International Business Transactions - Assignment Example

Question 1 In this situation, MM has an opportunity to act as a middle man and make about $1 million in the transaction. However, there are important considerations that he must make in order to structure in a way that nothing goes wrong. Some of the most important factors to consider when coming with an arrangement of the contract include: a) MM does not have enough capital to buy the steel ingots. This mans that he is relying payment of BB in order to settle payment of SS. The time period between the two payment periods depending on delivery of goods implies that MM has to come up with another source of capital in order to settle the payment b) On the other hand, the United States government is contemplating imposing a 50% tariff duty on all steel from Brazil. This means that MM has to get the steel on United States soil before March 9th although arrangement with SS was to have them offloaded from the port on March 10. c) It is also important to consider that both SS and BB are considering Bigman Carriers as their preferred choice to ferry steel to the destination. (i) What are some alternative ways to structure the transaction(s)? In view of the above factors, there are different ways in which the transaction can be structured. These include; First, MM can make arrangement with SS to have the goods delivered before 9th in order to evade the tax duty. In this case, MM will have to pay the company in advance in order to get the steel delivered. However, it is also important to consider the fact that MM does not have cash to pay for the steel and BB will make payment much later. This means that MM can find alternative financing like getting a loan from his bank and then purchase the steel before the duty is imposed (Albert, 1998). Second, MM can make arrangement with Bigman Carriers and deliver the steel direct from Brazil to Canada. This would evade the tax that is likely to be imposed by the United States government. Under this option, MM can make arrangement with both SS and BB such that the goods will be delivered at the same time as they will be paid by BB so that MM would settle payment with SS. (ii) What would be the best way to structure the transaction(s)? In consideration of the above structures, there are advantages and shortcomings which can be attributed to each. In the first case, the transaction would depend on two things. First it would depend on whether SS would agree to deliver goods before the mentioned date 9th. In case SS does not agree to deliver the goods within the stipulated time, then it would be a disadvantage because the steel will have to attract a duty of 50%. Second, the deal would depend on whether MM would be in a position to access capital financing from the bank. This is because SS has given a time limit within which the money will have to be settled. On the second option, the success or failure of transaction will depend on whether both SS and BB would agree to deliver goods within the agreed period (Mills, 2005). In this case, MM would have to convince SS to deliver goods at a later agreed date upon which BB would also be available to make the payment. This would also depend on the cost that Bigman can charge to deliver goods from Brazil to Canada direct and whether this cost is comparable to what could have been paid if the goods first went through United States. In consideration of the above structures, the second option would be the best. This is because it would involve direct transfer of goods from Brazil to Canada and also making of direct payment. This would also be the best option for MM considering that he does not have capital payment for the goods and the impending duty tax to be imposed by the United States on Brazil steel. (iii) With respect to each structure, please provide a general description of the set of arrangements you contemplate, the contract(s) involved, and the basic terms of the contract(s). Consider both structures there are important arrangement and contracts that must be signed to make the deal successful. All parties in the transaction want the deal to be completed within the stipulated and with little problems. The following are important arrangement that must be implemented in each structure: First structure; In the first options, the following must be taken into important consideration: MM must be in a position to obtain loan from his bank Citibank in order to finance the purchase. Without this capital financing, he might not be able to settle the payment SS must agree to deliver goods earlier that what they have agreed on. Under their agreement, SS would deliver the good by 10th and by this time, US would have already imposed a 50% duty on Brazil steel. Therefore SS must agree to deliver the goods before 9th in order to evade the tax duty. On the same note, MM must be able to make full payment of goods before 8th. The following contracts must also be made under the fist structure; Contract between MM and bank to get capital finance – this is an agreement which must be reached between MM and Citibank in order to get capital financing. In this regard, the contract or agreement must outline the amount of money that MM will receive and the period within which the money must be repaid. It must also outline the terms of payment including the amount of interest that the loan will attract. MM will also enter into an agreement with SS on purchase of goods. This agreement will include the total quantity of goods to be delivered, their price, period within which they will be delivered, and conditions of goods. This contract will be important since it will outline the conditions under which the goods will be sold. SS will also enter into a shipping contract with Bigmans Carriers. This would include the bill of lading which outlines the terms and condition of shipping the goods from Brazil to United States Second structure: In the second structure, there are number of arrangements that will have to be put in place for the transaction to be successful; MM must convince SS to deliver goods and an earlier date when BB will have to pay. In this case, SS will have to postpone the sale of goods until the agreed date. This means that MM will just receiver payment from BB and pay SS simultaneously. Under this deal, Bigman Carriers must also agree to transport the steel ingots from Brazil to Canada and hence evading the U.S tax to be imposed. This will depend on the total cost of transport that Bigman Carriers will charge (Huber, 2001). Under this transaction, important contract will involve the contract between MM, SS and BB on deliver of goods and the bill of lading contracting with Bigman Carriers. Question 2 In this case study, KM is contemplating the best mode of entering direct to the European market after introducing its products through an agent. As can be assessed, after acquiring a large share of European dishwasher market, KM contemplates making a direct entry into the market. Before analyzing the options that KM is contemplating, it is important to understand whether there is any legal binding that may spoil the plan based on its earlier arrangement with GS. As has been shown in the case study, KM has been using Gepetto & Sons (GS) to market its dishwashers in the European market. The contract between the two companies has been renewed in writing only showing the willingness of the other party to continue with the trade agreement which could imply that both were fining the arrangement helpful in maximizing their profit. Since the arrangement was made in writing and the commitment was only for one year, it means that there would be no legal binding that would impede on the plans of the company to enter directly into the European market. In most cases, companies have found it quite difficult to enter directly into the market after year of using an agent to sell in the market. The contract signed between GS and KM has been most convenient to KM as it has helped its product to acquire about a tenth of the European market. This means that the company has a strong bargaining power when it is considering entering into the market through any of the two options. Analyzing the two plans In the first plan, KM is contemplating licensing the production and ales of the company product to both DK and NCF. These are two major competitors of the company and they have a sizable market share also. However, KM has the size of both their markets combined with means it still has strong case if it decides to license the two companies while at the same time, there are issues that are likely to arise from such an arrangement. In the plan, KM contemplates proving the technical knowledge for the production of its product. It would provide all technical specifications and the intellectual property to protect the products but it will not provide the integrated circuits which can be considered as the brain chips behind its dishwashers. KM would continue producing the chips and then sell them to DK and NCF for $25 each. DK would be licensed to sell the products in thirteen northern-most EU countries while NCF would be licensed to sell the products in Southern-most EU countries and the Mediterranean countries. In the arrangement, KM will pocket 25% of all sales plus the $25 which will be charged for each chip used by the two companies. KM also hopes to protect its intellectual property since any improvement that will be made in the dishwashers will also be assigned to the company. In the second plan, KM contemplates entering the market directly by acquiring DK. This means that KM would have formed a new acquisition which will be named KitchenMaid Deutschland (KMD). The acquisition would not continue manufacturing DK dishwashers but would continuing selling product from both companies under their respective trademarks. Under this arrangement, KMD product will be sold in the Northern EU countries using the developed DK network. This arrangement would however exclude the Southern Europe. Therefore the company aims at selling the products in these regions at a subsidized introductory price but will however use intellectual property law to prevent the resale of product in the rest of EU countries and United States. Under the arrangement, KMD would also be forced to purchase the chips from the parent KM at a higher price of $500. There are issues which are arising from each of the plan that the company wants to take. Considering the first option of licensing the DK and NCF to sell the company products in Europe, it is important to note that the two companies also have an interest in advancing their brand and hence this would bring about conflict of interest. Licensing arrangement always comes with its issues especially when both companies have interest or selling similar products (Karla, 2009). There are important questions that remain unanswered under this arrangement; (i) How long will the licensing arrangement last? (ii) Will DK and NCF continue selling their own products and at which price? (iii) How will the two companies balance between selling their brands and KM’s product, and in this case in which ratio? (iv) Who will be responsible for advertising the products? (v) Who will set the price for the products, and does KM have a control on these prices? These are just few of the questions that remain clearly unanswered under the arrangement. As has been found, most licensing arrangement ends up as cartels which control the price of producers and services. It has also been established that there arise legal and pricing issues in such arrangement. DK and NCF may raise the price of KM products which means their products will have a price competitive edge. In the long term, this may erode the market gains that KM products have had when they were distributed by GS. It is important to come up with a clear price policy that will regulate sale of KM products by both DK and NCF. Under the arrangement, there is no clear policy on the length of time that the arrangement will take. It is not clear how the arrangement may be ended. This creates an ambiguity in th relationship since any party may withdraw from the licensing as they wish. This may lead to a legal battle especially when one party has invested on the development of products. It is important that the two parties makes it legal the terms of entry and exist from the licensing. As has been highlighted earlier, DK and NCF are also dealing with their own brands in the same area. This creates a conflict of interest especially when the licensing will not have defined clear terms of engagement in terms of time both will stay in licensure. DK and NCF may engage in practice that will increase the market share of their product over those of KM and eventually drive KM products out of market. It is also important to agree on other market conditions like knowing who will be responsible for marketing the products. Will both parties share the advertising cost or will both DK and NCF take responsibility of their advertising cost? This is important in order to ensure that there is an agreement between both parties on how such costs will be shared. In the second arrangement, there are also important issues that need to be addressed first. This is an acquisition arrangement in which KM will acquire DK and all its brands. As history has it, such mergers or acquisitions have been know to be a recipe for disaster if they are not well managed. Unless well structured right from the beginning, the acquisition must be conducted in a legal framework that will ensure that both companies merge under an agreed legal framework that clearly defines the duties of each party (Higgin, 2003). However, if KM acquires DK, it means DK will cease to exist solitarily in the market but will sell its products under new company name. An acquisition will be work for KM that it will work for DK. It will give KM exclusive rights to decide on the fate of DK products. As has been already highlighted the new acquisition will not continue producing some of DK dishwashers and continue producing others. The new acquisition will also sell DK products under DK trademark and KM products under KM trademark. This means that it will be under the prerogative of KM to continue producing DK brand which it seems are more profitable than others and hence there will a line of products that will eventually be withdrawn from the market. This is likely to hurt the marketability of DK products since there are consumers who prefer the products that may eventually be withdrawn from the market. This has been found to be a major problem with acquisitions since there are products which cease to exist in the market and therefore the company ends up loosing consumers. Before the company decides to stop producing some goods, it must come up with a market research data that will show the market preference of these products. The new acquisition may also find it difficult to market its products at a price compared to the licensing arrangement. Under licensing, the parent company would sell chips at $25 to both DK and NCF. However, under acquisition, the company would have to buy chips at a higher price of $500 which is 200% higher. Adding to the production cost, the company may be forced to sell its products at a higher price compared to what the products would be selling under licensing arrangement. It would be important if the new acquisition enters into agreement with the parent KM company to purchase the chips at a lower cost for a number of years so that the company an establish itself. Since the company will transfer the technical knowledge in the production of dishwashers to the new acquisition, it may be important at some state to allow it to produce its own chips since this arrangement equals transferring the parent KM Company to Europe. Under this arrangement, the company is only assured of the Northern European market. It is still not clear what will happen in the Southern European market as DK does not have a well established distribution network. This implies that there is a danger of the company losing its Southern market if proper arrangements are not up in place to cover the market as well. The company contemplates using introductory prices in the southern Europe market by selling the products at 50% price that what products will sell at in the North. Even with the arranged use of intellectual property rights to protect re-sell of the products, there will be issues that will arise from consumers. If the products will be sold at half the price they were retailing before, consumers may raise question of the quality of the products. The company is not also guaranteed that these low priced products will not be sold in the south European market or United States in that case. For example if consumers from south Europe visit a country in the North Europe and purchase the dishwashers, this is not like to be treated as infringement of intellectual properties. Although this may be considered as a small case, it may end up being a big issues contributing to sale of thousands of dishwashers. The company needs to come up with another arrangement. In order to penetrate the South European market, it would be advisable for the company to invest and enter directly into the market. Previously, the company products have been sold through GS which means they still maintain a large market share. Therefore the company should invest in putting in place a distribution network, although this will require a huge capital investment, but in the long term it will help DK and KM products to penetrate the southern European markets. List of References Albert, W. (1998). Structuring international transactions. Prentice Hall Higgin, J. (2003). International trade. Macmillan Huber, M. (2001). Chartering and operations in Tanker operations. Cambridge: Maritime Press Karla, C. (2009). International contracts. Basic Books Mills, S. (2005). Bills of lading: A guide to good practice. Newcastle Tyne Publishers Read More