Pricing for International Markets

1. 1 Pricing for International Markets International Marketing Kirti S. Celly

2. 2 Agenda // Imports Price Escalation Dumping Global Pricing Export Pricing: Exchange Rate Issues Managing Currency Risks Countertrade Transfer Pricing

3. 3 Pricing Considerations Generic Issues are identical. Consider Marketing Objectives Skim vs. penetration pricing Target markets, cost structures, competition Distribution Control over international channel Length of channel Business practices and norms

4. 4 // Imports Potential is greatest when price differentials exceed transportation costs High price differentials (because of demand) Exchange rate differences Import restrictions�quotas and tariffs Differing taxes Differing trade margins and channel lengths Restrictions on distribution �authorized importer� Diversion Strategies: Price harmonization across markets

5. 5 Price Escalation: A Critical Factor in International Pricing Strategically, it is important to determine desired end-user price Exporters myopically focus on export price Add shipment, insurance, documentation, handling, warehousing, clearing, import duties, importer�s margins, local wholesaler�s margins, retail margins�.

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9. 9 Managing Price Escalation: Strategies Lower Cost of Goods Lower Manufacturing Costs (Use FTZs) Eliminate Functional Features Lower Quality Lower Tariffs Tariff Reclassification Product Modification Partial Assembly Repack aging Lower Distribution Costs Shorten Channels of Distribution Lower Shipping Costs Reduce Margins

10. 10 How FTZ Help Manage Costs (and therefore price escalation) Lower Tariffs Duties typically assessed at lower rates for unassembled goods. Substantial Labor Cost Savings Labor costs are generally lower in the importing country FTZ Lower Transportation Costs Rates are affected by weight and volume; unassembled goods may qualify for lower freight rates. Local Content Savings Typically tariffs are based on imported content, so if local packaging or component parts can be used in the final assembly, there may be further reduction of tariffs.

11. 11 Tariff Classification: An Example US Customs Service reclassified MPVs (passenger vehicles with duties @ 2.5%) as trucks (cargo vehicles charged customs duties @ 25%) Nissan Pathfinder (2 door) Justice Dept. Same design as a pick up truck Court: Use of vehicle counts; it shouts at consumers �I�m a car, not a truck�

12. 12 Managing Price Escalation: Strategies Pricing Policy Absorb cost differences Penetration pricing Non-cost based pricing

13. 13 �Dumping� Selling below �normal value� (GATT, WTO) Normal value benchmark price in country of origin Selling below long term average total costs Including overhead and marketing cost allocations Consequences (where dumping + injury ) Countervailing duties (WTO) Minimum access volumes

14. 14 �Dumping� Motivations Market Penetration Strategy Predatory Pricing Build scale and experience-based entry barriers Utilize excess capacity Marginal cost pricing is especially useful in countries where demand is price elastic Competitive parity

15. 15 Anti-dumping Investigations USDOC�whether dumping is occurring ITC�Given dumping, is domestic industry materially injured (US Antidumping Act) Dumping Cases

16. 16 Avoid Anti-Dumping Charges: Strategies Government Export Subsidies Production, VAT, income tax exemptions, FTZs, preferential financing Model year changes (�old technology� is exported less expensively) Local assembly/Screwdriver technology

17. 17 Global Pricing Strategies Uniform WW Prices-HQ determined Includes assessment of variations in FX rates, regulatory differences and sales taxes Pros Simple Reduces arbitrage opportunities Best use: Standardize product class price Cons Pricing is not an active marketing tool

18. 18 Global Pricing Strategies Market differentiated pricing�customized by market (e.g., dichotomous) Includes assessment of variations in FX rates, VAT, and sales taxes Pros Factors in contextual factors in pricing (e.g., exchange rate differences, stage of PLC, price and income elasticities) Pricing is a proactive marketing tool Advantages of price uniformity are relatively small Arbitrage can be anticipated & managed Cons Emergence of international gray markets esp. when value to weight/volume ratio is high barriers to trade are low

19. 19 Export Pricing�Key Considerations Knowledge of and experience with export markets Degree of control over export channels Cost-plus approach: �take the domestic price, add insurance and freight, put in a hefty cushion for contingencies, and slap on a profit mark-up� Pros: Cost data critical to managing escalation or dumping charges Cons: Signals opportunism, limited commitment to growing exports

20. 20 Terms of Sale Codification of International Trade Terms International Chamber of Commerce Incoterms Currency of Settlement or Quote Prices often set in domestic currency�importer carries risk Export Pricing�Key Considerations

21. 21 Terms of Sale (______ order of exporter obligation) Delivered duty paid C.I.F. or C & F F.O.B. F.A.S. Ex-works Export Pricing�Key Considerations

22. 22 Exchange Rates and Pricing You are a U.S. exporter of air safety equipment to Mexico City Generally, how would you quote prices to the importer? Why? What are your options to manage exchange fluctuations? What are the importer�s options? When might you see price changes?

23. 23 Anatomy of a Transaction: Exchange Rates and Pricing

24. 24 Anatomy of a Transaction: Exchange Rates and Pricing

25. 25 Anatomy of a Transaction: Exchange Rates and Pricing

26. 26 Anatomy of a Transaction: Exchange Rates and Pricing Quote is USD Comfort level Relatively stable currency USD useful for you USD tradable Exporter�s Options Reduce (Increase) USD price so that importer is unaffected by deteriorating (Improving) rates Motivation is to preserve demand, maintain trading partnership Do nothing�let importer bear the risk of deteriorating exchange rate with the USD

27. 27 Anatomy of a Transaction: Exchange Rates and Pricing Importer�s Options Increase End-User Prices�let customers bear the burden of deteriorating rates Motivation�preserve margins Implications�Possible reduction in demand, especially if: Currency weakening relative to USD is linked to domestic inflation Product category allows postponement (non-essentials, durables) Competition does not play same game Do nothing�accept lower margins Motivation�preserve demand, retain customers Implications�likely where price elasticity of demand is high

28. 28 Strategies for Managing Currency Risks Risk Modifying (Transfer risk to buyers) Charge higher prices Incur local debt�get paid in local currency and use it locally Risk Shifting Hedge forward (fixes amount of currency to be received, date and cost) Buy options (flexible, since right but not obligation to buy currency at certain X rate within a period or on a date Self Insuring Adjust credit terms to account for expected FX changes (build an interest factor into transaction)

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31. 31 �Let�s Do a Deal�--Countertrade Seller provides products and promises in return to buy products� Increased incidence in world trade Facilitates trade Preserved FX for buyers under controlled FX regimes Improves BOT for importing country Allows importing country to gain market access for their products Facilitates upgradation of local manufacturing capabilities

32. 32 Types of Countertrade Product Swaps (Goods for goods) Simple Barter Compensation deals Include some cash payment Reciprocal Contracts Buyback: seller promises to buy back goods as payment for technology or FDI Counterpurchase: seller buys unrelated goods Offset�local sourcing, subcontracting, export development in return for technology of FDI

33. 33 Countertrade Challeges Contract negotiation and enforcement Valuation Locating and developing markets for countertraded products Emergence of specialized countertrade organizations

34. 34 International Transfer Pricing Transfer price is the price charged for intra-company transfer of goods across country borders Growing importance as companies seek to Maximize WW profits Facilitate parent control of subsidiaries Motivate managers at all level to �think global�

35. 35 International Transfer Pricing: Motivations Minimize global tax liabilities Max profit in low-tax locations High prices for transfer from low-tax to high-tax locations, and vice versa Reduce FX Risks Adjust transfer prices to siphon funds from countries where currency devaluation is forecast

36. 36 International Transfer Pricing: Motivations Avoid/Circumvent export quotas and other governmental regulations Undercharging for products sold to subsidiaries Reducing Tariff Liabilities Shipping goods into high-tariff countries at minimal transfer prices to reduce duty base

37. 37 International Transfer Pricing: Motivations Concealing Subsidiary Profitability Reducing income taxes in high-tax countries by overpricing goods transferred to units in such countries; profits are eliminated and shifted to low-tax countries Charging high prices for products sold out of countries with dividend repatriation restrictions, thus generating invisible income Reduce negative consumer and governmental reaction to foreign companies

38. 38 Transfer Pricing Caveats Regulatory Scrutiny (e.g., Sec 482 of U.S. Internal Revenue Code) Prove equivalence to arms-length deals Sensitive anti-MNC issue Countervailing forces E.g., higher transfer prices to importing country to reduce local income tax results in higher import duty liabilities

39. 39 Transfer Pricing: Good Practice Local mfg costs + Std markup Sales at most efficient producer �s cost + Std markup Sales at negotiated prices Sales at same price as arm�s length transactions