Now Friends in this video, I will talk about seven common mistakes done by the exporters in the export process. So the objective of this video is to understand what are these common mistakes which are done by the exporters in export procedures? And what can be the consequences of such mistakes?
One of the very important and most commonly done mistakes, especially by the new entrants in the export business, is to not do the homework before soliciting any business. So lack of preparation before soliciting the export orders can lead to major problems, which sometimes may lead to the early losses and the failure of the new company to survive. So the consequences of such mistakes can be that the exporter maybe not able to execute export order in the stipulated time. There can be quality issues. There can be poor delivery, and the customer may feel frustrated with the exporter, and it can also lead to financial losses.
So to give you an example. In this example, Pashupati Exports, a new entrant in the rice exports, received an export order for five containers of basmati rice from UAE on LC terms. After the receipt of the order, client sent the artwork to print rice bags. Exporter realised that before doing that, he need to arrange for the food safety licence, which he was not aware, which he came to know only after getting the order. And he also came to know from the C and F agent appointed later by the exporter that there are certain bank formalities which have to be done before being able to book the shipping space, which was to be done very fast because the time period required was not sufficient. Also for rice exports, the exporter had to arrange for LUT, the letter of undertaking for GST waiver and that has to be obtained, which would take good amount of time, may be one week, 10 days time and time was at premium, at this stage. So further the miller of the rice is based around 600 kilometres from the head office of the exporter.
And a third party inspection, which was to be done by SGS, required coordination of the exporter. And since the exporter was not having the good number of employees, he had to run around himself for this coordination. So which required a lot of time and the bag printing company had to be arranged near the Miller, and that was not done earlier. So which further required good amount of time. So overall buyer’s inquiries and monitoring indicated that the buyer was already getting panicky as the progress of the work was delayed and the buyer had his own commitments with his own forward clients in UAE, whom the buyer was supplying these rice bags. So finally, the delay was so much that the exporter had to ask for the extension of the LC validity from the buyer, which the buyer refused, and the exporter had already spent a lot of money on different aspects of the order. And there was a big financial loss for the exporter.
Friends, another very common mistake done by the exporters in a typical export procedure is the failure to screen the buyer or the country, whether the due diligence has been done properly. So such failures are very very common. So lack of sources or the methods of getting the data on the buyer and about the country, the right information is not there with the exporter or he’s not yet prepared to find such information. So these things lead to the failure of the exporter to screen the buyer and the country. And the lack of awareness of the local and overseas regulations governing a product export or destination, so these kind of things lead to such failures.
Another very common mistake done by the exporters in this regard is failure to negotiate right Incoterms, international commercial terms. So the reason of this kind of situation may be the lack of bargaining power or the poor negotiation by the exporter. So generally the most balanced INCOTERM is the FOB, free on board and sometimes to get the business, the exporter agree for the D terms, without realizing the additional costs, which may be involved in taking the goods to the overseas market, getting it unloaded in the destination market, getting it cleared from the customs and moving from the port to the party and paying the import duties. So the total cost incidence of such kind of incoterms can be very, very high. And because of the lack of the bargaining power, the party is not able to even increase the price to that extent. And also, the failure to negotiate the right INCOTERMS, can also be the result of the lack of knowledge about all the different INCOTERMS, the latest ones and how these work?
Another common mistake done by the exporter is the failure to secure the correct LC terms. Now LC is a very complicated banking process of the documents and payments, so it can be in the form of the failure to secure the right payment terms itself. So whether it is LC terms, whether it is DA terms, whether it is DP terms, what kind of terms are there for the payment, the party may not be able to negotiate for different reasons. So this has to be avoided, especially if you’re dealing with the buyer for the first time. And even if, it is able to secure LC terms, the party may be unable to secure the correct LC terms, which I’m talking about. And failure to identify common problems, with the LC conditions, so when LC is opened and the situation come when the beneficiary that is the exporter has to accept or reject the letter of credit. It may fail to identify the inbuilt or inherent common problems, prohibitive problems which can prohibit the exporter to be able to execute the export order. So failure of the knowledge of the LC conditions and the right advice by the local bank. In the absence of such advice, the problems can be there of this type, and sometimes it is also the failure to choose the right currency of the LC. So generally, in order to protect the FX fluctuation risk, it is always advised to secure the LC currency as the home country currency of the exporter so that the exporter is protected from the foreign exchange fluctuation risk. But many a times it is very, very difficult. And generally what happens that the exporter and the importer agree on a third country hard currency.
Then Friends, another common mistake, or the common failure of the exporter in the process is the failure to book the shipping space in a timely manner because the shipping space timing has to be matched with the LC latest date of getting the Bill of Lading that is the transport document. So this kind of failure can lead into delays in shipments or the delays in payments by the banks. Loss of future business, cost of the transport, which may get increased due to the failure to book the shipping space in a timely manner and well in advance. So if that is not happening, the cost of transport is likely to increase drastically.
Then very commonly, if exporter is not experienced enough and for various reasons, he’s picking a wrong service provider so service providers can be the local bank, or it can be the freight forwarder, selected by the exporter, shipping lines, if it has not been nominated by the buyer, which actually has to be avoided. Generally, the shipping line has to be selected by the exporter only, and it should be independent of the control of the buyer. So failure to understand the consequences of the control of buyer on the intermediaries can also lead to major problems and picking of the wrong service providers or the inter modal transport providers. So any of these service provider, if picked up wrongly or some party which is influenced by the buyer, is picked up by the exporter, It can lead to major problems, or it can sometimes also lead to the buyer’s frauds.
So in another example, Messrs. Ricela export from Raipur India received an order from Singapore to supply six containers of basmati rice on LC terms. So Ricela exports appointed a new CNF agent to handle the shipment of exports clearance and to arrange the sea shipment of the consignment. Now, the company arranged very good quality of basmati rice and packed as per the requirement of the buyer and well in time and handed over the shipment to the CNF agent. Now the goods left Vizag port for Singapore. Exporter received the payment also against the letter of credit issued by the buyer’s bank.
But on reaching Singapore goods received by the buyer, were found to be damaged due to the water seepage during the sea journey, since containers were damaged. Now buyer asked for the compensation, failing which it refused to deal with the exporter in future. Now, it was the failure of the CNF agent to get the good quality, proper containers for the rice bags because rice bags are normally jute bags or such bags where the seepage of any water can damage the product. And that is what exactly happened. So it was a new CNF agent, and the exporter selected this CNF agent probably for saving some cost or in a routine manner. And the service provider chosen was not correct. It was not experienced enough and it could not provide the good services. And ultimately it was the loss of the exporter, loss of the future business, loss of the reputation.
Then friends, finally, one of the major mistakes which is done by the exporters in a the typical export process is the failure to do sufficient risk management of the shipment. So risk management of risks like transportation risks. So not having this sufficient insurance cover or the commercial risk, not having the ECGC cover if required, depending on the situation and the failure to protect itself from the foreign exchange fluctuation risk, for example, by negotiating for own currency contracts or hedging through banks or swap contracts. So any failure to protect the shipment from such risk of the foreign exchange fluctuation can also lead to major losses. Or overall inadequate protection of the different processes which are involved in the export process.
So these are the common failures of the exporters and seven major mistakes which are done by the exporters in typical export transaction. TO LEARN ALL ABOUT EXPORTS PROCEDURES, DOCUMENTATION, POLICY AND INCENTIVES, enroll to these courses at https://ebizee.com/udemy/