Export Risk ManagementDoing international business brings new risks along with great opportunities. As an exporter, it is important for you to know the risks that may involve, so that you can identify and manage them. The risks involved in international business are quite different from those that occur in domestic business. Risk management begins with knowing what the risks actually are. That is why export risk management begins with identifying the risks in export, types of export risk. More risk is involved during international exports as compared to that in the domestic market. Therefore, it is essential for the companies which are going to enter in the field of exporting to devote time and money to measure all the risks related to exporting business and setting up a risk management plan. There are many risks and challenges involved in the exporting business. Different types of risks involved are:
- Financial Risk or Credit Risk
- Poor Quality Risk
- Transportation Risks
- Logistic Risk
- Legal Risks
- Political Risk
- Unforeseen Risks
- Exchange Rate Risks
- Sovereign Risk
- Culture and language risk
Financial Risk or Credit Risk:This risk refers to the risk of insolvency, non-payment, late payment, default or fraud by foreign buyers. This is incurred because it’s difficult for an exporter to verify the buyer’s creditworthiness and reputation due to larger distances between trading parties. Thus, it is essential for the exporters to collect reports from overseas credit agencies about the financial strength and business reputation of buyer’s firms.
Poor Quality Risk:This is the risk of rejection of entire shipment after the arrival at the importer's premises due to the poor quality of exported goods. So, it’s better to check the quality of goods properly before exporting the same. Sometimes importers may ask a pre-shipment inspection that will be conducted by an independent inspection company. Such an inspection protects both the importer and the exporter. The costs for the inspection are borne by the importer or it may be negotiated to be included in the contract price. Alternatively exporting product samples to the importer by an international courier company is a good option. But remember the final products produced and shipped must be same as product samples.
Transportation Risks:This is the risk of transferring goods from one country to another. While transporting, there is the risk of theft, damage and possibly the goods not arriving at all.
Logistic Risk:Logistics risks relate to the risks of international logistics. The exporter must consider all aspects of international logistics, in particular, the contract of carriage. This carriage contract is drawn up between a shipper and a carrier (i.e. transport operator) and largely depends on Incoterms 2010.
Legal risks:This risk arises due to changes in international laws and regulations. They change frequently and vary from country to country. So, it is important for the exporter to draft a contract in conjunction with a legal firm, in this manner ensuring that the exporter's interests are taken care of. The exporter must be clear about the law and dispute-settlement procedure that will apply to the contract. Great care must be taken in assessing the legal aspects of trade with a particular country.
Political Risk:This risk arises due to the instability of the government sector. As a result, government policies change frequently. Thus, exporters must be persistently aware of the policies of foreign governments in order to change their marketing tactics accordingly and take the necessary steps to prevent loss of business and investment. It is important to inform exporters to be aware of government interference in the target market.
Unforeseen Risks:Unforeseen risks arise due to an unexpected occurrence in a country like a natural disaster (earthquake) or a terrorist attack. This may completely destroy an export market or exported goods of a company. So, it is important for the exporter to ensure that a force majeure clause is included in international contracts.
Exchange Rate Risks:The possibility of an exchange rate movement is referred to as ‘exchange risk’. The exporter must approach the Foreign Exchange division of his bank prior to quoting any prices internationally. Hedging scheme is a strategy that the exporter could follow in order to protect against the influence of exchange rate movements.
Sovereign Risk:This involves the risk of a country ceasing or restricting access to particular goods into their market. This restriction is placed by the use of embargos, tariffs and quotas. It can be due to political reasons.
Culture and language risk:Cultural and language risks are involved in almost all exporting business because both the parties are from different countries. So, their culture, language and taste are different.
Risk management planTo manage such risks one must have efficient export risk management plan. This helps to know the unforeseen circumstances that may occur and helps to generate mechanisms to overcome them. The main purpose of export risk management is to reduce the risks to the most favourable level faced by a company. The way a company manages its export risks is linked to its attitude to risk and to its degree of competitive edge. Six basic risk management steps are taken within the export risk management process:
- Establishing the context
- Identifying the risks involved
- Assessing the consequences of risks in terms of probability and possible
- Is prepared mentally and in terms of resources to modify products and services as per changing market trends.
- Develop strategies that can help to mitigate these risks
- Monitoring and reviewing the outcomes
- Communicating and consulting with other parties involved within your business
Export Risk MitigationThese can be considered as the strategies that exporter adopts for avoiding various risks related to the export of goods. There exist a few strategies that every exporter should include for the betterment of their business. These are
- Direct Credit: Export is supported by Export Credit Agencies through the provision of direct credits to either to the buyer and seller.
- Guarantees: This includes various guarantees such as Bid bond (tender guarantee), Performance bond, Advance payment guarantee (letter of indemnity), and standby letter of credit.
- Insurance: Insurance is a must for exports of products which include Transportation insurance, Credit insurance, Credit insurance, foreign exchange risk insurance.
- Hedging:Hedging: Within these various instruments are used to Hedge Price Risk such as stabilization programs and funds, the timing of purchase/sale, fixed price long-term contracts, forward contracts.
Risk AvoidanceBy the risk avoidance method companies aim to export the products only in the countries which are economically risk-proof. Avoiding export risks means one must not enter markets which have political instability or cutting off supplies to customers with a poor payment culture.
- Helps to identify what actually you want to achieve from exporting.
- Enlists various activities that you need to consider to achieve the target.
- Includes various ways for measuring your progress.
- Helps you to be focused on your goals.