International Business Transactions - Michael Motson - Assignment Example

RUNNING HEAD: INTERNATIONAL BUSINESS TRANSACTIONS International Business Transactions Name Institution Date Introduction International Business Transactions are in most cases complex as opposed to local business transactions. It is against this backdrop that appropriate structuring and clear contract guidelines should be devised in order for the involved parties to attain their intended benefits. International Business Transactions encompass various issues that vary from imposed tariffs, financial issues, varying markets, legal frameworks and company structures among many other issues. This particular paper therefore seeks to provide an analysis of two case studies that raise a variety of issues concerning international business transactions. Furthermore the case study analysis will be grounded on evaluating and providing valid solutions concerning the issues in question. The solutions provided will be backed by a variety of literatures that are relevant to the issues in question. Question 1 Case Synopsis Michael Motson a New York based business man has been presented with two international business opportunities that have great probability of profitability if structured suitably. The first transaction entails procuring steel from a Brazilian steel manufacture, located in Sao Poulo. Motson is to procure 5,000 metric tons of 41 steel which he will later supply to the Canadian shipbuilding company located in the outcasts of Halifax. Matson is looking forward to a good business deal with Juan Salazar, CEO of Salazar Steel, a Brazilian steel producer situated in Sao Paulo. Salazar proposal to Matson entailed the selling the selling of the 5, 000 metric steel that had a guarantee of purity 1.6% carbon, for $10 million. Salazar further proposes that the steel was to be packaged onto Bigman Carriers thereafter they would depart from the Brazilian port on the 1st of March and it should arrive in New York on the 10th of March. According to the specifications given by Salazar, Matson was to make payments to Salazar Steel through the Sao Paulo Bank not later that the 8th of March. After the meeting with the CEO of Salazar Steel, Matson later met Billy Bashford, the Canadian shipbuilding company C.E.O. Bashford’s proposal was that he was ready to buy from Matson 5, 000 metric tons of 41 steel ingots, with a purity warranty of not more than 1.6% carbon, for $11 million. However he laid a condition that the steel was required to arrive in Halifax port by March 25. The implication is that the Journey would have to begin from New York by 20th march. Furthermore Bashford proposed that Matson should transport the steel through the use of Bigman carriers. However, Bashford would not pay for the steel delivery until the 21st of March, due to the fact that he did not have cash available. Ways of structuring the transaction(s) According to the American Conference Institute (1997) international business transactions can be structured in a systematic manner to ensure that each party involved benefits from the transaction. What is evident from Matson case study is that undertaking international business transaction can be described as complex in nature essentially due to the various risk factors that are associated to the entire business process. Some of the risk factors include strict regulations, fluctuations and transport risks. In addition the transactions have timelines and entail the transportation of goods across two different countries. As a result it is vital to adopt effective strategies of structuring the transaction, in order to avoid any sort of complexity or challenge. Endorsement of a Sales contract One key step in the structuring of the transactions is the endorsement of a Sales contract. Mason needs to consider the endorsement of a sales contract between the two business parties Salazar the CEO of Salazar Steel and Billy Bashford the CEO of Bilder Bay Shipbuilders. The sales contract should have a clear description of the terms of agreement regarding the shipment of the steel form one country to another. In addition the stated timelines of the transactions and the payments should also be clearly outlined by the sales contract. Brand, (2000) highlights that; it is vital for every party involved in the transaction to go over the details of the transaction and afterwards sigh a memorandum of understanding. When making an analysis of the first transaction between Matson and Salazar Steel Company, certain aspects have to be considered when designing the sales contract. In the event that an agreement is drawn between Matson and Salazar concerning the proposed shipment of steel, the sales contract based on the timelines and the payment will be drafted in the following manner; The Salazar Steel company will make a sale of 5,000 metric tons of 41 steel ingots, to Matson with a warranty for purity not more than 1.6% carbon, worth $10 million. On Ist March the 5,000 metric tons of 41 steel ingots will leave the Brazilian port through the Bigman Carriers and arrive in port of New York on 10th March. Matson will then make payments for the 5,000 metric tons of 41 steel ingots to Salazar Steel through the Bank of Sao Paulo, not later than 8thMarch. The Salazar Steel company will thereafter structure the transaction in order to ascertain that every procedure is executed as planned. When evaluating the second transaction between Matson and Bashford. In case both parties agree to proceed with business concerning the shipment of the specified steel, the sales contract based on the timelines and the payment will be drafted in the following manner; Matson will make as sale of 5,000 metric tons of 41 steel ingots to Bilder Bay Shipbuilders with a purity warranty not more than 1.6% carbon, for $11 million. On March 20 the 5,000 metric tons of 41 steel ingots will depart form New York harbor and by March 25 it is expected to arrive at the port in Halifax through the Bigman carriers. On 21 March, Bilder Bay Shipbuilders are expected to make payment to Matson through the Bank of Halifax. Matson’s bank; the City bank is then expected foresee the fiscal measures that exist in Matson’s account. The Letter of Credit A letter of credit can be described as a technique of guaranteeing that the person shipping the products or the shipper is paid and the person purchasing the product gets their shipment (Raworth, 1991). The letter of credit is basically an effective manner of making payments for freight; however it is not a solid guarantee of obtaining full payment. However a letter of credit can be perceived as a promise to pay which is made credible by involving the bank. The bank does the issuing of the letter of credit as a method of ensuring that the seller gets paid as long as they do what they were supposed to do. In this context Bilder Bay Shipbuilders are expected to make payment to Matson through the Bank of Halifax, as agreed when he meets his side of the deal. Ralph etal (2009) reveals that a letter of credit is in most cases common when making international business transactions due to the fact that the bank functions as an interested party between the seller and the buyer. In addition the letter also assists all parties to put into consideration and evaluate all the expenses that are involved in the transaction. For instance it is evident that Matson has to put some factors into concerning the operating costs that will be incurred in the course of these transactions. For example, some of these key aspects to be considered include the cost of shipping insurance from Sao Paulo to New York and from New York to Halifax. These expenses roughly add up to $80,000. It is essential that Matson puts into consideration the fact that his current capital of $100, 000. Furthermore it is vital that he should look for more capital from his bank, Citibank in order to ascertain that he undertakes the transactions without any sort of deficit. As argued by Ralph etal (2009) international business transactions in most cases require additional capital due to possible fluctuations , changing market forces , quotas , duties, regulatory requirements that can alter the present value of foreign currency . The figure 1 below illustrates a diagrammatic presentation of how the entire transaction can be structured in summary; Figure 1 Alternative ways of structuring the transactions An essential alternative strategy of structuring the transactions is through negotiation. Matson’s objective was to be part of the transaction as a middle man through the two proposals offered by Salazar Steel and Bilder Bay Shipbuilders. His other objective was to make a profit of a million dollars. Matson holds a capital of 100, 000, however additional expenses can be incurred in terms of shipping and insurance costs from Sao Paulo to New York and from New York to Halifax. Another crucial factor to consider is that on 9th March the United States government will make a decision on whether to impose a countervailing duty of up to 50% on Brazilian steel. Negotiation is an essential strategy for Matson to adopt in order to remedy the condition and actualize his one million dollar profit. Matson should negotiate for certain terms in the agreement he makes with the two parties. First, he should negotiate that his bank in this context the City bank should be the manager of the transaction. This particular provision will ensure that Matson’s bank offers insurance devised to protect transactions that are in most cases perceived as risky. In addition, the Citibank would give assistance and credit in foreseeing these particular transactions. Secondly, another essential move in negotiation is for Matson to negotiate for a suitable date in which Bigman carriers can deliver the 5,000 metric tons of 41 steel ingots in order to prevent experiencing the countervailing duty of up to 50% on Brazilian steel that the US government is intending to impose by 9 March (American Conference Institute 1997). As a result of the stated negations the contract terms and the structure of transaction will be undertaken in the follow manner; Citibank will structure and oversee every stated transactions Salazar Steel Company will then sell to Matson 5,000 metric tons of 41 steel ingots for $10 million, with a warranty for purity not more than 1.6% carbon. On 28 February, the 5,000 metric tons of 41 steel ingots will depart from the Brazil port through the Bigman Carriers and by March 8 they should arrive in New York. Matson will thereafter make compensation through his bank Citibank for the 5,000 metric tons of 41 steel ingots not later than 8 March to Salazar Steel through the Sao Paulo Bank. Matson will thereafter make the sale of 5,000 metric tons of 41 steel ingots, with a warranty for purity not more than 1.6% carbon, for $11 million to Bilder Bay Shipbuilders On March 20th the 5,000 metric tons of 41 steel ingots will leave New York harbor and arrive at the port in Halifax through the Bigman carriers by March 25. On March 21 Bilder Bay Shipbuilders will make payment to Matson through the Bank of Halifax. Fiscal measures on Matson account would then be performed on The Citibank. Question 2 Case Synopsis Kitchen Maid is one of the prominent dishwasher producers in the United States. The company has made sales of $3 billion dishwasher’s around the world. The company has predominantly sold its dishwashers in Europe for the past seven and a half years through the assistance of an Italian agent known as Gepetto & Sons. The contract between Kitchen Maid and Gepetto & Sons was that as Kitchen Maid’s agents, Gepetto & Sons would receive a payment of 10% percent commission on every sale of dishwashers. During the previous seven years, Kitchen Maid has enjoyed success due to the fact that Gepetto & Sons doubled the sales of dishwashers in Europe. The company has expectations to boost its sales in the European market to about $800 million in 2009; which is roughly a 10% increase. At the start, Kitchen Maid and Gepetto & Sons signed a one year contract that was to be terminated by 31 December 2002. Ever since, the contract between the two companies has been subject to renewal through the letter exchange as ever year ends. Kitchen Maid is considering the possibility of two alternative plans regarding the European market essentially due to raising competition in the market. The first initiative is to end its contact with Gepetto & Sons at the end of 2009 in order to pursue other initiatives. The first plan the company has is to license its sales and production to both Nouvelle Cuisine de France and Deutschland Kitchenland. The second initiative is that the Kitchen Maid Company management planned to acquire the Deutschland Kitchenland, produce Kitchen Maid dishwashers in the Deutschland factories and discontinue manufacturing some of the their dishwasher’s. The fresh brand would sell the Deutschland products under its own trademarks while the Kitchen Maid products would be sold under the company’s trademark. Furthermore market expansion would be undertaken by the Kitchen Maid Deutschland products by selling in northern European Union countries through the well- advanced distribution channels in the Deutschland. In other countries within the European Union, the Kitchen Maid Deutschland products would be sold for a few years at a "special introductory price" of approximately 50% of the prices that KMD will be able to change within northern Europe for the purpose of establishing a firm market position. Issues Raised by KitchenMaid Plans One of the major issues of concern is that Kitchen Maid faces two major competitors in Europe market, these competitors include, Deutschland Kitchenland which is a dominant player in the northern European market with a yearly dishwasher sales of $500 million. The other competitor is the Nouvelle Cuisine de France which is a dominant player in the Southern European market; the company attains an annual dishwasher sale of $300 million. On the other hand, the French government owns 20% of Nouvelle Cuisine de France. Both Nouvelle Cuisine de France and Deutschland Kitchenland are advantaged to benefit from a 15% protection of European Union tariffs on dishwashers. Another issue that can be raised from the case is that the Kitchen Maid Company is faced with challenge of raising its sales across Southern and northern European market. Consequently another challenge facing the company is that a huge sum of commission payments made by the company is transferred to European Union tariffs and Gepetto & Sons commissions. Regardless of the fact that the company enjoys a sale of $3 billion dishwashers across the world, a large portion of its revenue is consumed by Gepetto & Sons, the company’s sales agents in Europe. The costs are majorly incurred from the high European Union tariffs and commission payments. Kitchen Maid also wants to terminate its long term contract with Gepetto & Sons (GS) which can have certain implications to the company based on the fact that Gepetto & Sons (GS) has had a long term standing on the European market. Furthermore an additional issue arising from the Kitchen Maid business affairs is the planned action by the management to acquire the Deutschland Kitchenland, termination of manufacturing some of the their dishwasher’s and producing Kitchen Maid dishwashers in the Deutschland factories. All these activities can rather be termed as complex if not effectively managed. Aspects to put into consideration As the Kitchen Maid Company’s management endeavors to license the production and sell its dishwashers to Nouvelle Cuisine de France and Deutschland Kitchenland, there are a number of important factors that the management should put into deliberation. Foremost it is essential to consider the fact that the management of these businesses may to some extent be resilient to the proposed deal, due to the fact that the companies have there own stable brands within the European market. In addition the two companies have benefited from the 15% cut off on tariffs on dishwashers provided in the European Union market. Ralph etal (2009) highlights that the modes of involvement within a foreign market can to great extents be complex depending on the operating strategy adopted by a business. The framework adopted by the company can be perceived as a strategic alliance whereby a company seeks to form an alliance with other companies in order to combine their competencies and commitments in order attain a greater goal (Ralph etal, 2009). However, if these companies agree to the proposal offered by the of the Kitchen Maid Company’s management, the business should put into consideration certain essential aspects. These include the Legal and Financial issues that relate to the presented proposal of licensing the production and the sale of its dishwashers to Deutschland Kitchenland and Nouvelle Cuisine de France. According to Brand, (2000) licensing is broad based foreign operation strategy that entails a variety of factors such as the sell of patent, technical advice and manufacturing know how. The financial considerations made include the fact that the management service provider earns management fee which is frequently expressed as a percentage of the gross revenue. In addition the service provider may in actual sense make more earnings than what the original business owners earns. Based on these particular considerations Kitchen Maid should make consultations with attorneys and financial personnel in Europe due to the fact that they are familiar with the financial matters and international trade regulations. Consulting the experts is vital in order to make certain that the company does not blindly and involuntarily engage in a legal binding that could land the company into serious problems in the future (Brand, 2000). It is also essential for the company to put into consideration the fact that the European market is actually a key market that the management should effectively analyze. Kitchen Maid Company should undertake Market research on certain aspects concerning the European market essentially on the aspect of the production and sale of dishwashers. For instance the company should undertake a survey on the various aspects that spearhead brand loyalty among the population in the Southern and the Northern European market. Furthermore, the research should have the objective of identifying whether their products will result to substantive sales that make the company’s investment of licensing the products and sale of its dishwasher’s to Deutschland Kitchenland and Nouvelle Cuisine de France valuable. Another essential aspect to be considered is the current operational state of the two proposed companies. For example the government of France holds 20% of the Nouvelle Cuisine de France. As a result the management of Kitchen Maid Company should evaluate if the company is carrying out its operations as a separate entity or as an integral part of the government. This sort of evaluation is essential since it will assist the company to effectively negotiate suitable terms that are in line with the structures of these particular companies. It is essential to take note of the fact that certain benefits and pitfalls do exist if the Kitchen Maid Company strives to license its sale and production of dishwashers to the Nouvelle Cuisine de France and Deutschland Kitchenland companies. An evaluation of the set regulations within the European market is also very much crucial. Based on the fact that Kitchen Maid Company is considering expanding its European market, it is essential for the management to focus on the laws that exist within the region. Some of the vital areas of consideration include the licensing of production, intellectual property and trade tariffs. Also the aspect of entry into the European market through an offer of reduced costs may bring about certain implications to the company. Kitchen Maid Company is bound to go through a decline or a recession of its revenue since the initiative to produce a new brand is costly, and thus it will take up much of the company’s resources. Ways of improving the company’s plans One of the effective ways of improving the company’s plans is through undertaking a comprehensive research on whether the intended plans are actually beneficial to the company or not . Also consultation from financial experts and attorneys is also vital, especially about international business operations in the European market. Through undertaking research and making consultations with financial experts the company can be able to amend or appraise its intended plans. Effective negotiation of the plans with the proposed companies is also important. Kitchen Maid Company should actively negotiate its proposal with both the management of the Deutschland Kitchenland and Nouvelle Cuisine de France companies. Consequently, the parties should sign a well documented contract that outlines the role played by each party in the production and in sales of the products. Moreover, the KitchenMaid Company can protect its plans by seeking insurance coverage in order to mitigate and respond to the risks that could emerge from the intended plans. Conclusion International Business Transactions are governed by various factors which include legal frame works, the target markets, company structures, financial issues, imposed tariffs among many other issues . It is essential for these transactions to be accurately structured and have precise contract guidelines in order for the parties to attain their intended goals. What is also evident is that risks within the international business framework are inherent as a result counsel should be undertaken from personnel in the financial spectrum and legal. The case studies analyzed above, provide a clear description of issue that arise when making international business transactions. In addition some of the crucial factors to be considered have also been outlined. . References American Conference Institute.(1997) . Negotiating and Structuring International Business Transactions. ACI Publications, New York. Brand, A.(2000).Fundamentals of international business transactions. Kluwer Law International. Ralph H, Wallace M, Spanogle, A.( 2009) .International Business Transactions: A Problem- Oriented Course book. West. . Raworth, P. (1991). Legal guide to international business transactions. Carswell Publishers, UK. Read More