Reference no: EM133492481

Renewable Energy Production

Florida B.P. is a medium-sized business located in the U.S. The company produces biodiesel, a renewable energy source. Biodiesel is a type of biofuel produced as an alternative to fossil fuels and is viewed by many as the answer to reducing greenhouse gas emissions and the reliance on oil supply.

The Florida-based producer, owned and operated by its president, Manuel Correo, has successfully sold biodiesel within the U.S. since it opened its doors in 2007, and began exporting to Canada in 2012. The export relationship with Canada has gone extremely well and has been lucrative for Florida B.P. In addition, the transition to becoming an international exporter has been quite smooth due to the fact that Canada and the U.S. have a friendly trade relationship based on trade agreements, similar regulations, and common business practices.

Biofuels have existed for over a century: they used to run the first automobile engines in the 1800s, long before Henry Ford designed the original Ford Model T to run on ethanol, a popular biofuel source. Although they have been in use in numerous industries for many years, it is only recently that the government and-as a result-businesses have begun to push for increased use of biofuels. The transport industry in particular is seeing major legislative changes calling for the reduction in greenhouse gas emissions throughout the world.

The United Nations is leading the way, with a panel formed in 2009 to regulate the airline industry and impose minimum biofuel usage quotas. Forced to consider their future fuel needs, major airlines, and shipping companies have begun arranging the purchase of mass amounts of biofuels and investing in domestic biofuel production.

implemented its regulations. The objective is that 10 percent of transport fuel from each member country will come from renewable sources by the year 2020. Given the relatively short timeline, transport-based businesses are looking for ways to obtain a dependable and reasonably priced source of biofuels.

Discouraging First Attempt

Recognizing the future rise in demand for biodiesel, and with its Canadian success fresh in its minds, the Florida B.P. sales team began attending trade shows in Europe in order to build its reputation in the EU biofuels market. Before long, it had struck a deal with Fraser Transport, a Scottish transport company that runs a large fleet of buses and operates a number of fuel depots around the country, to
provide fuel for its fleet at less cost to the company. They negotiated a contract for a shipment of 500,000 gallons of biodiesel to be delivered within six months.

Triumphantly, the team returned home. Florida B.P. produced and shipped the biodiesel to Fraser Transport, and waited for payment to arrive via wire transfer. The contract stipulated payment upon receipt of the product, known as open account trade. Having traded with Canada many times in this manner, and knowing it was trading with a reputable company, it had not been concerned about the payment arrangements. As time went on, however, Manuel and his team became worried, and then seriously aggrieved. Although the Scottish company had paid 25 percent upon receipt of the product, it had provided nothing in the three months following that. After several failed attempts to contact Fraser Transport representatives, Florida B.P.'s chief financial officer turned the matter over to an international debt collection agency. The agency worked on the case for a year and recovered an additional 25 percent of the amount due.

Manuel and his team felt they had failed at their first attempt at overseas trade. Many aspects of the deal had not gone well. The collection company had recovered some money for them, but it had been expensive to hire and retain. In addition, the price had been negotiated in British pounds, which had decreased in value over the past year and a half. As a result, the partial payment received from Fraser Transport was reduced further when converted to U.S. dollars. Lastly, the initial phase of producing the 500,000 gallons had been successful, but when arranging to package and ship the biodiesel, the company had run into a number of unanticipated challenges and costs. This resulted in a minor delay and also had the company scrambling to pay for the unexpected expenses upfront.

Although it was discouraged, the team decided to make another attempt; this time, it would operate on advance payment only. Manuel traveled to the EU himself to meet with potential clients and returned to Florida has made a few sales. The company found advance payment worked well in that it was paid for its shipments in full and on time; however, the sales team strongly felt the payment terms it could provide were not competitive and were affecting success in the EU market.

Another Opportunity for Success

Manuel began investigating other options and found a financial institution to assist the company with its export financing. Through the options provided by the bank, Florida B.P. was able to offer a documentary collection option to its clients, allowing them to hold payment until confirmation of shipment via documents submitted to their bank of choice. The bank also assisted the company by offering extended payment terms, allowing Florida B.P. to take on larger orders and bigger clients. To assist with the many initial expenses involved in each sale, the company opted to request 10 percent of the total amount due upon signing of the contract. This allowed it to ensure it had the funds in its accounts to produce and ship the fuel without incurring penalties from the bank or late shipments.Finally, the Florida B.P. CFO made the decision to price all sales in U.S. dollars, thereby hedging its foreign exchange risk and protecting the company from fluctuations in the euro and the pound.

Over time, Florida B.P. became an experienced exporter of biodiesel fuel to the EU and beyond. Lack of experience had caused it to make mistakes that cost the company financially but benefitted it with newfound knowledge and improved processes that protected the business from risk while allowing it to remain competitive in the EU market.

Case Study Questions

1. Florida B.P. chose to use a debt collection agency to attempt to recover payment from Fraser Transport in Scotland. What alternative options could it have pursued to resolve the outstanding amount?

2. Florida B.P. has become more competitive by offering flexible payment options and extended financing terms to clients; however, it is continuing to price contracts in U.S. dollars, which is disadvantageous to buyers. What other strategy could it use to minimize its foreign exchange risk and become more competitive? Give reasons for your answer.