International Business Transactions - Case Study Example

Name: XXXXXXXXXX Course: XXXXXXXXXX Institution: XXXXXXXXXX Title: International Business Transactions Date: XXXXXXXXXX @ 2010 International Business Transactions Introduction International Business Transactions revolve around multiple of issues ranging from legal frame works, imposed tariffs, financial issues, company structures and the market among many other issues. These transactions require proper structuring and elaborate contract guidelines in order for the parties involved to actualize their intended profits or gains (Insight information Inc 1999). This paper seeks to examine two case studies that revolve around international business transactions. In respect to the two case studies this paper will attempt to assess and give credible solutions in regard to the situations at hand. The recommended solutions for the two case studies will be in reference to relevant literature reviews that revolve around international business transactions. Question 1 Micheal Matson, an entrepreneur in New York is looking forward to a good business deal with Juan Salazar, CEO of Salazar Steel, a Brazilian steel producer situated in Sao Paulo. Salazar proposed to Matson that he would sell to him 5,000 metric tons of 41 steel ingots that have a guaranteed purity of 1.6% carbon, for $10 million from Salazar Steel. Salazar further elaborated that the steels to be sold could be packed onto a ship operated by the Bigman Carriers, thereafter they would depart from the Brazil port on March 1 and arrive in New York on March 10. According to Salazar’s specifications, Matson was give payment to Salazar Steel through the Bank of Sao Paulo not later than March 8. Furthermore, the company was to structure the payment so that nothing would go wrong. Subsequent to his meeting with Juan Salazar the CEO of Salazar Steel, Matson met Matson met Billy Bashford, CEO of Bilder Bay Shipbuilders, a Canadian shipbuilding company located in the outcasts of Halifax. Bashford proposed that he was willing to purchase from Matson 5,000 metric tons of 41 steel ingots, with a warranty for purity not more than 1.6% carbon, for $11 million. Bashford elaborated that the steels needed to arrive in Halifax at the port no later by March 25 this implies that they would have to start the journey from New York harbor by March 20. Bashford preferred that Matson should send off the steel through the Bigman carriers. Nevertheless, Bashford would not render payments for the steels until March 21 since he did not have cash available. According to Bashford’s proposal he would structure the transactions so that nothing would go wrong moreover the Bank of Halifax would be used in the fiscal transactions. Matson hopes that he would act as a middle man through the proposals from Salazar Steel and Bilder Bay Shipbuilders. Through these transactions he hopes to make one million dollars in profit. Nevertheless, there are several considerations are quite crucial to the presented deals. For instance, Matson has $100,000 only in capital, the insurance and shipping costs from Sao Paulo to New York is about $50,000. On the other hand, the shipping and insurance costs from New York to Halifax, presumably costs about $30,000. Another factor to consider is that on March 9 the U.S. government will make a decision on whether to enforce a50% countervailing duty on Brazilian steel this would take effect on the same day. Currently, Matson operates with Citibank and he would prefer if he would structure the deals so that nothing would go wrong. Consequently, Matson requires advice on the best ways of structuring these transactions. This paper will illustrate some of the alternative ways of structuring these transactions, a general description of the set arrangements and the basic terms of the contracts with both Salazar Steel and Bilder Bay Shipbuilders. Literature Review Brand Ronald (2000) in his book, “Fundamentals of international business transactions” explains that risks in any business transaction is inherent, when transactions are across national borders the causes and levels of risks are multiplied or increased. It is therefore the role of an international transaction lawyer to reduce the doubt and uncertainty as far legal matters are concerned and create certainty as much as possible to the involved parties. Primary risk factors in international business transactions include transportation, regulations and fluctuations (Brand 2000). Transportations concerns include injury, risks of losses, damages, delay when necessary to transport goods from one country to another so as to complete transaction. Regulations from more than one government further complicate the processes of international business transactions. The processes of transaction across national precincts increases the number of applicable rules thus bringing about more uncertainties in regard to quotas, duties, licensing requirements and the stability of particular political structures. In the course of international business transactions fluctuations are bound to occur not only in the regulatory requirements, quotas, duties, or law but also from the market forces that can alter the values of the foreign currency in use, insurance and cost of freight. Brand (2000) further illustrates that dealing with the increased risks involved in international business transactions requires, institutional protection, negotiated protection and purchased protection. Institutional protection can be found in relevant international and national legal frame works within the transaction vicinity. Purchased protection occurs in the form of insurance from a particular political or commercial risk. For instance, in the United States this can be actualized through the Import- Export bank that provides loans and insurance to the parties involved, the bank also assists in the structuring of overseas transactions. In a case whereby the transaction involves an investment overseas it is possible to procure insurance against particular risks. Investors could look to the government to provide insurance that is designed to enhance and protect these transactions. The United States gives insurance coverage for overseas investments that take place in risky countries through the “Overseas Private Investment Corporation” (OPIC). This corporation gives coverage against damages and expropriations (Brand 2000). In addition to purchased protection and institutional protection of risk reduction in international business transactions, negotiated protection is imperative. Negotiated protection can be actualized through a well structured contract agreement governed by a legal framework from the host country(Brand 2000).A relevant law clause should be included in the signed international contract so as to provide a neutral but well developed source of application and interpretation of the terms in the contract. In reference to the USA law on anti dumping duties these penalties can be imposed when there is an unfair market value on the sales, causation or material injury. These penalties could be imposed when low priced imports have been procured so as to avert unfair competition and to protect the local industry (Campbell & Rohwer 1984). Contractual terms that arise from usage and trade customs are regarded as Incoterms. These terms are helpful in that they provide a series of international regulations for the interpretation of general phrases thus avoiding confusion. Sales contracts are a form of a legal contract that depicts that depicts the exchange of goods from the seller to the buyer for an agreed value of money. This contract initiates the process of international business transactions and it is in most cases governed by the statutory law of a particular jurisdiction. Sales contract that involve the exchange of goods is governed by the Uniform commercial code encompassing jurisdictions such as United States and Canada (Campbell & Rohwer 1984). Michael Mason has been presented with two international business transactions that are bound to be profitable if structured appropriately. The first one involves procuring steel 5,000 metric tons of 41 steel ingots from Salazar Steel, a Brazilian steel manufacturer located in Sao Paulo. Thereafter, he is to supply the procured tons of steel to a Canadian shipbuilding company located in the outcasts of Halifax. Evidently, these transactions are intricate in nature due to the numerous risk factors involved such as transportation, regulations and fluctuations. Furthermore, these transactions have timelines and they involve transportation of good across two different overseas nations. The primary step towards commencing with this transaction requires a clear description of the set arrangements and basic terms of the contracts with both Salazar Steel and Bilder Bay Shipbuilders. Structuring of transactions Below is a diagrammatic presentation of how the transaction can be structured so that the needs of the involved parties can be actualized (American Conference Institute 1997). Sales contract A key step that Mason needs to consider when structuring this business transaction with Juan Salazar the CEO of Salazar Steel and Billy Bashford the CEO of Bilder Bay Shipbuilders is the ratification of a sales contract. The contract should depict clear terms of agreement in regard to the shipment of the specified steel from one end to the other, the timeline of these transactions and payments. The parties involved in this transaction should go over the various details revolving around the transaction and sign a memorandum of understanding. In the event that Matson and Salazar agree to the proposed terms in regard to the shipment of the specified steel, the timeline of these transactions and payments the sales contract will be as follows; Salazar Steel will sell to Matson 5,000 metric tons of 41 steel ingots, with a warranty for purity not more than 1.6% carbon, for $10 million. The 5,000 metric tons of 41 steel ingots will depart the Brazil port through the Bigman Carriers on March 1 and disembark in New York on March 10. Matson will render payment for the 5,000 metric tons of 41 steel ingots not later than March 8 to Salazar Steel through the Bank of Sao Paulo. Salazar Steel will structure the transaction so as to make certain that each process goes as planned. In the event that Matson and Bashford agree to the proposed terms in regard to the shipment of the specified steel, the timeline of these transactions and payments the sales contract will be as follows; Matson will sell to Bilder Bay Shipbuilders 5,000 metric tons of 41 steel ingots, with a warranty for purity not more than 1.6% carbon, for $11 million. The 5,000 metric tons of 41 steel ingots will leave New York harbor by March 20 and arrive at the port in Halifax by March 25 through the Bigman carriers. Bilder Bay Shipbuilders will render payment to Matson through the Bank of Halifax on March 21. The City bank would foresee the fiscal measures on Matson account. Credit It is apparent that Matson needs to put some factors into consideration in regard to the expenses that will be incurred in the course of these transactions. For instance, some of these considerations include the expenses of insurance and shipping and from Sao Paulo to New York and from New York to Halifax. These costs will add up roughly to $80,000. Considering his current capital of $100, 000, it is recommendable that he should seek credit from any of the banks involved in the structuring of the transaction. The additional capital received as credit from then bank will cover the imposed tariffs, possible fluctuations, regulatory requirements, quotas, duties, market forces that can alter the values of the foreign currency in use, insurance and cost of freight (American Conference Institute 1997). Alternative ways of structuring the transactions Matson’s target was to act as a middle man through the proposals from Salazar Steel and Bilder Bay Shipbuilders and make a profit of a million dollars. However, there a number of factors that are bound to avert him from actualizing this goal. For instance, he holds $100,000 only in capital. Furthermore, expenses will be incurred through the insurance and shipping costs from Sao Paulo to New York and from New York to Halifax. Another factor to consider is that on March 9 the U.S. government will decide on whether to impose a countervailing duty of up to 50% on Brazilian steel (Vause 1997). In order for Matson to remedy the situation and actualize his one million dollar profit he should negotiate for certain terms in his contract agreement with Juan Salazar the CEO of Salazar Steel and Billy Bashford the CEO of Bilder Bay Shipbuilders. Foremost, he should negotiate that his bank in this case the City bank should manage the transaction. This provision will see to it that his bank provides insurance that is designed to enhance and protect these transactions that could be termed as somewhat risky. Moreover, the City bank could provide credit and assist in foreseeing these transactions. Secondly, Matson should negotiate for an appropriate date in which the Bigman carriers can deliver the 5,000 metric tons of 41 steel ingots so as to avoid countervailing duty of up to 50% on Brazilian steel that the US government is bound to impose by March 9(American Conference Institute 1997). Consequent to these negations the terms of contract and the structure of transaction will be as follows; Citibank will oversee and structure all the transactions Salazar Steel will sell to Matson 5,000 metric tons of 41 steel ingots, with a warranty for purity not more than 1.6% carbon, for $10 million. The 5,000 metric tons of 41 steel ingots will leave the Brazil port through the Bigman Carriers on February 28 and arrive in New York on March 8. Matson will render payment through Citibank for the 5,000 metric tons of 41 steel ingots not later than March 8 to Salazar Steel through the Bank of Sao Paulo. Matson will sell to Bilder Bay Shipbuilders 5,000 metric tons of 41 steel ingots, with a warranty for purity not more than 1.6% carbon, for $11 million. The 5,000 metric tons of 41 steel ingots will leave New York harbor by March 20 and arrive at the port in Halifax by March 25 through the Bigman carriers. Bilder Bay Shipbuilders will render payment to Matson through the Bank of Halifax on March 21. The City bank would foresee the fiscal measures on Matson account. Question 2 Kitchen Maid is one of the leading dishwasher producers in the United States. The company has actualized the sale of $3 billion dishwasher world wide. Kitchen Maid has particularly sold its dishwashers in Europe for the past seven and a half years through the help of an Italian agent referred to as Gepetto & Sons. The agreement between Kitchen Maid and Gepetto & Sons was that as agents Gepetto & Sons would be paid ten percent commission on all dishwashers sales. In the past seven years Gepetto & Sons has doubled the sales of Kitchen Maid dishwashers in Europe. The company expects to increase the sales to $800 million in 2009, this is about 10% of the European market. Initially, Kitchen Maid and Gepetto & Sons entered into a one year contract that was to end by December 31, 2002. Ever since their contract has been subject to renewal for another term through letter exchange by companies as each year ends. Kitchen Maid faces two main competitors in Europe, among these competitors include, Deutschland Kitchenland which dominates the northern European market with an annual dishwasher sales of $500 million. The other competitor is the Nouvelle Cuisine de France which dominates the Southern European market with annual dishwashers’ sales of $300 million. The government of France owns 20% of Nouvelle Cuisine de France. Both Deutschland Kitchenland and Nouvelle Cuisine de France are privileged to enjoy a 15% protection of European Union tariffs on dishwashers. As a result of the huge market of Kitchen Maid products in Europe, a large sum of the company’s commission payments goes to the high European Union tariffs and Gepetto & Sons commissions. Consequently, the company is considering two alternative plans in regard to the European market. The company’s management has plans of bringing to a standstill its contract with the Gepetto & Sons at the close of 2009 so that it can pursue other channels. For instance, the first plan of the Kitchen Maid Company is to license its production and sales to both Deutschland Kitchenland and Nouvelle Cuisine de France. The company would provide technical specifications and intellectual property necessary for such production, except for the function-specific integrated circuits that are the "brain chips" of each of its appliances. In accordance to the company’s specifications the chips will continue to be produced by Kitchen Maid thereafter they will be sold to Deutschland and Nouvelle. Several of the brain chips incorporate functionalities that can be comparable to those used to enhance the performance of military tank motors. The Kitchen Maid Company would exclusively license Deutschland to sell Kitchen Maid dishwashers produced by Deutschland in the thirteen northern-most European Union member states only. On the other hand, the company would exclusively license Nouvelle to sell the dishwashers produced by Nouvelle in the twelve southern-most European Union member states and Mediterranean countries such as Inter alia, Libya, Israel, and Syria only. If the agreement is to push through the Kitchen Maid company would outlay the wholesale prices for the dishwashers. Moreover, the agreements would also prohibit Deutschland and Nouvelle from selling their own respective brand-name dishwashers in the European Union countries or the Mediterranean countries. The Kitchen Maid would be in turn rendered 25 percent of gross sales of the dishwashers and $25 per every chip sold. All through the term of the contract, any advances in dishwasher technology by either Deutschland or Nouvelle would be assigned exclusively to the Kitchen Maid Company. Alternatively, the management of the Kitchen Maid Company planned to acquire the Deutschland Kitchenland, stop manufacturing some of the their dishwasher’s and produce Kitchen Maid dishwashers in the Deutschland factories. The new brand would sell Deutschland products under its own trademarks whereas the Kitchen Maid products would be sold under it own trademark. The Kitchen Maid Deutschland products would be sold in northern European Union countries through the well-developed Deutschland distribution channels. In the other European Union Countries, the Kitchen Maid Deutschland products would be sold for a few years at a "special introductory price" of about 50% of the prices that KMD will charge in northern Europe in order to help establish a solid market position. The Kitchen Maid Deutschland Company would incorporate intellectual property law to avert the re-sale of these dishwashers at lower prices in northern Europe and the United States. The company would purchase all "brain chips" from its parent, paying $500 per chip. This paper seeks to advise the Kitchen Maid Company of the emerging concerns in regards to its plans. It will also recommend ways of improving the set plans. Problem statement The Kitchen Maid Company is faced with challenge of increasing its sales across northern and Southern European. Despite the fact that the company enjoys $3 billion of dishwasher sales worldwide, most of its revenues go to Gepetto & Sons it sales agents in Europe as commission payments and the high European Union tariffs. Furthermore, the company has two main competitors that dominate the European Market. Deutschland Kitchenland dominates the northern European market with annual dishwasher sales of $500 million whereas the Nouvelle Cuisine de France dominates the Southern European market with annual dishwashers’ sales of $300 million. These competitors also enjoy 15% off European Union tariffs on dishwashers thus their increased sales and income. Consequently, the management of the company is contemplating on discontinuing its contract with its sales agent in Europe and licensing Deutschland to sell Kitchen Maid dishwashers. Another alternative that the company is considering is acquiring Deutschland Kitchenland, stop manufacturing some of their dishwasher’s and produce Kitchen Maid dishwashers in the Deutschland factories. The new brand would sell Deutschland products under its own trademarks whereas the Kitchen Maid products would be sold under it own trademark. It is however imperative that the company should consider certain factors before embarking on these plans (Stoever 2000). ] Factors to consider As the management of the Kitchen Maid Company endeavors to license the production and the sale of its dishwashers to Deutschland Kitchenland and Nouvelle Cuisine de France there are a number of critical factors that the management should put into consideration. Foremost the management of these companies may be somewhat resilient to this proposal since these companies have over the course of time thrived in the sale of their own brands in the European market. Moreover these companies enjoy 15% off European Union tariffs on dishwashers. Nevertheless, if these companies consent to this proposal the management of the Kitchen Maid Company should put into consideration some Financial and Legal issues in regard to the presented proposal of licensing the production and the sale of its dishwashers to Deutschland Kitchenland and Nouvelle Cuisine de France. The company should consult financial personnel and attorneys in Europe since they are familiar with the financial matters and international trade regulations. Good counsel is necessary so as to ascertain that the company does not inadvertently enter into a legally binding transaction that could overturn the company’s success and growth (Folsom, Gordon & Spanogle 2005). The European market is a key factor that the management of the Kitchen Maid Company should put into consideration. The company’s management should conduct research on certain aspects of the European market that revolve around the production and sale of dishwashers. For instance the company should conduct as a survey on the various elements that promote brand loyalty amongst the populates of Northern and Southern European market. Additionally, the company’s research should be geared towards finding out on whether their products will result to exquisite sales that make its investment of licensing the sales and production of its dishwasher’s to Deutschland Kitchenland and Nouvelle Cuisine de France worthwhile. As the management of the Kitchen Maid Company endeavors to license the production and the sale of its dishwashers to Deutschland Kitchenland and Nouvelle Cuisine de France, the structure of these companies should be put into consideration (Stoever 2000). For instance 20% of the Nouvelle Cuisine de France is held in possession by the Government of France. The management of the Kitchen Maid Company should establish whether the company is functioning as an integral or separate entity. This is vital since it will enable the company to negotiate suitable terms that are compatible to the structures of these companies. It is worth noting that there exist certain advantages and disadvantages even as the as the Kitchen Maid company endeavors to license the production and the sale of its dishwashers to Deutschland Kitchenland and Nouvelle Cuisine de France. Given the fact that the Company’s target market lies in the expanse of the European Union countries the management of the Kitchen Maid Company should put into account the set of laws governing trade in the European Union countries in regard to intellectual property, licensing of production and sales and trade tariffs (Raworth 1991). Secondly, as the company’s management attempts to acquire the Deutschland Kitchenland, stop the production of its dishwasher brands and introduce the KitchenMaid Deutschland certain factors also need to be put into account. This endeavor will indefinitely contribute to the hammering of the Kitchen Maid dishwasher brand. Furthermore, as the company introduces the KitchenMaid Deutschland dishwasher brand to the European Union countries at a reduced prize the company is bound to experience recession in its annual revenue since the production of the new brand will inevitably take up much of the company’s resources that are asymmetrical to the sales of the new dishwasher brand with a subsidized price in the European Union countries (Raworth 1991). Ways of improving the company’s plans The Kitchen Maid Company can improve its plans by conducting a comprehensive research on whether the set plans are worthwhile when it comes to increasing its revenue and promoting the Kitchen Maid dishwasher brand. The management of the Kitchen Maid Company should also seek counsel from attorneys and financial experts in regard to European Union regulations and the various technicalities that revolve around these set plans. By conducting research and seeking counsel the company’s management can appraise, adjust or amend its plans thus increasing the chances that making these plans to be more fruitful and suitable for the existing European market. (Sterling & Wallace et al 1998). In an effort to enhance the set pans the Kitchen Maid Company should present and negotiate its proposal with both the management of the Deutschland Kitchenland and Nouvelle Cuisine de France companies. Subsequently, the involved parties should entered in a well denoted contract that elaborates the role played by each company in sales and production, the technical specifications and purchase among many other factors. Additionally, the KitchenMaid Company can improve its plans by seeking insurance coverage so as to reduce and counter the risks that could emerge as a result of the set plans (Folsom, Gordon & Spanogle 2005). The set of plans proposed by the management of the Kitchen Maid Company are indefinitely a form of multilateral economic integration since there are more than two companies integrated in the production and sale of a common product. So as to enhance these plans the management of the Kitchen Maid Company should establish a framework that is made up of a general set of rules that regulate the order of global trading, core principles of transparency and reciprocity (Rosset 1997). Conclusion International Business Transactions revolve around intricate factors such as company structures, legal frame works, the target markets, imposed tariffs and financial issues among many others. It is imperative for these transactions to be properly structured and have elaborate contract guidelines so that the parties can actualize their goals. Risks in international business transactions are inherent therefore counsel should be sought from personnel in the legal and financial spectrum. Dealing with the increased risks involved in international business transactions requires, institutional protection, negotiated protection and purchased protection. These protections can be actualized through appropriate insurance coverage either from the government or other relevant bodies (Brand 2000). Bibliography American Conference Institute, 1997, Negotiating and Structuring International Business Transactions, ACI Publications, New York. Brand, R, 2000, Fundamental International Business Transactions, Kluwer Law International, Netherlands. Campbell, D, & Rohwer, C, 1984, Legal aspects of international business transactions, North-Holland Publishers, New York. Folsom, R, Gordon, M & Spanogle, J, 2005, International business transactions: a problem-oriented course book, Thomson West Publishers, New York. Insight information Inc, 1999, International business transactions: problems and applied solutions, Insight Press, UK. Sterling, W & Wallace, D, et al, 1998, A Lawyer's guide to international business transactions, American Law Institute Press, New York. Stoever, W, 2000, Renegotiations in international business transactions: the process of dispute-resolution between multinational investors and host societies, Lexington Books, Michigan. Rosset, A, 1997, Principles and Harmonization of International Law Review, Uniform Law Review, vol 2, 441. Raworth, P, 1991, Legal guide to international business transactions, Carswell Publishers, UK. Raworth, P, 1991International business transactions: contract and dispute resolution, Instutute of Comparative Law Press, Waseda. Vause, G, 1997, Introduction to international business transactions: the legal environment for international trade and investment in the post-cold war era, Book World Publications, New York. Read More