There are many risks involved in exporting and in this section we briefly cover the main risks you are likely to encounter.
- Credit Risk
- Poor Quality Risk
- Transportation & Logistic Risk
- Legal Risk
- Political Risk
- Unforeseen Risk
- Exchange Rate Risk
- Cultural & Language Risk
1) Credit Risk:
In most instances – mainly because of the large distances and alien environments involved – it is generally difficult for the exporter to verify the creditworthiness and reputation of an importer. If the creditworthiness of a foreign buyer is unknown there is the increased risk of non-payment, late payment or even straightforward fraud.
2) Poor Quality Risk
If the goods to be exported are not inspected before they are shipped by an independent third-party, the exporter may find his entire shipment being rejected on arrival at the importer’s premises due to the poor quality of the goods. Some unscrupulous importers may do this just to put pressure on an exporter and to try and negotiate a lower price – be careful!
Alternatively, it may be a good idea to ship one or two samples of the goods being produced to the importer by an international courier company. This small task will ensure that if the importer accepts the quality of the sample goods and (this is important!) the main consignment is produced to the same standard, then it will be difficult for the importer to reject the consignment (unless something happened to the goods during shipping.
3) Transportation & Logistic Risk
With the movement of goods from one continent to another, or even within the same continent, goods face many hazards. There is the risk of theft, damage and possibly the goods not even arriving at all.
4) Legal Risk:
International laws and regulations change frequently and/or may be applied differently from that of the exporter’s own country. It is, therefore, important that the exporter drafts a contract in conjunction with a legal firm, thereby ensuring that the exporter’s interests are taken care of. The exporter should draw up a checklist of basic legal questions aimed at the importer prior to signing any formal contract.
5) Political Risk:
The political stability of a foreign country into which a company is exporting is of the utmost importance. Exporters must be constantly aware of the policies of foreign governments in order that they can change their marketing tactics accordingly and take the necessary steps to prevent loss of business and investment.
Instability in the target market could lead to losses resulting from war, civil strife, and political instability. It is essential to warn exporters to be aware of government intervention in the target market.
6) Unforeseen Risk:
A natural disaster or terrorist action in a particular country could completely destroy an export market for a company. Unexpected occurrences may also increase the cost of transport causing great loss to the exporter. It is, therefore, important that the exporter ensures that a force majeure clause is included in any international contract the exporter concludes.
7) Exchange Rate Risk:
The exporter must approach the Foreign Exchange division of his bank prior to quoting any prices internationally, in order to obtain advice and the movement of the Indian Rupee.
A strategy that the exporter could follow in order to protect against the influence of exchange rate movements is to hedge against such movements through the purchase of forward exchange rate contracts.
8) Culture & Language Risk:
Misunderstandings in communication and in international trade transactions arise because in most instances the importer and exporter come from different cultures and express themselves with different languages. In most instances, business practices, tax systems, rules and regulations, accounting methods, currency controls and customs systems all differ from that of the exporter’s own country.
The exporter must ensure that he fully understands these differences and often an in-market visit to the intended country of export will greatly assist the seller in having a better understanding of his intended marketplace and the culture differences (s)he may encounter.