There may be times in your exporting endeavours where you find that, although there is an attractive market open to you, you cannot compete in this foreign marketplace because of the low prices you encounter (in fact, this is likely to be a common occurrence). The question arises as to what you should do. We have already discussed the possibility of adopting a marginal costing strategy which could have a major impact on your export price, but which carries with it the danger of being accused of dumping. Being accused of dumping would not only ruin your reputation but could turn the market against you and result in you being driven from the marketplace. So what other options are open to you? We discuss a number of strategic approaches below that you could adopt to overcome the problem of extremely low prices in foreign markets:
- Eliminate costly financial features or even lower the product quality in the case of products destined for less sophisticated markets, e.g. those intended for developing countries. For example, labour-saving features in a product have little value where labour is plentiful and where little importance is attached to time-saving. Similarly, the ability for machinery to hold close tolerances is of no value if people are not quality-conscious.
- You may also want to consider modifying a product so that it will qualify for a different or lower rate of import duty.
- Consider shipping your goods in knocked-down form, as products may be charged lower duties if they imported in knocked-down form and then re-assembled in the country of destination.
- Aim at shortening your channels of distribution, although this may often difficult to do. The Internet, for example, is increasingly being used by manufacturers to sell direct to end-users.
- Arrange to have goods assembled in a free trade zone (FTZ) in the importing country.
- An investment in an off-shore production facility can be made to remain competitive in the foreign market.
FTZs as a way of lowering costs
A free trade zone -FTZ (or export processing zone – EPZ) is an area in which imported goods can be stored or processed without import duties being payable until such time as the goods leave the zone and enter the foreign market. Processing can include repackaging, cleaning, grading, assembling and light manufacturing. There are currently more than 300 FTZs in the world today. A bonded warehouse can also serve this purpose
Having products assembled in an FTZ, the exporter can lower costs in a variety of ways:
- Tariffs may be lower if duties are assessed at a lower rate for unassembled goods than for finished products
- If labour costs are lower in the importing country, substantial savings can be realised in the final product cost
- Ocean freight rates are governed by weight and volume unassembled goods consequently may qualify for lower freight rates
- If local content (e.g. packaging or component parts) can be used in the final assembly, import tariffs may be further reduced