EXPORT PARTNERING – SHARING THE RISKS AND THE REWARDS OF INTERNATIONAL TRADE
As an exporter are there times when you wish you could engage a temporary partner to share the risk with you on a particular overseas order? Someone that could, if and when needed, take over the financial burden of sourcing and procuring product, perhaps arrange shipping and forwarding services and even prepare and present LC documents direct to the bank on your behalf?
‘Export Partnering’ is where an EPC (Export Partnering Company) teams with a client as a partner in a single export transaction sharing both the risks and the rewards. It is proving to be an attractive solution for exporters who require procurement, logistical and financial support to complete overseas orders and is particularly valuable to trading companies who buy and sell goods internationally using documentary credits.
The risk element comes from the EPC sourcing and procuring goods from around the world, arranging packing, inspection, trucking and shipping services as and when needed so that their partner/client can fulfill the export contract.
Reward, meanwhile, is earned by the EPC being allocated a percentage of the order value when payment is received. This is usually arranged by the assignment of a proportion of the proceeds of a negotiable instrument such as an irrevocable documentary letter of credit. By this means the interests of both ‘partners’ are inextricably linked and dependent on the successful completion of the transaction
Export partnering inevitably carries substantial risk for the EPC, mainly because their role is to operate ‘silently’ alongside the client buying goods and shipping them on their behalf. As the client remains the sole beneficiary to the contract, the ‘partner’ is dependent on their continuing cooperation and goodwill right up until final payment is received. The EPC, before agreeing to such an arrangement will want to ensure that they are comfortable working with any prospective client and will endeavor to exercise some element of control over the procedure.
This control will normally take the form of a deed of assignment allocating a proportion of the proceeds of an irrevocable documentary letter of credit to the export partner. In addition, an EPC may also request the client allow them power of attorney over the credit enabling them to prepare and submit documents on behalf of the client to the issuing or confirming bank.
The following case studies demonstrates how partnering with an EPC helped one small business located in SW England.
CASE STUDY #1 – THE DISTRIBUTOR
A UK distributor of alloy and stainless steel pipe and fittings used in the oil and gas industry received a large order from one of their major customers in S.E Asia. Most of the ordered items were available from their own stock or on very short lead times from their usual UK based suppliers. However, more than 50% of the order value was for a quantity of large diameter nickel alloy pipe obtainable only from a manufacturer in the USA.
- Due to the specialist nature of the product, the US manufacturer was insisting on full payment in advance before they would commence manufacturing. Additionally they could only make the pipe available for collection from their own works meaning all export packing, internal trucking and freight to the UK would have to be arranged and paid for by the UK distributor.
- The distributors’ bank were unwilling to increase their facility to cover the initial transfer and the additional costs involved in the import of the finished product.
- Payment for the order from the customer was covered by an irrevocable letter of credit with terms stipulating that the goods were to be shipped from the UK on DAP basis to the customers facility via a named port of entry and that NO partial shipments were permitted.
- The goods from the USA had to be produced and shipped to the UK for collating and packing with the other items before being loaded into a container for onward shipment and before the latest shipment date stipulated in the credit.
When all of the difficulties involved in this export became clear the first instincts of the client was to inform their customer they were unable to proceed with the order. However, such action would inevitably incur repercussions not least of which would be the loss of a valuable and prestigious customer. As much of the distributors growth strategy was based on increasing international sales this was to be avoided if at all possible.
At this stage the distributor was introduced via their own bank to an EPC. Very quickly the EPC had reviewed all the relevant documentation and agreed to participate in the transaction in return for a pre-negotiated proportion of the proceeds of the credit being irrevocably assigned to them. Once the deed of assignment was in place the EPC proceeded to order the goods from the USA using their own office based in California.The US manufacturer was now dealing with what was ostensibly a domestic customer and became much less rigid with regard to their terms and conditions and production began without delay. When the item was ready the EPC arranged for it to be export crated, trucked to the port of exit and then shipped on to the UK.
Meanwhile the distributor had collated the balance of the order at their warehouse ready to ship out on the first available vessel, as soon as the pipe arrived. With the full cooperation of the client the EPC arranged for the whole order to be export packed loaded into the container. They also also assumed responsibility for the DAP shipment and, for the preparation and presentation of the shipping documents.
The result of this partnership was that a contract that seemed to have insurmountable problems in execution was shipped complete and on time
Companies that involve themselves in partnering projects tend to have a great deal of experience in the international trading process. The involvement brings a range of benefits that are not always obviously tangible.