Analysing the process of exporting wooden products in ansoco, ltd

L HOCHIMINH aIYUNIVERSIIY OF FOREIGN lANGUAGES - INFORMATIONlEQINOLOGY SCHOOL OF FOREIGN LANGUAGES GRADUATION PAPER TOPIC: : ADVISOR: MR IRo'ONG QUANG IUAN, MBA STUDENT: CAOCII CHllc CLASS:KA9804 HeM JULY 2000 ACKNOLEDGEMENT I would like to express my many thanks for the lecturers and professors of English Department of HUFLIT University for the knowledge that I have been taught during the past four years I am deeply indebted to my advisor, Mr Truong Quang Tuan, MBA for his valuable advice, suggestions, comments, criticism, correction and encouragement during the development of this paper I also would like to express my sincere thank for my colleagues at the Accounting Department and the Sales Department of ANSOCO, LTD; especially Mrs Nguyen Thi Thu for their assistance in providing me with necessary materials and sample documents Finally, I also would like to thank my friends for their interests and encouragement for me during the preparation of this paper CAO CU CHUC July 2000 •• ABSTRACT The knowledge, procedures and steps necessary to perform an international sales contract arc quite complicated The basic knowledge on international trade is given as a first part of the paper which provides some issues about international delivery terms of sales recognized and accepted worldwide Some means of international payment arc also given here; namely Bill of Exchange and Promissory Note; they are analyzed in detail on how to use them Next, the modes of payment are discussed; they are ranked from the most secure term: Cash in Advance to the least secure term: Open Account Careful analysis is focussed on Letter of Credit (LC) as the most popular and most complicated mode of payment used in international payment The second part of the paper deals with all the technical aspects relating to the establishment and performance of an international sales contract at An Suong Producing and Trading company , LTD a brief introduction to ANSOCO activities and its product line is given first, then the most important and most frequently used clauses in a contract are analyzed in detail there Next, shipping and payment documents such as Commercial Invoice, Packing List, Bill of Lading etc are defined and instructed to prepare on the purpose of fulfilling shipment delivery and getting paid Common errors and mistakes which occur during the preparation of these documents are identified and the ways to correct them are also introduced To affect shipment, customs declaration and customs inspection must be carried out; so the procedure o.f these processes are briet1y presented To obtain payment, which is the most important thing and the final purpose of exporting, is left at the end of the exporting process as the result of a lot of hard work and efforts Although disputes occurring during the execution of the contract are unexpected, they exist in most of the business transaction The last part of the paper points out typical disputes and some suggestions to settle these disputes as well as the ways to reduce them to a minimum level Further research needs to be conducted to find methods to minimize risks in the exporting field and expand the scope to other foreign market entries L Advisor: Truong Quang Tuan, MBA Graduation Paper INTRODUCTION As a Vietnamese saying goes: "Phi thltong bilt phil", it means that without trade wealth is impossible The saying may, more or less, exaggerate the importance of trade but the generalization is an excellent conclusion drawn from the practice and experience of our forefathers and is well proven in today reality In the primary stage of human society, there was no trade; prehistory men had to consume whatever food they found He may get lot of grain, fruits and could catch big animals at a time or get nothing at another When he got much food he had to eat all or otherwise it would be spoilt by the open air, humidity, heat and sun light Gradually, they knew that they should barter what they had with other people to get things that they could not obtain by themselves That process enabled them to get a variety of goods and it's the primary form of trade a For a larger extent, that is in national scope, there are two economic factors that make international trade possible and popular: First, countries have different factor endowments on land, material resources, labor, capital and technology; therefore, each country may specialize in producing the goods that they can produce with the least cost in exchange for other goods produced by other countries This theory, developed by Adam Smith in 18 century, is called the theory of absolute advantage Second, the difference in productive condition among countries also leads to comparative advantage International trade plays an important role, because it is able to increase the consumption of a country, it allows a country to consume all the products with larger quantity compared with the amount that it uses within the limit of its own production capacity if it does not participate in international trade International trade also plays an important role in the growth and development of a country Specialization will lead to an increase in world output and; therefore, via world trade, to an increase in the welfare of the countries involved This is the answer to the question why trade takes play across international boundaries As mentioned above, gains can be made from international trade or there is an interdependence among nations in the process of existing and developing However, participating in international trade is not a decision made overnight, it depends very much on the knowledge, the experience, the capital and the most important factor: human resource In order to enter the foreign markets, there are three modes of entry, namely exporting, joint venturing and direct investment; the below figure will illustrate the market entry strategies Page L • Graduation Paper Advisor: Truong Quang Tuan, MBA , EXPORTING DIRECT INVESTMENT INDIRECT DIRECT' ASSEMBLY FACILITIES MANUFACTURING FACILITIES rt 'EftM AMQUNTQF CQMMITMENTS,RISK, CONTROL AND PROFIT POTENTIAL It's obvious that the more descending to the left, the more amount of commitment, risk, control and profit potential we get So exporting is the simplest way to enter a foreign market, to take part in international trade Nevertheless, although it is the simplest method of the three, there is much complication in practice Penetrating a foreign market usually begins with the market research, the analysis of market opportunities must be carefully conducted, as people of different cultures, locations will not ve the same taste toward the same product For example we can not export beef to India or pork to Iran, Iraq, because of religious belief People in these countries consider these foods as a taboo We must also be aware that the foodstuff, especially seafood exported to ED market must obtain a very high hygiene condition to be accepted The process of negotiating and signing a sales contract, method of export financing, transporting the goods can be very complex that requires great care, and expertise Due' to limited ability and knowledge, and this field is very complicated and broad, the research only focuses on the most basic knowledge relating to the process of performing an international sales contract, the issue and documents involved Page L Advisor: Truong Quang Tuan, MBA Graduation Paper ~ CHAPER I: COMMON KNOWLEDGE ON FOREIGN TRADE & INTERNATIONAL PAYMENT l.WHAT ARE INCOTERMS? It is absolutely necessary for the seller and the buyer to have a very clear understanding of term of delivery they involve themselves in since different laws contain different solutions for the pertaining to who will arrange and pay for the carriage of the goods from the seller's works/factory/warehouse to the buyer's premises, who bear the risk if these operations cannot be carried out and who will bear the risk of loss of or damage to the goods in transit The International Chamber of Commerce (ICC) has set out the Incoterms to overcome the problems of conflicting national laws and interpretations by establishing a standard set of trade terms and definitions that offers "neutral rules and practices" As such, the Incoterms are used world-wide, and have become part of the sales contract if agreed between the seller and the buyer by simple reference to one of the trade terms expressly stating that it should be interpreted according to Incoterms Thus, uncertainties of different interpretations of such terms in different countries can be reduced to a considerable degree It helps the parties involved to reach a compromise So, Incoterms are internationally accepted trade terms which determine the passing of risk and the passing of costs under an international sales contract The terms have been grouped in four basically different categories Namely starting with the only term whereby the seller makes the goods available to the buyer at the seller's own premises (the "E" term: Ex-work); followed by the second group whereby the seller is called upon to deliver the goods to a carrier appointed by the buyer (the "F" term, FCA, FAS &FOB); continuing with the "C" terms where the seller has to contract for caniage, but without assuming the risk of loss of or damage to the goods or additional cost due to the events occurring after shipment and dispatch (CFR, CIF, CPT and CIP); and finally the "D" terms whereby the seller has to bear all costs and terms and risks needed to bring the goods to the country of destination (DAF, DES, DEQ, DDU and DDP) Incoterms were first published in 1936, amendments and additions were later made in 1953, 1967, 1976, 1980, 1990 in order to bring the rules in line with current international trade practice However, Incoterms haven't been perfect, the revised edition called Incoterms 2000 has come into effect on 01-01-2000 A chart setting out the current classification of Incoterms 2000 is as follows: Page Advisor: Truong Quang Tuan, MBA Graduation Paper INCOTERMS Group E De arture Group C Group D Arrival 2000 EXW Ex-work FCA FAS FOB Free carrier Free alongside ship Free on board CFR CIF CPT CIP DAF DES DEQ DDU DDP Cost & freight Costs, insurance and freight Carriage paid to Carria e and insurance Delivered at frontier Delivered Ex ship Delivered Ex quay Delivered duty unpaid Delivered duty paid The figures illustrated the division of risks and costs and other expenses between the buyer and the seller is given hereafter: ~ EXW Risks, costs PAS Risks, costs PCA Risks, costs PCA Risks, costs • POB Risks, costs i • • Risks CPR CIF DES DEQ DDU DDP [~osts [RiSkS Costs, premium Risks, costs Risks, costs (duty paid) Risks, costs (duty unpaid) Risks, costs, (duty paid) Page L Graduation Paper Advisor: Truong Quang Tuan, MBA POPULAR INTERNATIONAL TRADE TERMS OF DELIVERY USED IN VIETNAM As mentioned above, there are 13 terms of delivery used worldwide, but due to limited space and the popularity of some terms in Vietnam, the presentation of Incoterms will rather be confined to FOB, CIF, and C&F a FOB (Free On Board '" named port of shipment) Free on board means that the seller fulfils his obligation to deliver when the goods have passed over the ship's rail at the named port of shipment This means that the buyer has to bear all costs and risks of loss or damage to the goods from that point In this term the responsibility of the seller and the buyer are stipulated in the following: The Seller Must: Provide the goods and the commercial invoice or its equivalent electronic massage in conformity with the contract of sale and any evidence of conformity which may be required by the contract At his own risks and expenses, obtain any export authorization necessary for the export of the goods license, export quota, or other Deliver the goods on board the vessel named by the buyer at the named port of shipment on the date or within the period stipulated and in the manner customary at the port Bear all costs and risk of the goods until such time as they shall have effectively passed the ship's rail at the named port of shipment, including any taxes, fees or charges levied because of exportation, as well as the costs of any formalities which he shall have to fulfill in order to load the goods on board Give the buyer sufficient notice that the goods have been delivered on board Pay the costs of packing, any checking operation, checking quality, measuring, counting which are necessary for the purpose of delivery the goods weighing, At the buyer's request, risks an expense, assists him in obtain any documents or equivalent electronic messages issued or transmitted in the country of shipment and/or origin which the buyer may require for the important of the goods, where necessary, for their transit through another country Provide the buyer upon request, with the necessary information for procunng msurance The Buyer Must: Pay the price as provided in the contract of sale Obtain at his own risk and expense any import license or other official authorization and carry out all customs formalities for the importance of goods and where necessary for their transit through another country At his own expense, charter a vessel or reserve the necessary space on board a vessel and give the seller due notice of the name, loading berth of and delivery dates to the vessel Page L_ Advisor: Truong Quang Tuan, MBA Graduation Paper Bear all costs and risks of the goods from the time when they shall have effectively passed the ship's rail at the named port of shipment, from the agreed date or the expiry date of the agreed period for delivery which arise because he fails to give notice to the seller of the vessel name, loading point and required delivery time or because the vessel nominated by him fails to arrive on time, or unable to take the goods or closes for cargo earlier that the time notified; provided, however, that the goods have been clearly appropriated to the contract, that is to say, clearly set aside or otherwise identified as the contract goods b C&F (Cost and Freight named port destination) "Cost and Freight" means that the seller delivers when the goods pass the ship's rail in the port of shipment The Seller Must: Pay the costs and freight necessary to bring goods to the named ort of destination but the risk of loss of or damage to the goods, as well as any addition costs due to events occurring after the time of delivery are transferred from the seller to the buyer That means he must bear all risks of loss of or damage to the goods until such time as they have passed the ship's rail at the port of shipment Contract on usual term at his own expenses for the caniage of the goods to named port of destination by the usual route in seagoing vessel for the type normally used for the transport of goods of the contract description The seller must at his own expense provide the buyer without delay with the usual transport document for the agreed port of destination This document (for example a negotiable Bill of Lading) must cover the contract goods, be dated within the period agreed for shipment, enable the buyer to claim the goods from the carrier at the port of destination, unless otherwise agreed, enable the buyer to sell the goods in transit by the transfer of the document to subsequent buyer (the negotiable Bill of Lading) or by notification to the carrier The Buyer Must: Whenever he is entitled to determine the time for shipping the goods and/or the port of destination, give the seller sufficient notice thereof Accept delivery of the goods when they have been delivered on board the vessel at the port of shipment of the dated or within the agreed period and receive them from the carrier at the named port of destination Bear all risk of loss or damage to the goods from the time they have passed the ship's rail at the port of shipment Pay all coast relating to the goods from the time they have been delivered and all costs and charges relating to the goods whilst in transit until their arrival at the port of destination, unless such cost and charge were for the seller account under the contract of carriage Page Advisor: Truong Quang Tuan, MBA Graduation Paper Unloading costs, including lighterage and wharfage charges, unless such cost and charges were for the seller's account under the contract of carriage All additional costs incurred if he fails to give notice to the seller, for the goods from the agreed dates or the expiry date of the period fixed for shipment, provided, however, that the goods have been duly appropriated to the contract, that to say, clearly set aside or otherwise identified as the contract goods, and when applicable, all duties, taxes and other charges as well as the contract of carrying out customs formalities payable upon import of the goods and, where necessary, for their transit through any country unless included within the cost of the contract of carriage c CIF (Cost, Insurance and Freight named port destination) The CIF term is similar with the C&F term, however, in this term the seller has to contract for insurance and pay the insurance premium, the buyer should note that under CIF term the seller is required to obtain insurance only on minimum cover of the Institute Cargo Clauses Should the buyer wish to have the protection of greater cover, he would either need to agree as much expressly with the seller or to make his own extra insurance arrangement The minimum insurance shall cover the price provided in the contract plus ten per cent (110%) and shall be provided in the currency of the contract So we can see that Incoterms are critical for developing an export or import-costing sheet In addition, should a dispute arise, Incoterms are the only international trade terms recognized in a court of law Feasibility of any transaction (profit) requires exporters and importers to understand the costs and risk associated with any international transaction: responsibility for shipping costs, purchasing insurance, customs clearance and duties, etc If something should go wrong during transportation (risk), who has title to the goods and where, exactly, does title (risk) transfer? THE SUMMARY OF RESPONSIBILITY OF THE BUYER & THE SELLER Free On Board (FOB) All costs and risks until the goods pass the ship's rail (loading onto ship) Costs and risks transfer to the buyer when goods pass the ship's rail Cost and Freight (CF) Costs to port of destination (freight and other charges, additional documentation and freight forwarder's fees) Risks assumed once the goods are loaded at the exporter's port of shipment Must consider marine insurance plus all costs after ship arrives at port of destination , I Page Graduation Paper " s Advisor: Truong Quang Tuan, MBA CUSTOMS DEClARATION ' Customs procedure is an international conventional Customs officers, who are regarded as the guards of the country's door, are to protect domestic goods from the invasion of imported goods Customs procedure is indispensable in import-export trading because exported goods must get the customs officers' permission to be transported internationally and imported goods must be completed customs procedures to be entered domestic market Customs procedure is obligatory to every business engaging in import-export a tool of governmental management, protecting domestic production, sovereignty and national security trading as it is the benefits, Customs procedure also aims at discovery, preventing of violation of customs decree and other rules and regulations relating to import-export trading Customs regulations of one country differ from that of the other; moreover, customs procedure in customs points in a country is also different from the others However, customs procedure in Vietnam can be summarized as in the following figure: SUBMISSION OF DECLARATION The customs procedure in ANSOCO if performed as the following: Basing on the signed contract with foreign partner and the notification from warehouse staff that the goods are ready the sales department proceed to prepare the commercial invoice, packing list, and customs declaration A full set of customs declaration includes: - • Customs declaration (3 sheets of the same serial number) • Sale contract ( I copy) • Invoice (2 copies) Page 44 , NguOi xual kh~u, nul , '? 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