International Business Transactions - Michael Matson - Assignment Example

Name : xxxxxxxxxxx Institution : xxxxxxxxxxx Title : xxxxxxxxxxx Tutor : xxxxxxxxxxx Course : xxxxxxxxxxx @2012 Introduction International business transactions as deals or transactions undertaken by foreign businesses can be described as rather challenging. This is due to the fact that various aspects have to be factored in, before making any sort of transactions. As highlighted by Ralph et al (2009) the code of conduct of transactions in the global community is entangled around problems such as international contracting, trade regulations, financing, technology transfer, disputes in international business and foreign investment challenges. Due to the existence of such complexities, many businesses involved in international business transactions always have the desire to ensure that nothing goes wrong when carrying out transactions. In despite of the existing challenges, globalization of business has made transaction across boundaries much easier. In addition the existence of a legal framework of structuring and coordinating transactions has become very useful. This paper seeks to examine two case studies that highlight issues that arise when carrying out international business transactions. The paper will also provide effective solutions that can be applied in the contexts of the two scenarios. Question One Synopsis of the Case Michael Matson (MM) a twenty five year old business man based in New York is in a persistent hunt for a good business transaction. At cocktail party, Matson met a Brazilian CEO Salazar who works with a Brazilian Steel manufacturing company located Sao Paulo. Matson believes that this time around he has landed on a good business deal. Salazar, presented Matson with a business deal that entails selling 5, 000 Metric tons of #41 steel ingots that have a purity warranty of not more than 1.6% of carbon. The steel was to cost $10 million. The transaction also involved loading the steel onto Bigman Carriers a Brazilian ship. The ship was to depart from the Brazilian port on the 1st of August and Land in New York on 8th of August. The transaction was to be structured by SS’s Bank in Soa Paulo. Matson encountered another lucrative business transaction with a Canadian business man Billy Bashford who is the CEO of a Canadian shipbuilding company known as Bilder Bay Shipbuilders (BB), which is situated in Halifax. Bashford’s offer entails buying 5,000 metric tons of #41 steel ingots from Matson. The steel has a warranty of not more than 1.6% carbon and will be purchased at $11 million. The arrival date of the steel at Halifax port was not to exceed 25th August. This implies that that the steel should not depart from New York not later than 20th August. Although Billy Bashford preferred using the Bigman Carriers, he will not able to have money to purchase the steel until the 21st of August. He however holds a bank account with the Bank of Halifax. From the two deals, Matson believes that he can act as a middle man and make approximately 1 million dollars from the transaction , however several aspects have to put into consideration which include ; A capital of $100,000 The cost of shipping and insurance from Sao Paulo to New York would be about $50,000 From New York to Halifax, the cost would be about $30,000 The U.S. Government will decide whether to impose a countervailing duty of up to 50% on Brazilian steel on August 9th, which would take effect on that day. MM intends to structure the deal in order to ensure that nothing could go wrong Ways of structuring the Transaction Drafting of a Sales contract The drafting of a sales contract is one of the most fundamental steps of structuring an international business transaction. As indicated by the case MM encountered two lucrative business deals, however he only entered into an oral type of contract. It is however vital for him to enter into a written contact with both parties. This is because as highlighted by Hinkelman et al, (2005) a written contract is essential based on fact that it will serve as a proof as evidence incase there is need for verification of the transaction. In addition as stipulated by the U.S Uniform commercials Code (UCC), every sales contract for goods with a total value that exceeds $ 500, must be written down in order for the transactions to be enforceable. In the context of MM, a written down sales contract is therefore vital in based on the fact that his transaction costs are way beyond $ 500, as proposed by the U.S Uniform commercials Code. The sales contract between MM and the two parties; Salazar the CEO of Salazar Steel and Billy Bashford the CEO of Bilder Bay Shipbuilders, has to be drafted effectively, whereby the responsibility and rights of all the parties should be outlined clearly (Oettinger, 2010). Transaction between Matson and Salazar In this particular scenario, certain essential elements have to be integrated when coming up with the sales contract. In the event the deal between Matson and Salazar that involves the shipment of steel from Brazil is successful, the sales contact on the basis of responsibilities, payment and timelines will be drafted as follows; A sale of 5,000 metric tons of 41 steel ingots, with a purity of not more1.6% carbon , will be made by Salazar Steel company to the Matson. The steel will be at a cost of $10 million. The 5, 000 metric tons of steel will then depart from the Brazil port on 1st March via the Bigman Carriers. By 10th August, the steel cargo is expected to arrive at New York. Payment of the 5,000 metric tons of 41 steel ingots is therefore supposed to be made Matson to Salazar Steel not later than August 8th. Payment will be made through the Bank of Sao Paulo. In order to ensure that every transaction is undertaken as written down , the Salazar company is expected to make a structure of the transaction Transaction between Matson and Billy Bashford In the event that both parties have reached a consensus to proceed with the business transaction, the sales contract will be structured in the following way; The metric 5,000 metric tons of 41 ingots of steel will leave the New York harbor on 20thAugust. The cargo is expected to arrive at the Halifax port through via Bigman carriers. The Canadian company; Bilder Bay Shipbuilders is expected to make payments to Matson on August 21st through the Bank of Halifax. City bank which is Matson’s bank is then required to forecast the fiscal measures that are available in Matson’s account. Essential terms in the Sales contracts Based on the fact that the transportation of the steel will be through inter -land water transport, the contract will also outline the specifications of clearing the goods at the port. If Salazar who is the seller/ exporter is to clear the steel and then place them along the vessel at the port of shipment, then the clearing specifications will be Free alongside Ship. On the other hand, if Salazar clears the goods for exports and is also responsible for the risks and costs of delivery of the goods beyond the port of shipment, then the clearance specifications will be free on board (Oettinger, 2010). Regulatory Consideration’s in the Sales Contracts According to Anderson (1997) parties involved in an international business transaction are supposed to adopt law clauses in their sales contracts in case of any sort of dispute arises in relations to the contact. In this context, the integration of a common law within the international business framework known as Lex Mercatoria is suitable when drafting the sales contact. Lex Mercatoria stipulates aspects such as who bears the risk incase a loss occurs, the security of the goods , the method of payment and what happens in case a dispute arises and is taken to court . Letter of Credit A letter of credit is simply a written instrument that is usually given by a bank on behalf of a client in order to ascertain that the issuer will definitely honor the demands of the payment (Miller, 2012). Based on the fact that sellers and buyers involved in international business transactions are usually separated from each other by thousands of miles, special safety measures have to be taken in order to ensure that the seller will deliver the goods they have been paid for and the buyer is assured that the seller will not be paid until there is evidence that the goods have been shipped ( LeRoy & Jentz, 2009). The letter of credit can be described as an effective method of payment of goods however it does not always guarantee that full payment will be attained. Nevertheless when a bank issues the letter of credit it basically influences the seller to do what they are required to do as outlined by the sales contract (Schaffer& Agusti, 2008). Bilder Bay Shipbuilders are in this particular context supposed to pay Matson when he keeps his end of the deal. The payment is supposed to be made through the Bank of Halifax. According to Ralph et al (2009), the letter of credit is frequently used when undertaking international business transactions because the bank acts as an interested party between the seller and the buyer. Furthermore, the letter of credit also enables both parties to evaluate and effectively analyze every expense that exists in the entire transaction. In this scenario Matson is therefore supposed to put into consideration the operating costs that are bound to be incurred in the event of the entire transaction. For instance, some of the main issues to be evaluated include the cost of shipping from Sao Paulo Brazil to New York and from New York to Halifax. A rough estimation of these operating costs is $80,000. Consequently Matson should put in mind the fact that he has a current capital of $100, 000. In addition, it is essential for Matson to find ways of acquiring additional capital probably from his bank, the Citibank. As propagated by Ralph et al (2009) undertaking international business transactions usually needs additional capital due to the probability of occurrence of challenges such as; regulatory requirements that may change the present value of foreign currency, quotas , changing market forces, duties and fluctuations . As a result acquiring additional capital will give him a certainty that he is able to carry out the transaction without the occurrence of a deficit which may affect the success of his entire business deal. Below is an illustration that shows how the whole structure of the transaction in a summary; Figure 1 Alternative ways of structuring the transactions The transactions can also alternatively be structured through the adoption of negotiation. Suvanto (1998) highlights that negotiation of international business transactions is a crucial element in attaining the objectives of the transaction. This is because misunderstanding can arise in communication based on the fact that the parties involved in the transactions come from different cultural, legal and also economic backgrounds . Negotiation will therefore enable the drafting of transaction which the parties can understand the concepts and terms of the transaction. Matson had the goal of being involved in transaction whereby he would act as a middleman in the two business deals offered by Bilder Bay Shipbuilders and Salazar Steel. Matson also had the objective of being able to make a profit of 1 million dollars from the deals. On the other hand he wants to invest a capital of 100, 000 dollars into the deal. Nevertheless, Additional expenses are bound to occur which include insurance and shipping expenses from Sao Paulo to New York and from New York to Halifax. Another crucial element to put into consideration is the fact that the U.S government will come up with a verdict on August 9th on whether to whether to impose a countervailing duty of up to 50% on Brazilian steel. Negotiation is therefore a vital aspect that Matson should take on in order to deal with the situation of the imposed duty and also actualize his objective of getting his desired profit of one million dollars. Matson should therefore negotiate for certain kinds of terms or conditions in the agreements that he wants to make with Bilder Bay Shipbuilders and Salazar Steel. Foremost one of the aspects to be negotiated is that; City bank which is the bank he operates should be the manager of the business deal. This will therefore ascertain that Matson’s bank, provides insurance that will facilitates protect the transaction, in case any risk occurs. Another crucial aspect of negotiation concerns the date. Matson is supposed to negotiate for an appropriate date in which the 5,000 metric tons of 41 steel ingots can be delivered by Bigman carriers. Negotiating for a suitable date is important because it will assist in averting the duty of up to 50% on Brazilian steel that the United States government wanted to impose by August 9th (American Conference Institute 1997). Consequently due to the proposed aspects of negotiating, the structure of the transaction will proceed as follows; Citibank which is Matson’s bank will oversee and structure each aspect of the transactions The Salazar Steel Company will then make a sale of the 5,000 metric tons of 41 steel ingots at a cost $10 million, to Matson The 5,000 metric tons of 41 steel ingots will then leave the Brazilian port through the Bigman Carriers on August 1st of August. The cargo expected to land on New York on the 8th of August. Matson will make payment for the 5,000 metric tons of 41 steel ingots through his bank, the Citibank to Salazar Steel. The payment will be made to the Sao Paulo Bank no later that August 8th After receiving the cargo, Matson will then sell to Bilder Bay Shipbuilders the 5,000 metric tons of 41 steel ingots, with a warranty for purity not more than 1.6% carbon. The cost selling the goods will be $11 million as outlined by the sales contract. The cargo will then leave New York on 20th August. The 5,000 metric tons of 41 steel ingots is then expected to arrive on 25th August at the Halifax Port in Canada. Bilder Bay Shipbuilders are required to make payment to Matson on the 21st of August The Citibank will then undertake the Fiscal measures that arise Matson’s account Question Two Synopsis of the Case Kitchen Maid dishwasher manufacturers in the United States, is basically one of the renowned dishwasher production companies across the globe. Through the help of an Italian agent; Gepetto & Sons the company has for the previous seven and a half years sold its products to the European market. The contract terms between Kitchen Maid and Gepetto & Sons entailed Gepetto & Sons getting a 10% percent commission on every sale of dishwashers. For the period of time that Kitchen Maid transacted with Gepetto & Sons, the company successfully doubled its sales within the European market. Kitchen Maid has the objective of improving its 2012 sales within the European market by making sales of 800 million, which is an increase of about 10%. Initially, Kitchen Maid signed a contract of one year with Gepetto & Sons. The contract was supposed to end December 31st 2005. The contract has however been constantly renewed through the letter of exchange. Based on the fact that the European market is continuously getting to be competitive, the Kitchen Maid management has put in mind the need for finding alternate plans of dominating the European market. One of the company’s major considerations is that by the end of 2012, the company should terminate its contract with Gepetto & Son. The objective of ending the contract is to pursue other alternative ventures of winning the European market. In order to capture the European market the company is considering two alternative plans; The first plan entails licensing its production and sales to both Deutschland Kitchenland and Nouvelle Cuisine de France. The second plan is to the acquisition of Deutschland Kitchenland, which produces Kitchen Maid dishwashers in the Deutschland factories. The company will also stop the manufacturing of its dish washers using Deutschland Kitchenland. Instead a new subsidiary will be created which will be known as KitchenMaid Deutschland (KMD), which will sell DK product lines under the trademark of DK and sell the KM products under the trademarks KM. In addition the company also plans to undertake market expansion by selling Kitchen Maid Deutschland products to the countries located in the northern part of the EU. This will be facilitated by a well developed distribution network. A unique or special introductory price of 50% will also be introduced. Concerns that arise from Kitchen Maid Plans One of the concern areas about Kitchen Maid plans is grounded on the initiative of terminating the long term contract that the company has had Gepetto & Sons (GS). What is evident is that although the move can be perceived as profitable, it may actually bring about certain unforseen implications to the company. This is due to the fact that Gepetto & Sons (GS) has for a long time been prominent in the European market. As a result terminating the contract with Gepetto & Sons (GS) may actually lower the potentiality of Kitchen Maid in terms of dominating the EU market. Nevertheless, the issue about the huge commissions offered by Kitchen Maid to Gepetto & Sons commissions is also a factor of consideration. In despite of the fact that Kitchen Maid has been benefiting from the sales of $3 billion dishwashers across the world, a huge amount of earnings is actually directed to Gepetto & Sons who are the main sales agent of the company in Europe. The high costs arise from commission payments and also from high tariffs imposed by the European Union. As a result terminating the contract with Gepetto & Sons, is an option that may seem viable and easy as highlighted by Article 11 of the United Nations Convention on Contracts for the International Sale of Goods, which states that a sales contracts does not necessarily need to be concluded by writing and is not subject to any other requirement as to form. Another issue of concern is about the plan of the company’s management to make an acquisition of Deutschland Kitchenland, the ending of manufacturing certain dishwashers and also the issue of Kitchen Maid dishwashers being produced in Deutschland factories. All these initiatives can actually be perceived a rather complex essentially if they will not be managed properly. Also, an additional aspect of concern is the fact that Kitchen Maid is experiencing tight competition from two competitors who are both fighting for the European market and are also prominent. One of the competitors is the Deutschland Kitchenland Company which is a key player in the northern region of Europe. The Deutschland Kitchenland Company attains a sale of $500 million yearly. Another major opponent is Nouvelle Cuisine de France which largely covers the southern region of Europe. The Nouvelle Cuisine de France attains an annual sale of $300 million. Another challenge that the Nouvelle Cuisine de France causes is attributed to the fact that the French government has an ownership of 20% in the company. This creates a threat based on the fact that as argued by Shleifer (1998) companies that have government ownership operate in an environment that is more investment friendly. Consequently Nouvelle Cuisine de France operates in an environment that is more advantaged as opposed to Kitchen Maid. In addition another threat is derived from the fact that both companies Deutschland Kitchenland and Nouvelle Cuisine de France are bound to gain from the protection of 15% that is provided to European dishwasher manufacturing companies .On the other hand these issues can actually be beneficial to Kitchen Maid in case it licenses its sales and production with the two companies. The aspect of increasing sales within the northern and Southern European market is another issue that arises from the case. As highlighted earlier competitive forces do exist in these two regions. The two companies Deutschland Kitchenland Company and Nouvelle Cuisine de France are very dominant and have greatly captured the market. Consequently there is need for Kitchen Maid to devise effective strategies of capturing the European market. Critical Factors that must be considered and the ways of improving the company’s plans Before the management of Kitchen Maid Company implements its plans, there is need to factor in various crucial aspects that will enable its operations within the international market to be successful. As highlighted earlier, international business is basically very complex. One of the factors to put into consideration is the effective evaluation of the European market. Before undertaking any step, the company should first of all carry out a market research in order to evaluate the implications of the proposed plans on the performance of the company. One of the important aspects that should be evaluated is the implications of the termination of the contract with Gepetto & Sons. Furthermore the company should also analyze its capability in terms of manufacture and sale of dishwashers. For example the company should evaluate whether their dishwashers will lead to a substantive sale that will eventually result to licensing its products and also making a profitable sale to Nouvelle Cuisine de France and Deutschland Kitchenland. Another aspect of evaluation is analyzing the aspects that increase loyalty towards a brand in the European dishwasher industry. This should essentially be done on the Northern and the Southern European market. Another aspect that should be considered is the fact that although Kitchen maid company has the objective of licensing the production Nouvelle Cuisine de France and Deutschland Kitchenland, the move can be challenging . According to Ralph et al (2009), the modes of involvement that is adopted in a foreign market can sometimes be intricate depending on the type of operating strategy that a business has adopted. In the context of the case, the Kitchen maid Company has adopted licensing strategy. However there is need for the company to be aware of the fact that complexity can actually arise whereby, these companies can be resistant towards the proposed deals. This is due to the fact that the two companies have a substantial and developed brand within the market. Furthermore, the two companies are beneficiaries of the 15% reduction on tariffs that is given by the EU. In the event that the two companies accept the proposal given to them by the management of Kitchen Maid Company, there are various aspects that should be critically considered. The areas of consideration are the financial and the legal aspects that are involved in licensing the production and the sale of its dishwashers to Deutschland Nouvelle Cuisine de France and Deutschland Kitchenland. Brand, (2000) highlights that licensing is an international business operation strategy that is very broad based. This is due to the fact that it entails various aspects such as knowledge on manufacturing, technical advice and patents. On the other hand the financial aspects to be considered include the earning of a management fee by the management service provider. The fee is usually calculated as a fraction of the gross revenue. Brand, (2000) further highlights that in the context of licensing, the service provider may actually gain more earnings as opposed to the main owner of the business. On grounds of these particular deliberations, Kitchen Maid should consult a financial adviser or an attorney that is based in Europe. These experts are useful in providing credible advice based on the fact that they are familiar with regulations of international trade and the financial issues involved. Brand,(2000) propagates that consulting a specialists is important because it will enable the company to ensure that it does not unwillingly and blindly get involved in legal deals that can eventually result to serious effects in the long run. An additional factor to be deliberated upon is the present operational state of the two companies that Kitchen Maid intends to license. As indicated by the case, the French government has an ownership of 20% of the Nouvelle Cuisine de France. Consequently Kitchen Maid’s management should analyze whether the company is undertaking its business as a constituent part of the government or as a separate entity. This kind of analysis is significant based on the fact that it will help the company to negotiate for appropriate terms that are in line or linked to the structure of the business. It is also important to put into consideration the fact that pros and cons exist in the endeavor by the Kitchen Maid Company to license its production and sale of dishwashers to the Nouvelle Cuisine de France and Deutschland Kitchenland companies. Kitchen made should also analyze the regulations that exist within the European market. As highlighted by the case Kitchen Maid has its headquarters in the United States. What is evident is that in despite of the fact that common laws in international trade do exist, different regions of the world have certain regulations. For instance one of the EU regulations on licensing is that a licensor may give consent to licensee to distribute the company’s products with the use of a trade mark. The licensee is usually allowed to use the trade mark without any sort of fear that the licensor may claim their trademark (Raysman, 2008). Due to the fact that Kitchen Maid Company has the intention of market expansion in the European region, it is crucial for the company to examine the regulations that exist in the region. Some of the key area of analysis should involve trade tariffs, intellectual property and the licensing of production. Efficient negotiation of the plans is also a significant aspect. It is vital for Kitchen Maid Company to adequately negotiate its plans with the management of the two companies. As a result, all the parties will be able to sign a contract deal in which the contribution of every party is clearly outlined. In addition the company can also safeguard its plans through pursuing an insurance cover for every deal it engages in. Conclusion From the above discussion the two case studies have provided a unique evaluation of international business transactions. What is evident is that complexity does exist when undertaking international business transactions. This therefore calls for the need of effective analysis of the various existing business options. In addition it is essential for businesses operating within the international business network to fully understand the laws that exist within the various markets. References American Conference Institute.(1997) . Negotiating and Structuring International Business Transactions. ACI Publications, New York. Anderson, P, 1997, International Business Transaction, Sage. Brand, A.(2000).Fundamentals of international business transactions. Kluwer Law International. Hinkelman, E , Manley, M , Nolan , J , Shippey, K, 2005, Importers Manual , World Trade Press. LeRoy, M and Jentz, G, 2009, Business Law Today: Comprehensive, Cengage Learning. Miller, R, 2012, Fundamentals of Business Law: Summarized Cases, Cengage Learning. Oettinger, M, 2010, Succeed in international business, business planning, Sage . Raysman, R, 2008, Intellectual Property Licensing: Forms and Analysis, Law Journal Press. Ralph , H, Folsom, Wallace, G,. Spanogle, John , A , and Peter L. Fitzgerald, 2009 , International Business Transactions: A Problem Oriented Coursebook, Tenth Edition, West Group. Schaffer, R and Agusti, B,2008, International Business Law and Its Environment, Cengage Learning. Suvanto , S ,1998, Negotiating international Business Transactions- A Scandinavian approach , p1-7. Shleifer, A, 1998, State Versus Private ownership, Massachusetts Cambridge. U.S Uniform commercials Code (UCC) United Nations Convention on Contracts for the International Sale of Goods, 2010, United Nations publication. Read More