Counter trade

• Counter trade means exchanging goods or services which are paid for, in whole or part, with other goods or services, rather than with money

variants of counter trade

Barter :Exchange of goods or services directly for other goods or services without the use of money as means of purchase or payment

Switch trading: Practice in which one company sells to another its obligation to make a purchase in a given country.

Counter purchase: Sale of goods and services to a country by a company that promises to make a future purchase of a specific product from the country.

Buyback: occurs when a firm builds a plant in a country - or supplies technology, equipment, training, or other services to the country and agrees to take a certain percentage of

the plant's output as partial payment for the contract.

offset: Agreement that a company will offset a hard - currency purchase of an unspecified product from that nation in the future. Agreement by one nation to buy a product from another, subject to the purchase of some or all of the components and raw materials from the buyer of the finished product, or the assembly of such product in the buyer nation

Offsets

• Offsets are divided into two parts. First, direct offsets:

McDonnell Douglas sold MD 82 mid-size passenger aircraft to China. The contract included provisions for the Chinese to manufacture aircraft components such as doors to be used for landing gears, passengers, and cargo.

Offsets

The second form of offsets is indirect offset. These are goods that are not used in the products sold to that country.

A good example: the price of DC-9s sold to Yugoslavia was indirectly offset by the purchases of Elan skis.

Other variants• Clearing accounts: This form normally occurs between

Eastern European countries and the LDC's (less developed countries). The LDC ships products to one East European nation, creating an accounts payable entry on that country's trade books (country A owes US$ for this product).

Country A can then satisfy the entry with either its own products or it can be satisfied by another country that comes along and buys country A's debt. For example, we may sell product to Brazil and receive payment from one of Brazil's trading partners. Sometimes it is part cash and part products from that country

Why do we counter trade

• A majority of companies participate in counter trade due to a requirement of a foreign government or customer.

• Those companies that have utilized counter

trade have found it to be an effective way of expanding sales and improving efficiency in operations.

• Expand or maintain foreign markets • Increase sales • Sidestep liquidity problems • Repatriate blocked funds • Clean up bad debt situations • Build customer relationships • Keep from losing markets to competitors • Gain foreign contracts for future sales • Find lower-cost purchasing sources

Factors to be considered• The Industrial Factor... It is necessary to integrate the possibility of

technology transfer and sub-contracting from the very beginning of the product's conception.

• The design engineers must anticipate that some parts of the product will have to be produced abroad without affecting the good health of the company.

• All future markets will need to be considered so as to evaluate the possibility of cooperation, the capacity to integrate technologies, and the economic interest of the country to do so. This is not always an easy task, as the country requiring offset is often asking more than it can really do.

• Offsets should not be considered as an obligation, but as a partnership. The objective is not to do a one-off operation, but to establish a long-term cooperation. It is also necessary to establish close cooperation with the sub-contractors.

• The Commercial Factor... It is important to continually monitor the practice and development of the offset requirements in the targeted customer country and to analyze its economic needs.

• The supplier will need to study these needs through its network of contacts and to identify suitable partners, in conjunction with a local lobbying task force in order to penetrate local industrial circles which can often influence the decision of the purchaser.

• The Financial Factor... An attractive financial package is also part of a successful deal, possibly including investments and joint ventures.

• More and more, the fulfillment of the offset requires financial engineering involving the financial department of the supplying company as well as third parties such as banks and investment services companies

Advantages of Counter trade

• Gives additional hard currency

• Marketing expertise that they may not otherwise have.

• Technology advances that the country would not otherwise have.

• It gives access to markets for companies that may otherwise be closed to them.• It helps conserve foreign currency reserves of the importing country.

• It allows access to foreign markets without necessarily setting up marketing companies or programs.

• It allows the importing country to export products for which markets might not otherwise exist.

Trends And Prospects

• Several global trends are now becoming increasingly apparent which, if they continue unabated, will likely shape the international offset landscape in the new millennium. This trends suggest that:

• Aerospace weapons-related offsets will continue to account for the bulk of offset practices.

• The drop in reported international military exports is counterbalanced by a rise in the value of offset demands.

• The value of offset multipliers (incentive weighting factors) is shrinking while nonperformance penalties are becoming more severe.

• Indirect offsets are increasing and outpacing direct offset commitments.

• The accumulation of assumed offset obligation by U.S. and European defense suppliers are compelling these firms to bid against each other and each other’s supply chains.

Trends And Prospects

• In emerging markets, offsets are spilling over in the civilian sector driven by budgetary constraints and a buyer’s market (e.g., South Africa, Turkey, countries in the Middle East). These governments are beginning to require more stringent definitions of what constitutes “true” economic value in offset packages and in enforcing the fulfillment of offset obligations undertaken by suppliers.

• Western suppliers are encountering heightened difficulties in identifying viable indirect offset projects in emerging markets because of a limited universe of lucrative or viable indirect offset opportunities for which the suppliers must compete with independent cross-border business. In these markets, offset obligations are increasingly difficult and costly to meet and are, in fact, seldom fully met.

Trends And Prospects• Finally, because offset objectives in emerging countries are mainly

driven by political objectives and these countries’ governments have the option to source similar equipment from both Europe and the United States, financing packages and the offset level offered tend nowadays to outweigh other procurement criteria in the sale of weapon platforms and other high-cost government acquisitions.

• Indeed government-backed export financing, while always a key component of government procurements, has emerged as an important factor in winning large military equipment orders such as, for example, those related to the enlargement of NATO.

• As a result of the current tightening in offset performance conditions, especially those in force in emerging markets, the implementation of offset obligations is becoming costlier for foreign suppliers and increasingly difficult to fulfill successfully.

Examples

• Bhel looking at counter-trade deals to secure overseas orders

India’s largest power generation equipment manufacturer’s latest such deal in the works is a joint effort with state-owned mineral trading company MMTC Ltd to import palm oil worth $1 billion (Rs4,510 crore) from Malaysia, the second largest palm oil producing nation, in return for setting up a hydropower project in that nation. -May 2010, live mint

• the Government of the Philippines (GOP) will obtain the products and services of foreign suppliers through countertrade and technology transfer and industrial investments through offset agreements. The Philippine International Trading Corporation (PITC), an attached agency of the Department of Trade and Industry, is responsible for implementing the countertrade and offset program of the government. PITC sources needed products, develops supplier bases and facilitates all trade documentation, and negotiations and contracts for the GOP and its agencies. PITC also is very influential in assisting foreign suppliers to develop acceptable industrial offset and technology transfer programs. PITC has worked closely with DND in the Augusta I and II and GKN defense contracts for the AFP and it is active in formulating the offset requirements for the Defense Modernization Program.

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