Trade Finance and Export Credit Schemes
The consideration of adequate credit insurance cover under an appropriate scheme is invariably an integral part of an exporter's trade finance and risk mitigation strategy. It may also serve as a sales tool by enabling the exporter to increase sales on terms more advantageous to the buyer, expand into new markets and take advantage of cyclical selling periods, while simultaneously reducing substantially the risk of non-payment by the buyer.
Credit insurance is essentially about protection against bad debts, whether commercial or political. Consequently, a credit insurance policy can be considered to be a management tool that helps to improve and consolidate a company's credit management procedures and systems.
Export credit schemes are provided by two main categories of insurer: government-sponsored/run agencies and private sector commercial insurance companies.
In general, the former tend to provide longer-term cover, eg for projects, and the latter shorter-term cover.
Risks covered by export credit insurance fall into two main types:
commercial risks, which encompass credit risks as well as financial risks;
political risks.
A) COMMERCIAL RISKS
i) Credit Risks
Credit risks would include risks to contracts entered into with foreign companies (eg contract frustration and repudiation, embargo) as well as risks to receivables (eg buyer default, insolvency, non-payment). In cases where it is necessary to manufacture or purchase goods to special order, it may also be necessary to cover:
pre-credit, pre-export finance or pre-shipment/delivery risks that could take place from the date of entering into a contract and occur prior to shipment or delivery. This could include:
o the risk relating to the loss occasioned by the insolvency of the buyer during the period of manufacture;
o the loss resulting from the insolvency or default of the supplier, preventing the exporter from fulfilling the export contract, thus creating the additional cost of finding and paying for alternative supplies or manufacturing facilities;
o damages that may be claimed because of the exporter's inability to fulfil the contract as a result of the supplier's default or insolvency and/or the unavailability of alternative supplies or manufacturing facilities;
o the loss of any advance payment that may have been made by the exporter to the supplier as a result of the supplier's default or insolvency;
Pre-export finance insurance cover could incorporate elements of both commercial and political risks, eg contract frustration, embargo, licence
cancellation, supplier contract termination, non-delivery of goods and war.
revenue and financial risks, including:
o trade disruption;
o force majeure, eg the interruption of supplies to an oil refinery or other manufacturing or processing plant, with obvious consequential losses);
o unfair calling of 'on demand' guarantees.
B) POLITICAL RISKS
Some of the risks apply mainly to traders with shorter-term situations to cover and others to companies with longer-term investments such as manufacturing plants, processing plants or other operations in many parts of the world:
risks to foreign earnings, including currency inconvertibility, exchange transfer, selective and discriminatory taxation, restrictions on the
remittance of dividends and profits;
embargo, the introduction of a law or decree which prevents the export of the insured goods from the country of the supplier to the country of the buyer;
licence cancellation, eg the cancellation, suspension or non-renewal of a licence with the consequence of preventing the insured goods being shipped from the country of the supplier to the country of the buyer;
risks to foreign assets such as expropriation, confiscation, nationalization, deprivation, forced abandonment, sabotage, terrorism and war damage;
risks to overseas personnel such as kidnap, extortion, detention, emergency repatriation.
EXPORT CREDIT AGENCIES
Europe and Scandinavia
Austria Oesterreichische Kontrolbank AG (OeKB)
Website: www.oekb.co.at Belgium Office National du Ducroire/National Delcrederedienst (ONDD)
Website: www.ondd.be Croatia Croatian Bank for Reconstruction and Development (HBOR)
Czech Rep. Export Guarantees Development Corporation (EGAP)
Website: www.egap.cz
Czech Export Bank (CEB)
Website: www.ceb.cz Denmark Eksport Kredit Fonden (EKF)
Website: www.ekf.dk Finland Finnvera Oy/PLC (Finnvera)
Website: www.finnvera.com
FIDE Ltd (FIDE)
Website: www.fide.fi France Compagnie Francaise d' Assurance pour le Commerce Exterieure (COFACE)
Website: www.coface.com + www.coface.fr
Direction des Relations Economiques Exterieures - Ministere de 1'Economie -(DREE)
Germany Hermes Kreditversicherungs - AG (HERMES)
Website: www.hermes-credit.com
Gerling Credit Insurance Group (CGIG)
Website: www.gerling.com Greece Export Credit Insurance Organisation (ECIO)
Hungary Magyar Exporthitel Biztosito Rt (MEHIB)
Website: www.mehib.hu Italy Sezione Speciale per 1' Assicurazione del Credito all' Exportazione (SACE)
Website: www.isace.it Netherlands Nederlandsche Creditverzekering Maatschappij NV (NCM)
Website: www.ncm.nl Norway The Norwegian Guarantee Institute for Export Credits (GIEK)
Website: www.giek.no Poland Korporacja Ubezpieczen Kredytow (KUKE)
Portugal Compania de Seguro de Creditos SA (COSEC)
Slovenia Slovene Export Corporation (SEC)
Spain Compania Espagnola de Seguros de Credito a la Exportacion SA (CESCE)
Website: www.cesce.es
Secretaria de Estado de Comercio (SEC)
Compania Espanola de Seguros y Reasseguros De Credito y Caucion SA (CESCC)
Website: www.creditoycaucion.es Sweden Exporfkreditnamnden (EKN)
Website: www.ekn.se Switzerland Export Risk Guarantee (ERG)
Website: www.swiss-erg.com United Kingdom Export Credits Guarantee Department (ECGD)
Website: www.ecgd.gov.uk
Outside Europe and Scandinavia
Argentina Banco de Inversion y Comercio Exterior (BICE)
Australia Export Finance and Insurance Corporation (EFIC)
Website: www.efic.gov.au Bermuda Exporters Insurance Company
Canada Export Development Corporation (EDC)
Website: www.edc.ca China The People's Insurance Company of China
Colombia Segurexpo de Colombia (Segurexpo)
Cyprus Trade Department of the Ministry of Commerce, Industry and Tourism of the Republic of Cyprus
Hong Kong Hong Kong Export Credit Insurance Corporation
India Export Credit Guarantee Corporation of India (ECGC)
Export-Import Bank of India (Eximbankindia)
Website: www.eximbankindia.com Indonesia Asuransi Ekspo Indonesia (ASEI)
PT Bank Export Indonesia (BEI)
Israel Israel Foreign Trade Risks Insurance Co (IFTRIC)
Website: www.iftric.co.il
Israel Discount Bank (Discount bank)
Website: discountbank.net Japan Export-Import Insurance Department Ministry of Economy Trade and Industry
Website: www.meti.go.jp/english/index.html
Japan Bank for International Co-operation (JBIC)
Website: www.jbic.go.jp
Nippon Export and Investment Insurance (NEXI)
Website: www.nexi.go.jp Korea Korea Export Insurance Corporation (KEIC)
Website: www.keic.go.kr
The Export Import Bank of Korea (Korea Eximbank)
Website: www.koreaexim.go.kr Malaysia Malaysia Export Credit Insurance Berhad (MECIB)
Website: www.mecib.com Mexico Banco National de Comercio Exterior SNC (Bancomext)
Website: bancomext.com New Zealand EXGO (EXGO)
Website: exgo.co.nz
Oman Oman Export Credit Agency - Oman Development Bank (ECGA)
Russian Federation Export Import Bank of the Russian Federation (Eximbank Russia)
Singapore ECICS Credit Insurance Ltd (ECICS)
South Africa Credit Guarantee Insurance Corporation of Africa (CGIC)
Website: www.creditguarantee.co.za Sri Lanka Export Credit Insurance Corporation (SLECIC)
Taiwan Taipei Export Import Bank of China (TEBC)
Thailand Export Import Bank of Thailand (Thai Exim)
Trinidad and Tobago Export Import Bank of Trinidad and Tobago (Eximbank Trinidad and Tobago)
Turkey Export Credit Bank of Turkey (Turk Eximbank)
United States Export-Import Bank of the United States (Exim Bank)
Website: www.exim.gov
Overseas Private Investment Corporation (OPIC)
Website: www.opic.gov Uzbekistan Uzbekinvest National Export-Import Insurance Company (UNIC)
Appointing Export Agents and Distributors
Before entering an overseas market seriously, the first important decision which a potential exporter needs to take is a choice of the most appropriate sales and distribution channel. Unless the exporter has decided to set up and staff a representative or branch office or form a local subsidiary company at the outset, it needs to appoint an agent or distributor to represent the company as its intermediary in each export market as the decision to enter is taken.
CHOOSING THE FORM OF INTERMEDIARY
A) Agents
Working as an independent contractor on commission, the foreign sales agent's task is to gain orders for his Principal's goods and convey them to the Principal. The exporter normally has the responsibility of delivering the product to the customer, which may be discharged by the company's forwarding agent.
The agent is normally not restricted to selling one company's goods, but is restricted territorially. A territory can be a well-defined geographical area, or it could be a specific market within a geographical area - eg the retail trade or mail order houses - in the case of consumer products. Alternatively, there may be no specific geographical limitation but the territory may be defined by the way in which the product is delivered - eg by e-commerce online for books or consumer services.
The typical characteristics of an agent and his role are the following:
The agency may be a company or firm or a sole trader and is usually a national of the specific market, having some expertise in the product sector.
The agent is responsible in the territory assigned to him for:
o research;
o promotion;
o selling;
o order getting;
o customer care;
o problem solving, etc.
Sometimes the agent is responsible, after acceptance of an order by the exporter, of calling the order off the forwarding agent's local warehouse and confirming delivery schedules. Sales agents may also take on the task of debt collection from customers who have exceeded their credit terms.
The agent receives a Commission from the company on sales in his territory, usually between 5 and 10 per cent, which should be based on the exporter's Ex-Works price to the customer and payable only after receipt of full payment by the customer. (It is common practice to pay advances of commission to agents against invoices to customers, which are recoverable in the event of failure to pay.)
Usually, the agent does not handle the goods sold and does not have any authority to commit its Principal contractually beyond accepting an order.
The benefits of an agent are his fast start-up capability and low fixed cost for the Principal. The disadvantages are concerns over the degree of
commitment, the lack of control over his commercial actions and the cost penalties of termination in many countries (as under EU Law).
B) DISTRIBUTORS
By contrast with the sales agent, the foreign distributor acts as a principal, buying and selling manufactured products for his own account, on his own terms, although in close consultation with the exporter. In effect, he is the exporter's direct customer, although not the end-user.
Delivery is made through the distributor, which manages the local customer relationship directly. Subject to local competition law, which in the EU outlaws exclusive distribution agreements except for categories of product where block exemption has been granted, the distributor is normally restricted territorially. He may be restricted from selling competitors' products by e-commercial terms of the distribution agreement, is usually trained by the exporter and easier to monitor than the sales agent. The distributor is usually a better channel to market than the agent for technically complex finished product requiring after
-sales service and repair facilities or for marketing-intensive products.
Usually an incorporated firm, the distributor:
purchases goods from the manufacturer and resells into the territory, sometimes as a sole distributor, at a profit;
makes a profit from marking up the discounted price at which he purchases the goods from the exporter to the agreed market price;
performs all the agent's tasks plus:
o stocking goods and parts;
o pre- and after-sales service;
o sales administration;
o local deliveries;
o installation;
o maintenance and repairs;
o credit control and payment collection.
Distributors' discounts vary from sector to product sector. Typically, industrial goods discounts might allow for 15 to 25 per cent mark-ups, whereas consumer goods discounts, which must provide for retailers' margins, may allow for mark-ups of over 50 per cent.
Higher distributors' margins also reflect the additional services which they perform over and above those of an agent, and the greater financial risk.
THE SELECTION PROCESS
Whatever agent/distributor combination a company has chosen to appoint, it should never appoint an intermediary without developing a clear specification of the role to be filled and then checking thoroughly that the appointee has the necessary attributes to perform the role.
Exporters should remember that for some national markets with strong regional characteristics it may be appropriate to appoint more than one distributor with clearly defined territories or a single distributor with several supporting agents.
Given the density and size of most West European markets, the appointment of more than one distributor may be sensible for companies intending to provide truly responsive product after sales service.
Generally, when one or more agents are appointed for a territory which is serviced by an exporter's appointed distributor, the distributor's selling
responsibilities are diminished and its margin is reduced by the amount of the agent's commission.
SELECTION CRITERIA
Compatibility vs competition
While familiarity with the same kind of product brings benefits in terms of market knowledge and potential customer contacts, the appointment of an agent or distributor already selling a competitor's products seems a certain recipe for failure. Replacing an existing competitor whom the agent has served with past success may seem attractive, but if the reputation and the quality of the previous product line were poor, the agent's past association could be a handicap.
There is also a loyalty factor; some customers will react unfavourably to an agent who changes Principals.
A more promising scenario is the appointment of an agent who is already selling complementary but non-competing products successfully to market sectors which the exporter has targeted; again, it is important that the complementary products handled are not of inferior quality to the exporter's.
Commercial capability
Candidates will need to demonstrate a high level of market knowledge in terms of the exporter's competition, the purchasing and procurement functions of major target companies and personal contacts within those targeted sectors.
Marketing skills and promotional expertise will be assessed against their attendance at trade fairs, effective use of trade media, local press and, where appropriate, direct mail.
Administrative capability may be judged against quality of customer relations management, use of IT, showrooms and, in the case of potential distributors, their logistical capability against warehousing and transport facilities.
Technical capability
The best evidence for a prospective agent or distributor's capability to provide the technical expertise necessary to sell and service an exporter's
products is success in the same market sector with comparable products. The technical qualifications of management and staff and in-house training activity are also relevant.
Financial status
The normal credit reference routines and reviews of trading history, balance sheets and capital adequacy should be undertaken. In the case of countries where there is no statutory requirement to file annual audited accounts, information held in government bureau offices may be accessed on payment of fees to search agencies.
Only through a site visit and face to face discussion can an exporter verify desk research findings on a candidate's capabilities and assess selling
ability, enthusiasm, professionalism, integrity and other personal attributes.
TERMS OF AGREEMENT
However confident the exporter may be in his final choice, it should be sure to grant only a trial period of representation (typically 12 months) until he is certain that the right choice has been made. Therefore, a company's written agreement with a new agent/distributor should include a specific termination date.
Essential Terms
The agreement should define the following:
products;
territories;
commission rates/discounts;
credit and payment terms;
the Principal's duties and responsibilities;
the agent/distributor's duties and responsibilities;
use of copyright and ownership of Intellectual Property Rights;
limits of the agent/distributor's authority;
product and commercial liabilities to customers;
length of the agreement and provisions for termination;
law governing the contract (jurisdiction);
provisions for disputes resolution.
Critical Issues
Many agents/distributors receive statutory legal protection (particularly throughout the European Union where Single Market law applies). Exporters must take particular care in their agency/distributor agreements to provide for the following:
A fixed duration for the agreement, subject to formal renewal by both parties. Compensation may be payable to an agent following cancellation of an agreement with no fixed duration.
While in English Law the longest period of notice to agents is three months for all contracts that have run for more than three years, the notice provision is extended in other countries (eg under German Law the longest period is six months in respect of contracts that have run for more than five years).
Quantitative definition of minimum performance levels as the basis for terminating the appointments of non-performing intermediaries. (Without definition it is very difficult to establish the level of non-performance.)
Claims for indemnities upon termination of an agency agreement in most jurisdictions and under English Law for compensation instead or as well.
Under most jurisdictions indemnities are calculated as an annual percentage of the agent's commission, calculated ..arnings over up to five years. In some jurisdictions (eg Germany) an agent who agrees to refrain from competition with the Principal after termination is entitled to reasonable compensation throughout the period of the restriction.
Competition Law and Distribution Agreements
Ordinary relationships between Principal and agent are unlikely to be caught in EU competition rules. However, distribution agreements, unless drafted carefully, may contain restrictions which infringe Article 85 (1) of the Treaty of Rome. Restrictions on a distributor not to sell competing products when granted an exclusive territory, not to serve certain categories of customer who fail to satisfy the manufacturer's requirements, or to purchase supplies of a specific product from one source only are not uncommon and are prima facie infringements. Where a block exemption does not apply and the parties are unwilling to remove the restrictions, the agreement may apply to the Commission for individual exemption under Article 85 (3). Where the parties' total market shares are 5 per cent or less, EC competition rules may not apply.
For more Information
* Business Trading, Currency Strategy, Commodity Trader, Insider Trading, Optimal Trading Strategies, Equity Investments, Stock Valuation Techniques, *
The consideration of adequate credit insurance cover under an appropriate scheme is invariably an integral part of an exporter's trade finance and risk mitigation strategy. It may also serve as a sales tool by enabling the exporter to increase sales on terms more advantageous to the buyer, expand into new markets and take advantage of cyclical selling periods, while simultaneously reducing substantially the risk of non-payment by the buyer.
Credit insurance is essentially about protection against bad debts, whether commercial or political. Consequently, a credit insurance policy can be considered to be a management tool that helps to improve and consolidate a company's credit management procedures and systems.
Export credit schemes are provided by two main categories of insurer: government-sponsored/run agencies and private sector commercial insurance companies.
In general, the former tend to provide longer-term cover, eg for projects, and the latter shorter-term cover.
Risks covered by export credit insurance fall into two main types:
commercial risks, which encompass credit risks as well as financial risks;
political risks.
A) COMMERCIAL RISKS
i) Credit Risks
Credit risks would include risks to contracts entered into with foreign companies (eg contract frustration and repudiation, embargo) as well as risks to receivables (eg buyer default, insolvency, non-payment). In cases where it is necessary to manufacture or purchase goods to special order, it may also be necessary to cover:
pre-credit, pre-export finance or pre-shipment/delivery risks that could take place from the date of entering into a contract and occur prior to shipment or delivery. This could include:
o the risk relating to the loss occasioned by the insolvency of the buyer during the period of manufacture;
o the loss resulting from the insolvency or default of the supplier, preventing the exporter from fulfilling the export contract, thus creating the additional cost of finding and paying for alternative supplies or manufacturing facilities;
o damages that may be claimed because of the exporter's inability to fulfil the contract as a result of the supplier's default or insolvency and/or the unavailability of alternative supplies or manufacturing facilities;
o the loss of any advance payment that may have been made by the exporter to the supplier as a result of the supplier's default or insolvency;
Pre-export finance insurance cover could incorporate elements of both commercial and political risks, eg contract frustration, embargo, licence
cancellation, supplier contract termination, non-delivery of goods and war.
revenue and financial risks, including:
o trade disruption;
o force majeure, eg the interruption of supplies to an oil refinery or other manufacturing or processing plant, with obvious consequential losses);
o unfair calling of 'on demand' guarantees.
B) POLITICAL RISKS
Some of the risks apply mainly to traders with shorter-term situations to cover and others to companies with longer-term investments such as manufacturing plants, processing plants or other operations in many parts of the world:
risks to foreign earnings, including currency inconvertibility, exchange transfer, selective and discriminatory taxation, restrictions on the
remittance of dividends and profits;
embargo, the introduction of a law or decree which prevents the export of the insured goods from the country of the supplier to the country of the buyer;
licence cancellation, eg the cancellation, suspension or non-renewal of a licence with the consequence of preventing the insured goods being shipped from the country of the supplier to the country of the buyer;
risks to foreign assets such as expropriation, confiscation, nationalization, deprivation, forced abandonment, sabotage, terrorism and war damage;
risks to overseas personnel such as kidnap, extortion, detention, emergency repatriation.
EXPORT CREDIT AGENCIES
Europe and Scandinavia
Austria Oesterreichische Kontrolbank AG (OeKB)
Website: www.oekb.co.at Belgium Office National du Ducroire/National Delcrederedienst (ONDD)
Website: www.ondd.be Croatia Croatian Bank for Reconstruction and Development (HBOR)
Czech Rep. Export Guarantees Development Corporation (EGAP)
Website: www.egap.cz
Czech Export Bank (CEB)
Website: www.ceb.cz Denmark Eksport Kredit Fonden (EKF)
Website: www.ekf.dk Finland Finnvera Oy/PLC (Finnvera)
Website: www.finnvera.com
FIDE Ltd (FIDE)
Website: www.fide.fi France Compagnie Francaise d' Assurance pour le Commerce Exterieure (COFACE)
Website: www.coface.com + www.coface.fr
Direction des Relations Economiques Exterieures - Ministere de 1'Economie -(DREE)
Germany Hermes Kreditversicherungs - AG (HERMES)
Website: www.hermes-credit.com
Gerling Credit Insurance Group (CGIG)
Website: www.gerling.com Greece Export Credit Insurance Organisation (ECIO)
Hungary Magyar Exporthitel Biztosito Rt (MEHIB)
Website: www.mehib.hu Italy Sezione Speciale per 1' Assicurazione del Credito all' Exportazione (SACE)
Website: www.isace.it Netherlands Nederlandsche Creditverzekering Maatschappij NV (NCM)
Website: www.ncm.nl Norway The Norwegian Guarantee Institute for Export Credits (GIEK)
Website: www.giek.no Poland Korporacja Ubezpieczen Kredytow (KUKE)
Portugal Compania de Seguro de Creditos SA (COSEC)
Slovenia Slovene Export Corporation (SEC)
Spain Compania Espagnola de Seguros de Credito a la Exportacion SA (CESCE)
Website: www.cesce.es
Secretaria de Estado de Comercio (SEC)
Compania Espanola de Seguros y Reasseguros De Credito y Caucion SA (CESCC)
Website: www.creditoycaucion.es Sweden Exporfkreditnamnden (EKN)
Website: www.ekn.se Switzerland Export Risk Guarantee (ERG)
Website: www.swiss-erg.com United Kingdom Export Credits Guarantee Department (ECGD)
Website: www.ecgd.gov.uk
Outside Europe and Scandinavia
Argentina Banco de Inversion y Comercio Exterior (BICE)
Australia Export Finance and Insurance Corporation (EFIC)
Website: www.efic.gov.au Bermuda Exporters Insurance Company
Canada Export Development Corporation (EDC)
Website: www.edc.ca China The People's Insurance Company of China
Colombia Segurexpo de Colombia (Segurexpo)
Cyprus Trade Department of the Ministry of Commerce, Industry and Tourism of the Republic of Cyprus
Hong Kong Hong Kong Export Credit Insurance Corporation
India Export Credit Guarantee Corporation of India (ECGC)
Export-Import Bank of India (Eximbankindia)
Website: www.eximbankindia.com Indonesia Asuransi Ekspo Indonesia (ASEI)
PT Bank Export Indonesia (BEI)
Israel Israel Foreign Trade Risks Insurance Co (IFTRIC)
Website: www.iftric.co.il
Israel Discount Bank (Discount bank)
Website: discountbank.net Japan Export-Import Insurance Department Ministry of Economy Trade and Industry
Website: www.meti.go.jp/english/index.html
Japan Bank for International Co-operation (JBIC)
Website: www.jbic.go.jp
Nippon Export and Investment Insurance (NEXI)
Website: www.nexi.go.jp Korea Korea Export Insurance Corporation (KEIC)
Website: www.keic.go.kr
The Export Import Bank of Korea (Korea Eximbank)
Website: www.koreaexim.go.kr Malaysia Malaysia Export Credit Insurance Berhad (MECIB)
Website: www.mecib.com Mexico Banco National de Comercio Exterior SNC (Bancomext)
Website: bancomext.com New Zealand EXGO (EXGO)
Website: exgo.co.nz
Oman Oman Export Credit Agency - Oman Development Bank (ECGA)
Russian Federation Export Import Bank of the Russian Federation (Eximbank Russia)
Singapore ECICS Credit Insurance Ltd (ECICS)
South Africa Credit Guarantee Insurance Corporation of Africa (CGIC)
Website: www.creditguarantee.co.za Sri Lanka Export Credit Insurance Corporation (SLECIC)
Taiwan Taipei Export Import Bank of China (TEBC)
Thailand Export Import Bank of Thailand (Thai Exim)
Trinidad and Tobago Export Import Bank of Trinidad and Tobago (Eximbank Trinidad and Tobago)
Turkey Export Credit Bank of Turkey (Turk Eximbank)
United States Export-Import Bank of the United States (Exim Bank)
Website: www.exim.gov
Overseas Private Investment Corporation (OPIC)
Website: www.opic.gov Uzbekistan Uzbekinvest National Export-Import Insurance Company (UNIC)
Appointing Export Agents and Distributors
Before entering an overseas market seriously, the first important decision which a potential exporter needs to take is a choice of the most appropriate sales and distribution channel. Unless the exporter has decided to set up and staff a representative or branch office or form a local subsidiary company at the outset, it needs to appoint an agent or distributor to represent the company as its intermediary in each export market as the decision to enter is taken.
CHOOSING THE FORM OF INTERMEDIARY
A) Agents
Working as an independent contractor on commission, the foreign sales agent's task is to gain orders for his Principal's goods and convey them to the Principal. The exporter normally has the responsibility of delivering the product to the customer, which may be discharged by the company's forwarding agent.
The agent is normally not restricted to selling one company's goods, but is restricted territorially. A territory can be a well-defined geographical area, or it could be a specific market within a geographical area - eg the retail trade or mail order houses - in the case of consumer products. Alternatively, there may be no specific geographical limitation but the territory may be defined by the way in which the product is delivered - eg by e-commerce online for books or consumer services.
The typical characteristics of an agent and his role are the following:
The agency may be a company or firm or a sole trader and is usually a national of the specific market, having some expertise in the product sector.
The agent is responsible in the territory assigned to him for:
o research;
o promotion;
o selling;
o order getting;
o customer care;
o problem solving, etc.
Sometimes the agent is responsible, after acceptance of an order by the exporter, of calling the order off the forwarding agent's local warehouse and confirming delivery schedules. Sales agents may also take on the task of debt collection from customers who have exceeded their credit terms.
The agent receives a Commission from the company on sales in his territory, usually between 5 and 10 per cent, which should be based on the exporter's Ex-Works price to the customer and payable only after receipt of full payment by the customer. (It is common practice to pay advances of commission to agents against invoices to customers, which are recoverable in the event of failure to pay.)
Usually, the agent does not handle the goods sold and does not have any authority to commit its Principal contractually beyond accepting an order.
The benefits of an agent are his fast start-up capability and low fixed cost for the Principal. The disadvantages are concerns over the degree of
commitment, the lack of control over his commercial actions and the cost penalties of termination in many countries (as under EU Law).
B) DISTRIBUTORS
By contrast with the sales agent, the foreign distributor acts as a principal, buying and selling manufactured products for his own account, on his own terms, although in close consultation with the exporter. In effect, he is the exporter's direct customer, although not the end-user.
Delivery is made through the distributor, which manages the local customer relationship directly. Subject to local competition law, which in the EU outlaws exclusive distribution agreements except for categories of product where block exemption has been granted, the distributor is normally restricted territorially. He may be restricted from selling competitors' products by e-commercial terms of the distribution agreement, is usually trained by the exporter and easier to monitor than the sales agent. The distributor is usually a better channel to market than the agent for technically complex finished product requiring after
-sales service and repair facilities or for marketing-intensive products.
Usually an incorporated firm, the distributor:
purchases goods from the manufacturer and resells into the territory, sometimes as a sole distributor, at a profit;
makes a profit from marking up the discounted price at which he purchases the goods from the exporter to the agreed market price;
performs all the agent's tasks plus:
o stocking goods and parts;
o pre- and after-sales service;
o sales administration;
o local deliveries;
o installation;
o maintenance and repairs;
o credit control and payment collection.
Distributors' discounts vary from sector to product sector. Typically, industrial goods discounts might allow for 15 to 25 per cent mark-ups, whereas consumer goods discounts, which must provide for retailers' margins, may allow for mark-ups of over 50 per cent.
Higher distributors' margins also reflect the additional services which they perform over and above those of an agent, and the greater financial risk.
THE SELECTION PROCESS
Whatever agent/distributor combination a company has chosen to appoint, it should never appoint an intermediary without developing a clear specification of the role to be filled and then checking thoroughly that the appointee has the necessary attributes to perform the role.
Exporters should remember that for some national markets with strong regional characteristics it may be appropriate to appoint more than one distributor with clearly defined territories or a single distributor with several supporting agents.
Given the density and size of most West European markets, the appointment of more than one distributor may be sensible for companies intending to provide truly responsive product after sales service.
Generally, when one or more agents are appointed for a territory which is serviced by an exporter's appointed distributor, the distributor's selling
responsibilities are diminished and its margin is reduced by the amount of the agent's commission.
SELECTION CRITERIA
Compatibility vs competition
While familiarity with the same kind of product brings benefits in terms of market knowledge and potential customer contacts, the appointment of an agent or distributor already selling a competitor's products seems a certain recipe for failure. Replacing an existing competitor whom the agent has served with past success may seem attractive, but if the reputation and the quality of the previous product line were poor, the agent's past association could be a handicap.
There is also a loyalty factor; some customers will react unfavourably to an agent who changes Principals.
A more promising scenario is the appointment of an agent who is already selling complementary but non-competing products successfully to market sectors which the exporter has targeted; again, it is important that the complementary products handled are not of inferior quality to the exporter's.
Commercial capability
Candidates will need to demonstrate a high level of market knowledge in terms of the exporter's competition, the purchasing and procurement functions of major target companies and personal contacts within those targeted sectors.
Marketing skills and promotional expertise will be assessed against their attendance at trade fairs, effective use of trade media, local press and, where appropriate, direct mail.
Administrative capability may be judged against quality of customer relations management, use of IT, showrooms and, in the case of potential distributors, their logistical capability against warehousing and transport facilities.
Technical capability
The best evidence for a prospective agent or distributor's capability to provide the technical expertise necessary to sell and service an exporter's
products is success in the same market sector with comparable products. The technical qualifications of management and staff and in-house training activity are also relevant.
Financial status
The normal credit reference routines and reviews of trading history, balance sheets and capital adequacy should be undertaken. In the case of countries where there is no statutory requirement to file annual audited accounts, information held in government bureau offices may be accessed on payment of fees to search agencies.
Only through a site visit and face to face discussion can an exporter verify desk research findings on a candidate's capabilities and assess selling
ability, enthusiasm, professionalism, integrity and other personal attributes.
TERMS OF AGREEMENT
However confident the exporter may be in his final choice, it should be sure to grant only a trial period of representation (typically 12 months) until he is certain that the right choice has been made. Therefore, a company's written agreement with a new agent/distributor should include a specific termination date.
Essential Terms
The agreement should define the following:
products;
territories;
commission rates/discounts;
credit and payment terms;
the Principal's duties and responsibilities;
the agent/distributor's duties and responsibilities;
use of copyright and ownership of Intellectual Property Rights;
limits of the agent/distributor's authority;
product and commercial liabilities to customers;
length of the agreement and provisions for termination;
law governing the contract (jurisdiction);
provisions for disputes resolution.
Critical Issues
Many agents/distributors receive statutory legal protection (particularly throughout the European Union where Single Market law applies). Exporters must take particular care in their agency/distributor agreements to provide for the following:
A fixed duration for the agreement, subject to formal renewal by both parties. Compensation may be payable to an agent following cancellation of an agreement with no fixed duration.
While in English Law the longest period of notice to agents is three months for all contracts that have run for more than three years, the notice provision is extended in other countries (eg under German Law the longest period is six months in respect of contracts that have run for more than five years).
Quantitative definition of minimum performance levels as the basis for terminating the appointments of non-performing intermediaries. (Without definition it is very difficult to establish the level of non-performance.)
Claims for indemnities upon termination of an agency agreement in most jurisdictions and under English Law for compensation instead or as well.
Under most jurisdictions indemnities are calculated as an annual percentage of the agent's commission, calculated ..arnings over up to five years. In some jurisdictions (eg Germany) an agent who agrees to refrain from competition with the Principal after termination is entitled to reasonable compensation throughout the period of the restriction.
Competition Law and Distribution Agreements
Ordinary relationships between Principal and agent are unlikely to be caught in EU competition rules. However, distribution agreements, unless drafted carefully, may contain restrictions which infringe Article 85 (1) of the Treaty of Rome. Restrictions on a distributor not to sell competing products when granted an exclusive territory, not to serve certain categories of customer who fail to satisfy the manufacturer's requirements, or to purchase supplies of a specific product from one source only are not uncommon and are prima facie infringements. Where a block exemption does not apply and the parties are unwilling to remove the restrictions, the agreement may apply to the Commission for individual exemption under Article 85 (3). Where the parties' total market shares are 5 per cent or less, EC competition rules may not apply.
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