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Opportunities For Development

In The Current Global Economic CrisisThe Potential of Rapidly Developing

Emerging Economies

Author: Daniel Evans, Co-Founder & Principal, Ormita Commerce Network


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Current Situation

Liquidity for many businesses (and governments) worldwide isstill an issue

Interbank market has stil l not recovered yet

Refinancing is harder to assure

There is a danger of postponement, reduction or cancellationof existing sales

Pressure on profitability of every transaction in a decliningmarket

Highly developed countries are coming under pressure fromthose with lower cost labour

Traditionally profitable markets may be drying up as creditbecomes harder to acquire


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A Changing Sales Environment

This was the biggest, but not the first, crisis

The World Bank has identified 96 banking crises and 176 monetarycrises in recent 20 year period

Such crisis are a remarkably perennial

Financial crisis in developing countries continue to happen despitevery different regulatory systems, different governments, differentdevelopment levels; and at very different times

Developed countries are finding it increasingly difficult tocompete against lower-cost models from rapidly emergingmarkets

There continues to be shortage of money in highly-developedcountries


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Import Growth = Export Decline ?

US is the worlds leader in gross domestic product (GDP), which isthe monetary value of all goods and services produced in acountry during one year.

US % share of world exports has shifted downward over the past

25 years, while its % share of world imports has increased.

Since 1975 imports to the US have significantly exceeded exportseach year.

Rapidly Emerging Markets (China, India etc) account for about

half of the total US trade deficit.


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The Challenge For Business

The major challenge for businesses in a world characterised bygrowing financial imbalances and increasingly economic crisis is tofind a balance between

a prudent andresponsible approachwith existing capital

continuing with existingrelationships during

difficult times

finding new businessopportunities in achanging market

accepting risks despiteglobal economic

turbulence

Businesses who do not change run the risk of market erosion

and eventual financial collapse!


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Other Macroeconomic Issues

The severe debt problems of a number of countries, along withthe increasing fragility of the international financial system.

The increasing use of barter and countertrade to supportinternational transactions.

The move toward market economies in formerly socialistcountries along with rapid privatization of publicly ownedcompanies.

The rapid dissemination of global lifestyles.

The gradual opening of major new markets, namely China, India,eastern Europe, the Arab countries, and Latin America.


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Company strategystructure and rivalry

Number of companies inan industry

Intensity of competitionPublic or private

owner

Related andsupporting industries

Existence of supplier clusters

Factor conditionsNatural resourcesEducation and skill levelsWage rates

Demand conditions

Size of marketSophistication of consumersMedia exposure of products

Porters Diamond of NationalCompetitive Advantage


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Changing

Consumer

Spending

Patterns

EconomicDevelopment

Changes

in Income

Labour CostsInflationand

Recession

We Are Living In A Changing World

Regulatory


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Finding (New) Foreign Customers

Firms that do not export and/or seek foreigncustomers loose out on huge opportunities forgrowth and cost reduction

Large firms are often more pro-active in

seeking foreign opportunities

Medium and small-sized firms are often slowto respond

Too busy with local side of business

Ignorance of potential opportunities

Lack of understanding of foreign trademechanisms

Intimidated by mechanics of exporting to aforeign country


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Consumer

Markets

International

Markets

Government

Markets

Business

Markets

Reseller

Markets

Market Types


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The Trade Feedback Effect

As a countrys exports increase, its nationaloutput and income increase, which leads toa increase in the demand for imports.Hence, imports affect exports and viceversa

This Trade Feedback Effect is one argumentfor free trade among nations

Emerging Markets are rapidly gaining moreof the worlds wealth and can not be ignored

Images: Shenzhen (China) 20 years ago and today


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Strategic Market Entry

Critical Markets:

Markets that are profitsanctuaries forcompetitors

Markets with volume

Markets that are growingin size

Markets with goodmargins

Increasing global levels of Foreign Direct Investment (FDI) &

Increasingly competitive world markets


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What Is An Emerging Market?

High-growth, high-potentialmarkets

in East Asia, Eastern Europe,Latin America; China, India,

South Africa, Turkey etc

Engaged in rapidindustrialization, marketliberalization, privatization,modernization

An artefact of past threedecades of global economicrealignment


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The Economic Effects of Being an Early Mover

High Possible Returns(Advantage)

High Possible Returns(Advantage)

High Uncertainty/Cost(Disadvantage)

High Uncertainty/Cost(Disadvantage)

Market Power:

Barriers to followers

Technical leadership Product positioningPre-emptive opportunities:

Marketing Early access to resources Brand Recognition

Strategic Opportunities: Location selection Low competition

Uncertainty: Regulatory environment

Low government experience New industryOperational Risks: Lack of supply inputs Lack of support infrastructure Unknown market structureExtra Cost:

Learning Curve Training cost Localisation


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The Promise of Emerging Markets

Dynamic, rapidly transforming

Young demographics

Middle class coming into its own

Engaged in technological leapfrogging

Low competitive intensity

Less regulated

Serve as export markets, investment destinations,and sourcing locations


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Continuum of Entry Modes

Trade RelatedExport, Subcontracting, Countertrade

Transfer RelatedLeasing, Licensing, Franchising, BOT

FDI RelatedJoint Ventures, Subsidiaries

Risk &

Return

Organisational control and resource commitment

Continuum of CooperationTechnicalTraining

PatentLicensing Franchising

Non-equity

co-operativeagreements

Equity JointVenture

Ext nt of nt o g n t on p nd n

N g g b Mod t H gh


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Developing an Export Strategy

Risks can be decreased by taking few steps:

Work with an experienced export consultant to identifyopportunities and deal with red tape

Focus on a few markets to learn what is needed to succeed

Enter on a small scale to reduce costs of any failure

Invest time and managerial commitment in building export sales

Build strong and enduring relationships with local distributors andcustomers

Hire local personnel

Keep option of local production open

Cost-efficient economies of scale

Greater market acceptance


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Collaboration With Competitors

Horizontal co-operation a window on each otherscapabilities: Opportunity to acquire others skills and technologies

Strategic Alliances:

Competition in another form Limited life span

Learning from partners of paramount importance

Mutual Gain is Possible Where strategic goals converge but competitive goals

diverge Size & market power of both is modest compared with

industry leaders

each partner believes it can learn from the others whilstprotecting its own skills


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CustomerCustomer

Demographic

Economic

atural

Technological

Political

Cultural

Company

Customers

Intermediaries

Suppliers

Competitors

Publics

Helping Get Through The Layers


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Available Products and Services

Accommodations (Hotels etc)

Advertising (Expos, Internet, Print, Out-of-Home, Radio, Television, Mobile)

Equipment Purchase & Rental

FixedAsset Purchase Graphic Design

Incorporation,Accounting & Audit Services

IT Support

Legal Advice, Contract Negotiation

Localisation of Materials

Marketing Advice

Public Relations, Media Liaison, Strategic Negotiations

Taxation Advice

Telecommunication (Video Conference, VPN etc)

Translation

Ormita can offer the following services on a no-cash(barter/swap) basis:


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Types of Media Availabilities

Internet

Blogs Email Blasts Localisation Newsletters Online Advertising Search Engine Placement Social Media Translation Video Website Design

Print

Campus In-flight Journals Magazines Newspapers Trade Publications

Out-Of-Home

Airport Billboards Bus Cinema Digital Elevator Expos Kiosks Mall Branding Mass Transit Metro Rail Point of Sale Advertising Signboards Street Signs Taxi

Radio

Network Satellite Spot Radio Shadow/Metro Traffic Talk Show

TelevisionCable DTV Network Satellite Spot TV Spot Cable

Mobile

Direct Response Campaigns SMS Advertising


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Emerging Market Ormita India


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Emerging Market Ormita China


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Other Countries Where Ormita Is Present

India

Australia

New Zealand

South Africa

Mexico

United States ofAmerica

United KingdomCanada

China

Hong Kong

Sweden

Turkey

PolandGermany

Iran

Greece

Egypt


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Some Media Acknowledgement


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Country Experience

Argentina El Salvador Kenya Portugal

Armenia Estonia Kosovo Puerto Rico

Australia Fiji Latvia Romania

Austria Finland Lithuania Russia

Bahrain France Luxembourg Samoa

Bangladesh Georgia Macau Seychelles

Belarus Germany Malaysia SingaporeBelgium Ghana Maldives Slovakia

Bosnia-Herzegovina Greece Malta Slovenia

Brazil Guatemala Mexico South Africa

Brunei Hong Kong Nepal Spain

Bulgaria Hungary Netherlands Sri Lanka

Canada India New Zealand Sweden

Cape Verde Indonesia Norway Switzerland

Chile Iraq Norway Thailand

Croatia Ireland Pakistan Turkey

Cyprus Israel Panama: UK

Denmark Italy Peru Uzbekistan

Dubai Japan Poland USA


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Entry To Restrictive Markets

One of the major obstacles facing western companies is thatcustomers in the new markets may not have any valuablecurrency to exchange for goods and services.

Various countries place restrictions on currency exchange for:

the protection of the currency balance requirements between imports and exports statistical purposes combating financing of crime and money laundering


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Countertrade

Countertrade is an alternative means of structuring aninternational sale when conventional means of payment aredifficult, costly, or nonexistent

Payment for goods (or services) with other goods (or services)

The exporter usually receives the goods first and sells them for cashor exchanges them for something else of use

May also involve switch trading, offset, tolling, counter-purchase,buyback or compensation

The counter-trade agreement is a framework contract setting outmatters such as

which goods are suitable for counter-trade valuation of the goods (determination of price) modalities of payment of the balance (time, currency) (often

through a clearing account) restriction on further sale credit security, etc.


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Why Countertrade?

Advantages

Avoidance of debt andexchange rate volatility

Covert reduction ofprices

Circumvention of priceand exchange controls

Increasing popularity ofbilateralism concept

A method of market entry

Stability for long-termsales

Improves quality oftransaction

Disadvantages

May not totally eliminateall commercial risk

May mask dumpingactivities

Does not allow formultilateral settlements

Trade is restricted to twoparties, each withspecific goods to trade

May be seen as non-competitive


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Managing Payment Risk

Countertrade offers a unique (and immediate) form ofcollateralization for payments to the supplier

It is well-known that that one means of managing payment risk inpurchase and sale transactions is through taking security onproperty.

Barter or countertrade, depending on how the transaction isstructured legally and financially, can serve the function ofcollateralization.

The buyer acquires not a security interest or mortgage on thesellers inventory but an actual property right in the inventory as

the payment in the transaction.

This may be cheaper than third-party financing as a bank hascosts to verify the existence of the goods, establish risks ofdamage and deterioration, ascertain its market value etc.


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Preservation of Buyer & Seller Cash

Countertrade preserves scarce hard currency andimproves the balance of trade in the importing country.

Lesser developed countries can take advantage of thedistribution and marketing networks of the companiesthey countertrade with to distribute their products.

Countertrade often results in a significant transfer oftechnology and know how from seller to buyer whichupgrades the buyer's manufacturing capabilities. Forexample, in a countertrade involving cola syrup forvodka, PepsiCo taught a German vodka maker how tomake their vodka bottles more marketable through the

use of screw caps and different labels.

Global currency volatility and more rigorous counterpartyrisk assessment contribute to higher cost of trade financefor importers, exporters and financial intermediaries


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Building Relationships

Countertrade gives unique benefits and advantagesto the seller of goods. A company willing to engage incountertrade can penetrate new markets andexpand sales potential in existing markets.

Business relationships can be created andstrengthened by the willingness to accept thepurchaser's domestically produced goods aspayment.

Countertrade can be used to obtain a steady, long-term supply of raw materials. For example OccidentalPetroleum obtained a reliable, low cost, twenty yearsupply of ammonia by entering into a countertradeagreement with the Soviet Union


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Lowering Opportunity Cost

During difficult economic times a seller may face high financecosts and slow movement of product - leading to surplusesand/or the need to reduce staff numbers and/or inventoryholdings.

There may be a lack of immediate opportunities to sell for cash.

Where liquidity is a challenge, goods can be sold "in kind" andthis credit applied to fixed operational costs of the business(offsetting real cash expenses)

Finding a new cash-paying customer for goods involves a newinvestment in marketing, versus a low cost for countertrade(especially where marketing and entry costs are offset against

new sales via bartering)

Countertrade represents an extremely low opportunity cost togenerate new sales


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Helping Manage Price Volatility

The government of an importing country contemplating using its foreignexchange to buy additional imports may worry that it will not be able togenerate sufficient exports to earn the needed foreign exchange.

One way to shift the risk to others is to make imports contingent onoffsetting exports.

Hedging currency risks through countertrade rather than financialinstruments may be desirable because purchasing financial instrumentsrequires an upfront financial payment and thus drains liquidity.

Financial instruments cannot hedge real exposures effectively becausefinancial value changes with nominal exchange rates, not real exchangerates, and is based on interest earnings not inflation. A countertrade dealcan help solve the real price problem.

Because counter-trade involves the exchange of real goods, notfinancial instruments for real goods, it can solve the inflation risk involvedin foreign currency procurements. Thus, it can sometimes provide asuperior hedge to financial instruments.


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Improves The Balance Sheet

Goods acquired through countertrade are still counted as an

increase in the assets of the business.

Bank capital guarantees reduce available lines of credit - bartercapital does not.

Allows the organisation to meet assets and/or equity ratios forother (cash) subsidies and loans.

Lets a business obtain future international lines of creditguaranteed by countertrading operations.


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Countertrade May Be Mandatory

EXAMPLES

Philippines

Executive Order 120 directs all governmentagencies to adopt countertrade (C/T) as asupplemental tool to the importation of foreign

capital equipment, machinery products, andgoods and services over a certain dollar value.

Kuwait

Decision No. 694 which stipulates that all ForeignContractors who meet certain criteria, should

participate in the Counter-Trade Offset Program.

The GATT, World Bank and DOC claim that countertraderepresents between 25% - 30% of all world financial activity

and is growing.


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Classification of CountertradeDoes the transaction involve reciprocal commitments

(other than cash payments)?

Does the transaction involve theuse of money?

Does the transaction extend overlong periods and involve a basket

of goods?

Are the goods taken back by theexporter the resultant output of the

equipment sold?

Is the reciprocal commitmentlimited to the purchase of goods?

No

Yes

Straight Sales(cash or credit)

Yes

Counterpurchase,

buyback or offset

Counterpurchase andbuyback

Buyback

Counterpurchase

Yes

Yes

No

No

No

No

Yes

Barter type

Simplebarter

ClearingArrangement

Are third partiesinvolved?

Yes

No

SwitchTrading

ClearingArrangements

Does the transactioninvolve debt?

Yes No

Swaps Offsets


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Compensation

The seller accepts goods as part payment, the rest ispaid in cash.

Example:

A British computer firm sells computers to a Russian mining firm.The Russsian firm can only pay part of the price in money, butwants to pay the rest with titanium.

The British firm does not need titanium so it contacts a metaltrader in London who promises to buy the from the Russian

mining firm titanium and pay the British computer firm.


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Counterpurchase

Two linked contracts

simple exchange of goods

reverse reciprocity grants access to resources

Trading parties maintain restricted-purpose drawingaccounts for the deposits of their countertrade activities.

Example:

The Finnish airforce buys F18 fighter jets from McDonald DouglasCorp. For 2,5 b. The air force pays in dollars. In another but linkedcontact McDonald promises in return to buy Finnish goods for 2,5b. dollars.


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Product Buyback

A long term contract made between a firm whichbuilds and runs a factory to buy the products made in

the factory.

One party purchases the output of another party that isderived from technology or equipment supplied by thepurchasing party.

Example:

A German firm builds and runs a factory in an African country.The factory is owned by the local government but it has nomoney to pay for it and not skilled staff to run it. Part of thefactories output goes to the firm that built and runs it atpredetermined price as payment for the factory and ascompensation for running it.


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Offsets

Purchases by a governmental buyer are matched(offset) to investments by the seller in non-related

industries in the buyers country.

Example:The Spanish government buys fighter jest from a foreigncorporation. The corporation promises in a separate but linkedcontract to manufacture the wings in Spain.


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Switch Trading

Two Contracts

Example:

A British firm sells machine tools to a Polish firm. The Poles wantedto pay in goods only. The Brits did not need Polish goods but

French goods. They find a French firm that needs Polish goods.The French firm receives the Polish goods and sends its owngoods to the British firm as payment.


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Debt Swaps

Debt swaps

debt-for-debt swap

debt-for-equity swap

debt-for-purchase swap

debt-for-nature swap debt-for-education swap


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Countertrade Usage - By Type


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Ormita: Business Assistance

Four types of business-centric free services :

Assistance in selection of export markets

Provide analysis on various modes of market entry

Work within budgetary constraints to create a broad-scalemarket entry plan which is offset against guaranteed new sales

Develop media plans which are offset against guaranteed newsales

Fee-based services :

Implementation of export strategy and budgetary expense

offsets Implementation of media and PR campaigns in new markets

Consulting on countertrade issues


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Ormita: Countertrade Services

Provides financial services to exporters and/or banks, allowingthem the ability to offer their products on commerciallyattractive terms

Offers a solution for insurance against the risk of debt losses for

commercial and political reasons

Allows governmental support of exports into various countriesenabling:

access to global markets

business development in riskier, emerging markets

Contributes to business competitiveness in a rapidly changingenvironment


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General Acceptance Criteria

Eligibility for promotion

Is the business particularly deserving of promotion?

Is the product or service useful for the target market?

Is the entry part of a long-term strategy?

Justifiability of Risk Reasonable prospect for the smooth execution of sales by the

supplier without the occurrence of a claim

Terms of Contract

Terms of payment in accordance with international rules and

basic agreements for export business

Budget

Is the budget suitable?


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Examples of Barter

A major restaurant chain was faced with disposing $1 millionworth of flavoured ground beef that had tested well but didn'tsell well. The chain traded the meat in exchange for spot TV,while the barter shop sold the meat for cash, at a discount, to astate prison system.

A beer company needed to destroy product that was past its

sell-by date. It ended up selling the bottles to a barter shop,which then recycled the glass, in exchange for media credits.

Excess guava puree was swapped for media credits through abarter company. The company eventually sold the puree to abeverage company that used it to make orange soda.

Log-home kits, aircraft skeleton frames and poultry have all beenswapped for a wide-range of media, including TV, digital, printand radio ads, in the U.S. and abroad.


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Examples of Government Countertrade

The Philippine Government is embarking on a program to carry out abarter system for its coffee products with the products of lucrativemarkets. This will help them promote the exports of their coffee and in turnget defense equipments from formerU.S.S.R. member nations likeRomania.

In 2009 Saudi Arabia agreed with Pakistan to swap oil for food.

Israel barters Calcium Carbonate, Talc and Dolomite and other raw

materials with the USA, UK and many European Union countries. The Thai Government recently traded fruits for Chinese-made

locomotives, passenger buses, and armoured cars.

Malaysia is currently supplying India with palm oil (from six state-ownedcompanies) worth $121 million in exchange for a contract awarded tothe Indian Railway Construction International Company. They will lay 31.5km. of tracks in the southern Malaysian state of Johor.

The Democratic Republic of the Congo and the China RailwayEngineering Corporation (CREC) have entered barter. According to thisbarter the Chinese company will provide Congo the desperately neededinfrastructure in exchange for a slice of Congos precious naturalresources to feed its booming industries.

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