import/export fees into account so that the buyer can still make a profit after shipping costs. When the price is decided, the buyer sends a letter of credit to the grower or manufacturer’s bank in their country where it is held until delivery is made.
After the delivery is completed. the buyer will release the letter telling his bank to send the money (usually American currency) to the seller’s bank. Because the price of currency fluctuates daily in each country, figuring out prices for products and what stipulations to put into a letter of credit can become very complicated.
“We have to stay on top of all the financial markets and all the currency prices,” Benavidez said, “as well as the political situation in each country. Since the devaluation of the peso two years ago, it has been tough to get people to invest in Mexico. Investors are now buying insurance policies to protect them against the devaluation of the peso, and that is very expensive.”
Some companies have set up subsidiaries in countries such as Mexico, so they can ship products directly to a source and avoid border delays and taxes. But currency fluctuations, especially the devaluation of the paso, have been devastating.
“We sell to countries all over the world on every continent, and we had a manufacturing plant in Guadalahara, Mexico, which we had to close because of the devaluation of the peso,” said Bob Brown, president of Harsh International Inc. in Eaton.
Harsh manufacturers hydrau-lic lifts for truck beds and a wide variety of mixer-type blenders for feed. The company has 105 employees and expects to record $30 million in sales this year.
“About 27 percent of our total sales are in exports,” Brown said, adding that the company lost a bundle when it closed the plant in Mexico. “We still have all our equipment there, and we hope we can reopen sometime. We have a lot of faith in the people there, but this could go on for a year.”
The Harsh company in Mexico was a Maquiladora, a type of Mexican joint venture through which Harsh owned the equipment and patents and licensed the Mexican company to sell Harsh’s products. Many companies have some type of subsidiary company in another country to make trade easier.
Because Harsh exports to so many countries, the company use a variety of methods to sell products.
“We do a little of everything,” Brown said. “In Canada, we sell directly to two major distributors which we don’t own, and in Canada we don’t pay tariffs. In England, we had a distributor, but we bought them out, so we sell to our own company in England.”
Harsh admits that the learning curve is steep and can be costly when a company does not know the ropes.
For companies without Harsh’s experience or those that have encountered problems, thousands of dollars can be saved by hiring an expert to find trade routes and move products across borders.
At Quantum International in Longmont, a group of people with years of experience in international trade helps companies all over the world with transportation, tariffs, letters of credit, trade brokers and just about everything that involves imports and exports.
The company was started three years ago by Lynn Hutchings and Jim Wilson, who previously ran the international-distribution facility for IBM Corp. and had to learn the hard way how to ship and receive products all over the world.
When dealing with some countries, such as Russia, where the currency is so devalued that 100 rubles equal about 3 cents, and it is almost impossible to get American dollars to buy products, companies often engage in a form of trade whereby the American company will buy a product from the Russian company, which then gives them the dollars to buy the American products they need.
The risk of losing money and products in developing countries is very great and presents another reason for hiring experienced people to negotiate the trade process.
“In Russia or countries where there are high interest rates, the potential for loss of product is very great,” Wilson said. “There is always risk when money is transferred.”
By using a formula Quantum has devised, company officials know the price of products for all their clients at each step of the way along the shipping route. They also advise clients of all the trade and tariff laws, so that a customer knows if it is cheaper to import and export products assembled or unassembled.
“We are able to save thousands of dollars for our clients by just removing a casing from a product, for example,” Wilson said.
Wilson listed the steps required in a trade transaction with the example of an American wholesaler purchasing a large quantity of vodka from a Russian distillery using American currency.
The vodka might start out costing $2.80 per bottle. It is crated by the distillery, and the crates are labeled with the bill of lading.
Then the vodka is shipped. The international ocean shipment will cost 28 cents per bottle, and insurance will cost 1 cent per bottle.
Next it arrives in the United States. U.S. customs duty will cost 8 cents per bottle, IRS tax is $2.15 per bottle, .001 for merchandising processing per bottle, harbor maintenance fee is .001 per bottle, the import broker fee is .01 per bottle, the importer of record fee is .10 per bottle, warehouse handling is .01 per bottle, excise tax .46 per bottle, wholesale distributor adds $1.87 per bottle, and the retailer markup is $1.92. This brings the price up to about $9.60 per bottle, which Wilson says is too high for the average bottle of vodka.
So he works with the buyer and tries to negotiate the price down at the distillery because most of the other costs are set fees and not negotiable.
But Wilson said they are able to use the formula they have devised to evaluate the total costs and see if the final cost is still profitable for the buyer. If not, Wilson renegotiates the cost at the top of the chain before the transaction ever begins.
“How companies manage product value and availability is an important factor,” Wilson said. “About 30 to 50 percent of the cost of a product is the price of bringing it to market.”
Michigan State University and Penn State University provided research for the Council of Logistics Management for a recent seminar in Orlando, Fla., and the council pointed to Quantum as having the best methodology for how to figure the costs of importing and exporting.
Quantum has recently developed a partnership with BJ’s, a wholesale club in California. BJ’s will buy retail products directly from manufacturers, then resell to foreign-company subsidiaries usually in the United States.
With this arrangement, manufacturers have their money upfront to put back into products, and all shipping and brokerage costs, and many others, are avoided because the foreign company ships the product.
The import/export market is complicated, and it is imperative for companies to have their ducks in a row, or they can lose big bucks.
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Many companies have found that international trade is not a panacea. In fact, without expert guidance, many pitfalls await the novice exporter.

Tariffs, bills of lading, customs duty, merchandise processing fees, insurance, letters of credit, import/export broker fees, warehouse handling, shipping fees and various other items can cause products to get stuck along a trade route and customers and manufacturers to lose sleep trying to fix glitches along the way.

Setting up international-trade deals for a company just entering the market may require the expertise of a business that specializes in establishing trade routes and handling tariffs or an agency that helps…

Christopher Wood
Christopher Wood is editor and publisher of BizWest, a regional business journal covering Boulder, Broomfield, Larimer and Weld counties. Wood co-founded the Northern Colorado Business Report in 1995 and served as publisher of the Boulder County Business Report until the two publications were merged to form BizWest in 2014. From 1990 to 1995, Wood served as reporter and managing editor of the Denver Business Journal. He is a Marine Corps veteran and a graduate of the University of Colorado Boulder. He has won numerous awards from the Colorado Press Association, Society of Professional Journalists and the Alliance of Area Business Publishers.
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