International Trade/Offshore Manufacturing/Sourcing/Export/Import/Consulting Selling to Brazil By James Cotton Push technology is defined as that set of intentions you want to use to "push" your capital equipment through to the market quicker, better and at a higher profit. This technique is particularly effective in the Brazilian market. To take advantage of this opportunity, let's take a look at 10 simple questions covering several options you will need to consider before diving into this pool: 1. Are you completely dedicated to the global market? 2. Is your product satisfactory to utilize this technique? 3. Are you using "just-in-time" manufacturing techniques? And, if so, how does this affect your delivery times to this market? Have you independently verified the process? 4. Is your dealer network in place, capitalized and successfully selling, now? When was the last time you performed an independent dealer review? 5. Have you investigated the opportunities that exist to leverage forward-availability, bonded-warehouse opportunities in Brazil? How do they work? How can you take advantage of them? 6. Do you require "in-country" addition of such items as safety stickers, or other language dependent items? Who can do this work? 7. Are you willing to finance the operation? Or, are you depending on your dealers to either completely shoulder the burden or share it with you? Are you still using letter of credit financing? 8. What are your wholesale and retail financing alternatives in this market? Have you investigated what they might be? Are you willing to discuss "recourse" with local lenders? 9. What is your competitive situation in the market? What are your competitors doing better, faster and at lower cost than you are? 10. When did you last review and update your strategic plan for this market? Are You Dedicated This is not as strange a question as it might sound. Dedication to the market is the most important quality you can possess. You must be in the game for the long term, because you're surely going to see ups and downs just like we have in the domestic market. Ask yourself, "Do I have adequate coverage in the market? Do I have my employees actively working with my dealers in their offices? Am I using independent advisers to confirm what I'm being told? Are my service offerings at least equal to, better, or superior to anything my competitors are offering? Do I have language-capable "troubleshooters" available on the phones each business day? Are these troubleshooters on the phone during my business hours or are they available during my customers hours? (Remember: you're dealing with several different time zones!) Am I taking advantage of all the trade show opportunities that exist in the market? What else can I do that I'm not now doing? Is Your Product Satisfactory This push technique is best suited to product that must be moved by ocean freight. Specifically, capital equipment or consumer goods that must be moved in bulk and/or repackaged in country. Similarly, if you are stocking your dealer with consumer goods that must move in bulk (containers), and are packaged for the U.S./Europe market but need further "labeling" for the Latin market, then this should be of interest to you. Just-in-Time Techniques If you're using "just-in-time (JIT)" manufacturing, then you should give the push technique serious consideration. Why? Because just now you're probably requiring (or should be!) your dealers to maintain at least 60 days inventory, if not 90 days. You're basing this assumption on forecasts that may be as much as 90 days old; forecasts that cannot react quickly to market changes in demand. Always assume that at precisely the time your inventory is depleted, market demand will soar and your competitors will be overstocked. Believe it, it happens every day. But what does this have to do with just in time manufacturing? The answer is everything. JIT places your product, in the case of Brazil, some four to six weeks away from your dealer. At a minimum. And the way the Brazilian market has been growing, the product that you ship today is probably sold by the time it reaches your dealer, meaning that you and your dealer are still out of stock. JIT affects your delivery time precisely because your forecasts cannot meet special cause demands. And with the projected growth in Brazil in particular and Mercosur in general (189 percent cumulative by 2001, by some estimates) you're going to stymie your growth. Which begs the last part of the question: Have you independently verified your market demand? Where is your market going? How much inventory do you really need in place? An independent analysis will provide invaluable insight into these problems. Is Your Dealer Network in Place? Just in time manufacturing is one thing. Delivering product to the market is another. But nothing happens until someone sells something. In our discussion here, your dealer. Hence the question. A lot of exporters are assigning an entire country to one outlet. Do you think this really makes sense? Have you really looked into the market? Latin markets are similar to ours in that there are regional differences within each country that can be further subdivided from there. So, in knowing your dealership, are you placing too much responsibility on him? Are you expecting him to cover an area "in a worst case scenario" of say the entire country of Brazil? Do you really know how much area this is? Would you assign the entire U.S. to one dealer? Your dealer must be sufficiently capitalized. Have you investigated this? Independently verified it? The use of JIT manufacturing and delivery places, in some cases, undue demands on your dealer. For example, to maintain (if we're really lucky) some 60 days inventory, then not only will he have to buy this inventory from you, but he also has to pay in cash the import duties and freight charges as well. This cash is money he could be using for operations, and selling and servicing. Of course, many dealers are capitalized well enough to handle this situation, but why the requirement? If a stock was available in a shorter period of time, perhaps we could craft an annual market plan that would demand better customer service using funds that may not have been available before. Leveraging Forward Availability The big players in the market are actively using "forward availability, bonded warehousing opportunities" to their benefit everyday. The major automobile manufacturers, equipment manufacturers, parts distribution facilities, etc. are well into this technique. If you have a market presence in Brazil and the Mercosur, you should investigate this opportunity. But, how do they work? If you're in the market, you know that last fall the Brazilian government rescinded all import duty exemptions, regardless of product. Now everyone has to pay. This was done in an effort to cool down the economy and help prop up ballooning trade deficits. The efficacy of this move is for another discussion. My point is is that it's a fact of life. And the opportunity exists that the Brazilian government will change this again. Since everyone now has to pay, the real costs to our dealers in bringing in goods has increased. And this is causing some pain on their part, since they are not receptive to demands of 60 to 90 days inventory that they're going to have to pay in cash the duty on. Now, quite a few of what Peter Drucker calls the "transnationals" have their own manufacturing facilities in Brazil. This is significant because they can bring in goods on a transfer price (read: they define the stated value for import duty classification purposes and payment). This is great if you have a plant there; but, what if you don't? Enter the bonded warehouse program. Actually, in Brazil, there are several large companies operating several bonded sites. The newer ones are the better ones. Why? In an effort to open up some outlying areas (away from Sao Paulo) the government has provided significant incentives to companies who open and operate these facilities, to the extent that some of the companies are making their living off the float in payment dollars. The way these facilities work is really straightforward, but at the same time a complicated concept for Americans. The reason is that Americans are always asking exactly what will you do for me at what price. In other words, give me your menu and I'll order what I want at the price listed. For Brazilian companies, this misses the point, and this is where mid-level American companies find difficulty. In a nutshell, these companies will do whatever you want them to do. But you have to tell them what to do. And most times, the American companies don't really know what they want, hence they ask for a menu instead. Here are some of the things these companies may be able to do for you: Arrange shipping from the U.S. port, prepaying all charges and invoicing you or your dealer. Use proprietary ro-ro ships, at a significant cost saving. Receive your goods at the port, unload them, and take them to the warehouse. Inventory them, and report this inventory to you electronically. Manage your inventory. Pre-deliver the equipment, making any warranty repairs on site. Clear the goods through customs, prepaying the fees, and invoice either you, your dealer or the customer. Deliver the goods to your dealer. Invoice your dealer on your invoice, printed in Brazil; finance your dealer (floor plan/wholesales financing), collect this payment in local currency and send it to you in dollars, electronically. Automatically manage your inventory, including forecasts. Transship to other Mercosur countries, including invoicing and financing. Finance the retail customer. Now, how do you take advantage of this opportunity? First, sit back and seriously determine your commitment to the market. The next step would be to develop a strategic plan leveraging these opportunities. Remember, these companies will handle most any aspect of your strategic needs, but you have to tell them what you want. A good way to start this strategic planning is to use an independent adviser familiar with the process. In-country Assistance These bonded warehouse can provide "in-country" addition of such items as safety stickers, or other language dependent items? Using JIT manufacturing, it is not cost-effective to attach various items to your equipment on the manufacturing line. However, when the items arrive in-country, your warehouse partner certainly can accomplish this for you. Consumer goods manufacturers can use this technique, as well. While this is not capital equipment, the idea is the same. For example, a manufacturer that produces cosmetics in small packages might, under Brazilian law, require a different "description" label, in Portuguese, from the one used in the U.S./Europe. The bonded warehouse solution was to receive the product in bulk (containerized), break it down, and form an assembly line in the warehouse to place these new stickers on the packages, before they were imported into Brazil. This also is cost-effective, since the new stickers can be locally produced at significant cost savings. Financing the Operation Who's going to pay for all this? Often, the dealers are happy to pay the storage fees associated with this plan. Why? Because it's cheaper for them when compared to the cash up front scheme of direct import. The storage costs are in the neighborhood of 0.25-0.35 of the landed cost every 10 days. But keep in mind that this is negotiable, depending on what you want done. One approach is for the manufacturer to place a factory stock in place in-country for all the dealers to draw from. The understanding at the beginning of a program like this is for the goods not to remain longer than 20-25 days before clearing customs. And the dealer(s) must accept delivery beyond the 45-60 day time frame. Of course, the costs can be allocated in any way deemed prudent. This is why a new strategic plan is so necessary right now. Are you still demanding letters of credit from your customers? Have you really analyzed the costs of doing LC business? You are probably taking operating capital away from your dealer by operating like this. On the other hand, some dealers like using LCs because they don't trust you to do what you say you're going to do. So I strongly suggest you review your LC policy. Financing Alternatives Whether or not you should decide to move with the forward-availability, bonded-warehouse solution, you're still going to have to face the financing alternative. And it will become more important if you decide to move in the warehouse solution, because you can push more product through to the ultimate customer. There are many financing alternatives available in Brazil. Most of the major U.S. banks are there, along with their sizable European and Brazilian cousins, as well. And they are interested in your business. Several of them may know your business, and for that reason, you're going to have to decide beforehand what you want. Probably, some of your dealers maintain accounts with these banks, and so are familiar to the banks in terms of credit extension. In the equipment business, just like in the U.S., the matter of "recourse" will come up. So be prepared for it! Ask yourself if you're willing to offer any factory-sponsored recourse. Ask yourself if your dealer network participate with you? Do you want them to know that you're offering the banks recourse in addition to theirs? What does your strategic plan say? Your Competitive Situation As discussed, major companies already are probably using some variation of the warehousing solution. They may have their own plant in Brazil and are bringing in equipment via the transfer price we discussed. But where exactly are you in relation to this? If your competitors are moving in this direction, it is a direct threat to you. They have found something that you're missing, and are moving aggressively to take advantage of it. So, what are you going to do about it? First, gather some market intelligence, and begin to make some hard decisions. If you were using the warehousing solution, your warehousing partner could be supplying you with market intelligence right now. They are in a position to monitor whatever you tell them to monitor, and report it to you or your adviser for analysis and action. This is not something you can wait on. You must move now, or your competitors will move to fill the vacuum. Finally, when did you last review and update your strategic plan for the Brazilian market? You do have a strategic plan for this market, don't you? I can guarantee your competitor does! When this article was first published, Jim Cotton was president of James Cotton & Associates, an Atlanta-based international marketing consultant firm. Advertise on this site Put your company on this site!