Volume #1, Special Issue#1
Editor: Jeffrey P. Graham
In This Issue: Evaluating Trade Leads
Trade leads are a very important aspect of the
import-export segment of international business. Until very recently, gaining
access to reliable sources of trade leads was a very expensive and time
consuming proposition for many small and medium sized companies (SME's). In
the United States, the Department of Commerce was the sole purveyor of trade
leads. Oh there were several so called "sources" for trade leads,
but most originated with the Department of Commerce. As the individual States
became more dependant upon international trade and investment for their own
economic development, their international divisions began soliciting trade
leads independently of the US Department of Commerce. In either case,
companies paid a monthly subscription fee in order to gain access to what was
available, whether it was appropriate or not. With the proliferation of trade
lead sources available on the World Wide Web (WWW), access to trade leads is
no longer a problem. What has not changed, however, is the time involved in
handling trade leads.
Enthusiastic proponents of the Internet will
always tell anybody willing to suspend common sense that more is better. What
is wrong with this concept, as is wrong with all Internet hype, is the
assumption that the additional information provided by the Internet can be
easily assimilated into a business enterprise and made useful without any cost
whatsoever. Therefore, the proliferation of trade leads now available on the
World Wide Web and in Usenet Groups should translate into more and better
opportunities for everybody. Nothing could be further from the truth because
the real problem with trade leads, is that most of them are of questionable
value.
First of all, for purposes of this discussion,
let me define what I mean by a trade lead. A trade lead is a specific offer to
buy or sell a particular product or service or a request for participation in
a business venture which is then posted for worldwide dissemination, either to
a government agency or a private group. A trade lead usually implies a
specific intent to conclude a transaction within a reasonable amount of time.
The time factor and intent to conclude a transaction is what supposedly
differentiates a trade lead from a company announcement or advertisement.
Trade leads can be categorized into two groups: 1)foreign government tenders
and 2) general procurement.
1) When a foreign government is going to
purchase some equipment for a project or possibly some services such as
engineering or planning, it issues a tender offer for the products or services
involved. Foreign firms wishing to bid on such offers usually have to pay a
fee to get a copy of the offer and the company requirements. While this fee
may be reasonable, it starts to become expensive if you bid on several
tenders. Often a performance bond must be posted as well. For those of you who
thought that English was the international business language, tell that to the
foreign government agencies who require that their tender offer bids be
completed in the language of their country.
What most SME's do not know is that usually
foreign tenders require the participation of a local company. What happens to
many SME's is that they spend good money only to find out that they are
actually not eligible to bid on the tender even though they might be really
capable of providing the good or service. Often, the tender offer is not
really well circulated outside of the country until the last possible moment.
What usually happens then is that a number of companies in that country will
solicit their overseas contacts with a letter stating that their company is
participating in this tender and has an excellent chance of winning the bid
with your company's assistance. You are asked to provide an itemized quote
including the manufacturer's name and brochures and then you are required to
add a 10-15% commission for the company.
One experience in particular demonstrated for
me why pursuing foreign tenders is not very easy. Several years ago, while
working as an export manager for a global trading company, I was mandated to
pursue a foreign tender whose value I thought to be questionable. However, the
new owner of the company knew nothing about international trade and was
certain that I was wrong. He felt it was important to pursue every lead. In
this instance, there were only three companies in the entire world which could
provide the equipment as specified in the tender offer. Two of those refused
to give me a price quotation because they recognized the tender offer and did
not wish to pursue it. In both cases, the export managers told me that they
would be happy to work with a trading company, especially in markets where
they had no representation, but that they generally did not bid on foreign
government tender offers because they were not comfortable with the commission
structure. The third company cheerfully gave me a price quotation which they
sent by fax. One page was missing and I had to call to request it. The clerk
who responded apologized profusely and then told me that she was glad that I
had caught her mistake because the previous ten companies who made the exact
same request for quotation had not. The foreign government finally chose two
local companies to compete as the project's agent. They both called the third
company asking for a large commission which was refused. The project was
finally dropped.
Foreign tender offers often tend to generate
very large commissions for local companies who are in good standing with the
government agency making the purchase. One reason for making the tender is to
lower the prices or obtain more favorable terms for the foreign government
agency which is actually the real buyer. It makes sense to participate in a
foreign tender offer as a subcontractor to the publicly acknowledged bid
winner. Estimate what it will cost you to answer an RFQ (request for
quotation) and any associated expense in inventory maintenance or initial work
up, whatever the case may be, and then have the bid winner post a cash
performance bond, if it is a domestic company or open a letter of credit in
your favor if the company is foreign. This eliminates the possibility of your
company wasting its time with pretenders. If a company is serious enough to
post a performance bond or open a letter of credit, then and only then are you
on safe ground. If you already have an existing relationship with a
distributor in a country and that distributor wants to bid on part of a tender
and makes a special request for quotation, you should , of course respond.
Most foreign tender offers involve huge
projects of one kind or another and by default they eliminate most SME's
because they are only capable of providing small parts of the whole project.
We do not think it is wise for export trading companies or the export
departments of small or medium sized companies to pursue foreign government
tenders unless they are dealing directly with an established distributor in
that market who already handles their products or as a sub-contractor to the
publicly announced contract winner with a performance bond/purchase order from
a domestic company or a letter of credit from a foreign company. We recognize
that these offers often seem very appealing but they can present complex
business issues which need to be resolved by competent international business
professionals. Unless a company has this talent in house, it can be a very
expensive proposition to just evaluate a deal without any chance of closing a
transaction.
Note to our foreign readers: We would give you
the very same advice about pursuing state and federal contracts in the United
States.
2) General procurement trade leads are usually
posted for three reasons: a) to advertise a company, b)to put price pressure
on a local distributor or c) to begin negotiating for a later purchase or
participation in a business venture. Prior to the proliferation of WWW sites
and Usenet groups dedicated to this activity, companies in the US paid the
Dept. of Commerce to access its BBS for trade leads. Many companies which
entered the export business in the 80's were very surprised to find out just
how inaccurate and unusable were many of these trade leads. According to my
own business contacts, the situation was very similar in many foreign
countries as well.
Many trade leads contain more information about
the company's business activity than they do about the particular transaction
being identified. Others ask for manufacturers brochures and contact
information and quite a bit of other information.
Who places trade leads? Foreign distributors
know exactly where to go when they want to buy something for resale. They do
not have to place a trade lead to procure anything except in very rare cases.
If a foreign distributor is placing a trade lead, it might be looking for a
new relationship or thinking about adding a new product to its line. Most
distributors will be straightforward and say that they are looking for new
relationships. End users tend to be more unwilling to divulge their interest
as they are often competing with distributors in their home market.
If you talk to people who actually sell in
foreign markets, they will privately tell you that their best leads are the
ones which they generate themselves usually by direct mail.
So that my foreign readers are not offended and
my American readers clearly understand the message which I am trying to
convey, trade leads can be valuable information but they must be interpreted
properly. I am not implying that foreigners or Americans are being deceptive
when they post trade leads. I am saying that newbies to foreign trade who read
a couple of magazine articles and think that they are ready to immediately
jump into import-export trade are fooling themselves. And it is these people
who often make the most serious mistakes about responding to trade leads. A
trade lead means something quite different to any experienced international
trader who understands how business transactions are concluded in foreign
markets.
The Internet presents troubling issues even for
the most experienced international business people because of the enormous
amount of misleading information which is pumped into the system; a system
which is not yet ready to process this amount of information. One is really
evaluating the company which posts the trade lead and this is now a very
tedious process. Twenty years ago, one could check a telex address and some
bank references and know rather quickly how credible a particular company
might be in a particular market because there were far fewer companies and
individuals doing business. If a company did not own its own telex machine but
used a telex service, this was one clearly distinguishing characteristic which
was quite helpful in the evaluation process. Since 1987, the year generally
accepted as the turning point for the domination of facsimile machines
worldwide, it has become much easier for small companies to enter global
business as traders and offer specialized international business services.
Since 1993, when the browser technology really began to take off and the
Internet began to seriously emerge as a marketplace, the changes have been
staggering. In the United States, anybody with $18.95 per month can have
unlimited access to the Internet, 7 days a week-24 hours per day. With fax
machines costing less than $200 and computers as little as $1000 per system,
anybody can get two simple telephone lines and one room in a house, apartment
or commercial space and set up their business very easily for a reasonable
amount of money.
It is not unusual for people who are just
wishfully thinking to write and post trade leads which are designed primarily
to elicit responses. These "companies" have limited capability to
engage in a business transaction, but their access to the Internet allows them
to proliferate what many call "trade leads" but which almost always
turn out to be worthless junk. The problem is that these so called trade leads
present very appealing business opportunities and are often skillfully
written. Such postings can send companies on time consuming and very expensive
fishing expeditions which yield no sales and have little potential for future
business as well.
A trade lead in 1997 means something quite
different than it did in 1977; both here in the United States and around the
world as well. Newbies to international business are going to have to face
this dilemma head on because it is now an integral part of the international
business learning curve. Some trade leads, especially sell offers, are only
valid for a very short time. Trade leads for used equipment are somewhat
tricky and really require proven expertise. And does anybody really know how
to evaluate close-outs?
Following are some guidelines for evaluating
trade leads:
1) Look for key words which might indicate a
company who is gathering information and not actually going to buy. Always be
suspicious of companies who ask for detailed information about manufacturers'
prices and do not identify themselves as distributors looking for new lines.
2) Be very wary of companies who post trade
leads for large orders and are not easily located in any company or industry
directories. These are often small companies who will issue an RFQ (request
for quotation) for large quantities in order to get a lower price and then
will try to order a very small quantity at that price.
3) Do not be unduly influenced by flowery
language. Many small manufacturers get trapped by this when they are looking
for a distributor.
4) Be careful of locked market activities. This
trade lead will specify a particular product. Your company contacts the
manufacturer, hoping to make a commission on the sale, only to find out that
the manufacturer already has representation in that country and will not sell
the product to you for resale to that market because they want to protect
their distributor relationship.
Locked market activities probably represent a
significant amount of the trade leads available. What you have are smaller
distributors who are selling just enough to make it profitable for them to try
and circumvent the major distributor in their market.
5) Ignore any trade lead which has "letter
of intent" or "letter of interest".
6) Ignore companies who claim to deal in any
commodity traded on world markets and who are placing trade leads. Traded
commodities such as coffee, sugar, urea, oil and gold are handled by well
established companies in well established markets. These companies do not
place trade leads in order to do business.
7) Be very wary of international business scams
designed to separate you from your money. Be suspicious of anybody who prefers
phone conversations to written documents. Do not get sucked into fantastic
business opportunities which promise to yield you, an inexperienced
international trader, huge profits with no risk. Learn which countries and
areas have a reputation for spawning international business fraud and avoid
them like the plague. Never ever respond to business opportunities which
require you to make wire transfers in advance of receiving goods or services.
Following are some guidelines for responding to
trade leads:
1) Design your collateral materials to answer
the most basic questions and provide enough information for a buying decision
to be made.
2) Invest some money in a digital catalog of
your products which can be easily transmitted via e-mail or sent by postal
mail on a floppy disk. For simplicity's sake, keep the price list and the
actual graphics separate, so you can easily edit either one.
3) Do not fall into the sample trap. Unless
your samples are extremely inexpensive, charge a minimal fee for them. Do not
make a habit of sending samples to anybody who asks for them. Identify the
person who is making the request and make sure that this person is the one
making the buying decision.
4) Understand that most foreign distributors do
not make fast buying decisions. It is not at all unusual for an initial order
to require 9-18 months from the time of the initial solicitation depending
upon the cost of the item.
5) Understand the difference between selling to
an end user on a one time basis and selling to a foreign distributor for
future distribution. Obviously, you would want to give the distributor more
consideration.
6) Identify your buyer!!!
Manufacturers need to be very careful of companies who place an order
immediately after your initial response. In some countries, selling to one
distributor can by law obligate your company to designate that company as your
distributor in that country. Be very careful about designating any company as
a distributor without verifying whether or not this will grant exclusivity by
law.
It is a good idea to try to identify your
buyer. Some companies are so eager to sell in foreign markets that they are
unwilling to do this. We do not advise this. If you respond to a trade lead
and provide the requested information and samples, you have a right to be in
contact with the person making the buying decision. There are several reasons
to do this, but wasting your time is the most important.
7) Do not respond to requests for letters
inviting a potential buyer to your country for a meeting unless you are
already doing business with the company. This is sometimes used as a scam to
get a visa for entry on the pretense of doing business. This type of letter is
risky unless there is a significant business deal involved. In such a case,
you should contact your country's foreign commercial attaché in that country
and see if they can make a personal visit on your behalf.
8) Use some common sense. Yes you have to be
polite, but that does not mean that you should spend $10,000 and a week to
travel overseas to get a $600 order. Everybody would like to meet the people
with whom they are doing business overseas, but that is not always practical.
Do not hop onto an airplane every time some distributor sends you a very
pleasant letter about how much potential business there is in his/her country.
For companies who are new to international
trade, huge mailings of collateral materials in response to trade leads
represent a significant investment in time and staffing. Try to evaluate the
lead as best you can in order to make a judgment about its priority. Yes, you
do want to respond to any possible sales lead. However, there is a difference
between a bona fide sales lead and a company which is announcing itself and
gathering information for future reference. That company which is gathering
information may very well make a purchase but in all likelihood it will be
later as opposed to sooner. Only time and experience will allow you to tell
the difference.
