Countertrade Review

Time and again the Australian Countertrade Association Ltd is approached by students and others for information about the practice of countertrade in Australia. As the Association has never surveyed Australian companies to establish a reliable picture of their involvement in countertrade, we cannot oblige. However, several academics, who incidentally are members of the Association, have conducted such surveys. One is Dr Richard Fletcher of the University of Technology, Sydney, and the other is Professor Peter Liesch, of the University of Tasmania, Launceston. Dr Liesch's survey was carried out in collaboration with Aspy P. Palia of the University of Hawaii, and its results have recently been made available. It forms part of a larger comprehensive study of countertrade practices in the Asia-Pacific region.

A mail survey of 600 Australian international trading firms was conducted. This sample, if it may be so called, consisted of 404 firms which had responded to a study of the inter-national involvement of Australian firms, and another 196 identified in Dr Fletcher's earlier study. The questionnaire was carefully structured to cover, on the one hand, attitudes towards countertrade, and on the other, each company's experiences and pract-ices in countertrade. Of the 600 questionnaires mailed, 136 returns were received, but of them only 107, or 17.8%, were useable, and were used in the subsequent analysis. Of the 107 firms then covered in the survey, 6O% had over ten years' experience in international trade; another 20% had from six to ten years experience. The primary international trading activities of the firms were exporting and importing. Twenty two firms (22%) had been required to countertrade, 44 (43%) had considered countertrade transactions, 24 (23.3%) had negotiated countertrade contracts, and 17 (17%) had implemented countertrade transactions. Forty eight companies (46.2%) employed over 100 people, 34 (33%) had an annual sales turnover of over $A50 million, and 24 (23 per cent) realised over 40 % of their sales from overseas.

Attitudes to Countertrade

There is a positive attitude toward countertrade among the sample of firms surveyed. Most who took part in the survey believe that countertrade is a permanent feature in the world trading scene, and many also thought that it would spread even further. The responses to questions regarding attitudes to countertrade were:

• 75% - countertrade is here to stay
• 62% - countertrade will grow and spread into the future
• 56% - countertrade is an innovative response
• 53% - firms should engage in countertrade only if necessary
• 41% - countertrade is a powerful marketing tool
• 41% - firms should take the initiative in countertrade deals
• 30% - countertrade is an inefficient form of international trade
• 19% - countertrade conflicts with GATT principles
• 16% - countertrade should be discouraged
• 3% - countertrade is a temporary phenomenon

Motivating Factors

Most of the respondents said that countertrade was of great importance to develop new markets (71%), that it increased sales potential (67%), increased the growth of sales potential (65%), built long-term strategic alliances (62%), strengthened the firm's competitive position (61%), increased the potential for market share (59%), developed markets for new products and/or services (55%), and fulfilled the buyer's requirement (53%).

Difficulties Faced

Nevertheless certain major difficulties were faced in conducting countertrade. A majority said that countertrade increased costs (68%), involved complex negotiations (64%), raised problems with pricing (64%), brought difficulties in re-selling countertraded goods (59%), consumed time in negotiations (55%), could find no use for countertraded goods in-house (55%), that countertrade increased brokerage costs (50%), and they also found a lack of brokerage facilities (50%). But, only a small number (18%) perceived the customers' negotiating strength to be a difficulty, and an even smaller number (9%) saw their customers becoming potential competitors.

Reasons for Not Undertaking Countertrade

The difficulty in re-selling the countertraded goods was seen as the major reason for not countertrading (74%). Other reasons were no in-house use for the countertraded goods (66%), a lack of knowledge about countertrade (64%), the complex negotiations involved (62%), the time consumed in negotiations (60%), problems with pricing (59%), and a general increase in uncertainty (57%).

Benefits Derived from Countertrade

The greatest benefit to be derived from countertrade was an increase in sales volume by 66% of the respondents. Other benefits recorded by a majority of the respondents were that countertrade allowed entry into difficult markets (64%), it overcomes credit difficulties (54%), it fosters long- term customer goodwill (53%), it increases the firm's overall competitiveness (52%), and allows a better use of capacity (51%).

Forms of Countertrade Practised

Counterpurchase, offset and switch were the major forms of countertrade in which the respondent firmas engaged. Barter and compensation occurred much less frequently.

One to five respondents had considered counterpurchase transactions 16 times, negotiated 13 times, and concluded 12 times. Six to ten transactions were considered once. More than 10 transactions were considered seven times, negotiated six times and concluded six times.

One to five offset transactions had been considered nine times, negotiated 11 times, and concluded 10 times. Six to ten offset negotiations were negotiated once. More than 10 transactions were considered seven times, negotiated six times and concluded six times.

For switch transactions, one to five were considered 11 times, negotiated seven times, and concluded seven times. More than 10 switch transactions were considered and concluded three times.

Only eight barter transactions were considered, and of these two were concluded. Of the three compensation proposals considered one was concluded.

Countries Involved

Indonesia, recording 76 out of a total 147 transactions, was by far the most important country where Australian companies undertook countertrade. The others, with the number of transactions, were India 11, China 9, U.S.A. 6, U.K. 6, Burma 5, Japan 4, and Malaysia 4. Those recording three transactions were Argentina, Brazil, Hungary, Iran, Libya and Syria; only one transaction occurred in Bangladesh, Singapore, Romania, Russia, and New Zealand. Three countertrade transactions were recorded with other Australian companies.

Product Categories Countertraded

The primary Australian exports under countertrade agreements, classified by degree of processing, are industrial raw materials, components, and agricultural raw materials. Semi-finished and finished goods occurred much less frequently in countertrade.

The most common imported goods in countertrade transactions are industrial raw materials, finished and semi-finished goods. Classified by their final disposition, inputs and consumer goods are the primary Australian countertrade imports.

Comparisons with Other National Surveys

The results of this survey of Australian firms are similar to the results of similar studies of British and Canadian firms. The benefit "allows entry into difficult markets" was ranked the highest by U.K. firms, and second highest by Canadian firms. The benefit "increases company competitiveness" was ranked highest by Canadian firms. All other benefits are listed similarly.

The Australian firms with countertrade experience concur with the U.K. firms in listing market access as the primary benefit of countertrade. In addition, these firms rank increased sales volume as another primary benefit of countertrade. Both the U.K. and Canadian firms list the attribute "increased sales volume" as the third most frequently quoted benefit. Australian countertraders rank increased overall competitiveness third. Both the perceived benefits "provides sources of attractive inputs" and "allows disposal of declining products" are ranked lowest.

In comparing these results to earlier studies of U.K. and Canadian firms, the same set of six difficulties faced are ranked highest by the groups in each of the three countries, but the Australian firms ranked the difficulties differently. Both the Canadian firms see the most significant difficulty the "lack of an in-house use for countertraded goods"; Australian firms ranked this difficulty sixth, but considered increased costs the major problem with countertrade. All three groups agreed that the "customers' negotiating strength" and "customers becoming potential competitors" were the least important.

Implications

The authors of this survey of Australian firms in relation to countertrade draw these tentative recommendations to assist foreign firms in their business relations with Australian firms when countertrade enters into the negotiations.

There is a reasonable likelihood that Australian firms entering into countertrade negotiations have some knowledge of countertrade. It also appears that Australian firms are generally positively disposed toward countertrade, although there may be a lack of knowledge of the existence and availability of a countertrade services industry to facilitate these transactions.

Australian countertraders acknowledge that countertrade does improve competitiveness. Thus, international marketing managers of foreign firms should highlight this attribute of countertrade. The results of the survey suggest that once an Australian firm has gained some experience with countertrade, this attribute of countertrade is internalised by the firm.

Although most of the firms surveyed acknowledged that countertrade is here to stay and that they expect it to grow and spread in the future, there is still 53% of countertraders who believe that the firm should be pro-active and take the initiative in countertrade deals. So foreign firms may expect to encounter some reluctance on the part of Australian companies to initiate countertrade transactions. But this initial reluctance will soon be replaced as it becomes to be realised that a willingness to countertrade will improve a firm's competitive position.

Australian firms appear to overlook the services of brokerage houses (trading companies) when they rank highly their inability to use countertraded goods in-house and difficulty in reselling countertraded goods. The international marketing manager of the foreign firm can alleviate this perceived problem by proposing a countertrade deal, and suggesting the services of brokerage firms.

In addition, a large proportion of countertraders report problems with pricing, and acknowledge the complex negotiations required in countertrade. These perceived concerns of Australian firms may also be alleviated through a complete package of countertrade arrangements with a reputable broker or trading house.

Once these perceived concerns are overcome, Australian firms are more likely to engage in countertrade. They acknowledge that there are major benefits to be derived through countertrade, specifically that it increases sales volume and that it facilitates entry into difficult markets. Australian firms are aware that countertrade does augment the firm's portfolio of international marketing tools. As Australian firms seek to improve their international marketing performance, increased experience with countertrade is likely to improve the reception foreign countertraders receive in Australia.

Finally, international marketing managers who seek to market their goods and services in Australia need to be familiar with past patterns of Australian counter-trade. A knowledge of the major forms of countertrade employed, the countries served, and the product and service categories countertraded will enable them to identify, and to take advantage of, emerging opportunities in the Australian market place.

(The paper from which the above is extracted is entitled "Survey of Countertrade Practices in Australia", by Aspy P. Palia and Peter W. Liesch. It is a precis of another paper, "Attitudes of Managers of Australian International Business Firms Toward International Countertrade", by Aspy P. Palia and Peter W. Liesch, a Department of Management Working Paper series of the University of Tasmania. A copy of the paper should be available from Professor Liesch, Department of Management, University of Tasmania, PO Box 1214, Launceston, Tasmania, Australia 7250. This summary is printed in Countertrade Review with acknowledgments.)

It is a commonplace to say that all business is built on trust, but this is even more so with countertrade. A countertrade transaction can scarcely proceed if the two parties involved mistrust each other or do anything to arouse suspicion of mistrust. A countertrade deal is difficult enough when each party collaborates fully with the other, and approaches the deal is a positive manner, intent on making it work and in overcoming all the obstacles.

Frequently each party comes to the deal with a different background of experience. One may have negotiated many countertrade or offset deals, and will know beforehand all the pitfalls likely to be encountered. The other party could be undertaking a countertrade deal for the first time. There could a strong temptation for the wiser party to take advantage of his superior knowledge to negotiate a deal that is much to his advantage and, on the other hand, to the other party's disadvantage.

This will soon rebound on the one who thought he was so smart. Not only will the aggrieved party be very reluctant to do business with him again, but he will let it be known to his business compatriots, banks and government officials that the other firm is not to be trusted. Further business could be impossible, not only with the inexperienced party, but with other companies in the same country.

Any exporter entering into a countertrade deal would be foolish to behave in this unethical way, even though there might be a short-term advantage to him. Countertrade goes beyond an everyday sales transaction; it is an excellent opportunity to create a partnership with the purchasing company, to create a platform for continuing business, perhaps not necessarily on a countertrade basis. This is particularly true if countertrade is taken up as a pro-active marketing strategy. Any competitive advantage gained would be thrown away if the importer who has negotiated the countertrade is dissatisfied with the transaction.

The African Experience

It is now difficult to propose countertrade to many importers and governments in the African countries, because in the early days, in the 1970s, Western trading companies took advantage of the comparative ignorance of then people with whom they were dealing. These eventually realised when the sums were done at the end of the deal that they had come off a decidedly second best, that the goods they had imported were obsolete or otherwise unsatisfactory. Perhaps no provision had been made for spares or servicing, or they were greatly overpriced. Or, their own commodities sold as countertrade goods, were bought at below world market prices.

One example has been the technique of the "swing" employed by an international trading company in its commercial transactions with certain African countries. A kind of clearing account was set up, the African country's sole commodity was taken out and sold, Western goods were supplied in return, more than necessary to cover the cost of the Western goods. This made it possible for the trading company to export more Western goods, more than the value of the credit. The prices were manipulated; the swing continued, much to the trading company's advantage. Explaining Countertrade

Countertrade is an ideal marketing strategy to penetrate markets in the under-developed world. But it would be natural for the importer in any of these countries to be quite ignorant of the complicated procedures that have to be followed. They are likely to be suspicious from the very beginning, and could have a post-colonial mentality that would alert them to being exploited once again by the Western exporter. The creation and fostering of confidence then is a vital part of the marketing strategy.

This would require patience and an ability to keep the long-time goal in sight.It calls for careful explanation of the countertrade process, step by step, particularly why it is necessary to take certain safeguards, such as taking delivery and disposing of the counter-trade goods first, and placing the proceeds in an escrow account, before the Western goods are delivered. The buyer's position can surely be appreciated, that he will be providing goods and having them sold for hard currency, with the possibility of not seeing his money, or the goods he is buying. The creation of trust is the only way in which this can be overcome. It follows too that there should be a scrupulous adherence to all the correct banking procedures, and a free and prompt flow of all information relating to the deal between the two parties.

This long-term approach is usually difficult for traders. Their mentality is to seize trading opportunities quickly, and to execute deals before these opportunities vanish. Furthermore, every deal has to show a profit, otherwise it is not worth undertaking. But they simply have to curb this impulse. Would it not be better to establish with the first deal an atmosphere of goodwill and mutual benefit, that would lead to a permanent trading relationship, even though that first deal might not yield an immediate profit?

The Offset Partnership

The need to establish a mutually beneficial partnership between the two parties is even more apparent in negotiating offsets. Any offset proposal involves long-term commit-ments, in setting up joint ventures, local investments, training programs, technology transfers, and so on. The savvy exporter realises that once he can create a relationship with the buyer which involves all of these activities, he is most likely to enjoy a long and fruitful business relationship. Maybe the cost of the offsets will at first be an addition to the tender offer which could make it unprofitable, but its real value should be seen to be in that it provides an excellent opportunity to cement a permanent working partnership.

A frequent difficulty in both countertrade and offsets is for the buyer to understand that offsets come at a price. It is obvious after a moment's thought, but the illusion still exists that offsets are offered as an act of generosity. However, the direction offsets are now taking is for the competitiveness of the offset proposal to be a decisive factor in the tender offer. Many buying countries seek opportunities to set up new industries, to introduce new technologies, and to export their primary products, through taking advantage of their big-ticket public-sector foreign purchases, and if carefully managed, offset proposals can achieve these ends and equally satisfy the seller as well as the buyer. Goodwill is the result, and that leads to a continuing, perhaps permanent partnership.