Reference no: EM132873595

Once Automotive Exports Inc. (AE) had decided to enter the Okinawa market, Raymond Dekker, the general manager, turned his attention to specific arrangements for financing the exports transactions to the island. Automotive's intention was to have the customers of its Okinawa sales agent, Ryukyu Trading Company (RTC), finance the shipments through letters of credit. On the first order received from RTC the letter of credit had been delayed. Dekker had wanted to make prompt shipment to show the Ryukyu organization and its customers the fast service and deliveries they could expect from AE. For this reason, he did not wait for the technicalities involved with the letter of credit to be resolved and proceeded with the shipment, using a "to-order" bill of lading to retain title and control of the merchandise. As the matters turned out, the shipment arrived in Okinawa before the letter of credit was received in the United States. When it did arrive, AE presented it to its bank along with the shipping documents. The bank promptly made the payment in dollars and airmailed the documents and clearances to its correspondent bank in Okinawa where they were relayed to the customer. Dekker had quoted the lowest export prices possible on the order and had advised RTC of its commission percentage as agent and the terms of sale: letter of credit from the local customer. Since Dekker had discovered that Ryukyu's customers would buy only on a delivered-price basis, AE had to give its new agent a fairly accurate basis for estimating the c.i.f. charges on each of the lines. On some of the early quotations following the first order, the Ryukyu's c.i.f. estimates were too low and its customer's letter of credit did not cover all costs. In these cases, the Ryukyu's account was charged for the balance. Conversely, when the estimate from Ryukyu was too liberal for c.i.f. charges, the difference was credited to its account. By trial and error, the Ryukyu improved its c.i.f. quotations and, after several shipments, they corresponded closely to the exact shipping charges

• After a series of orders had been received from the Ryukyu Company, the financial delays showed clearly that wholesalers on the Island of Okinawa were having considerable trouble getting letters of credit. The reason was that the importer had to make a full deposit of the amount with the local bank before they would open the letter of credit. Since the period of about 90 days was required - after the order was placed and the letter of credit was issued - before the goods were received in Okinawa, a severe strain was being placed on the working capital of the auto parts importers. In view of this, Dekker believed that, if practical, other financial arrangements should be made to replace the particular letter of credit procedure being used. The delays in opening letters of credit might have to be accepted as a necessary evil - a condition of doing business in Okinawa. On the other hand, it might be possible to effect other terms of payment.

Problem 1. What kinds of problems were caused by the current method of financing? Analyze all aspects carefully.

Problem 2. Which alternative methods of export financing are available? (Exclude methods that rely on government subsidies or risk underwriting.)

Problem 3. Carefully analyze the applicability of each method to the situation as depicted in the case.

Problem 4. Which of these methods would you use if you were AE? Why?

Problem 5. To what extent - if at all - will the nature of the product influence your decision? 6. If Okinawa had its own currency, in which currency should the shipments be invoiced? What is your rationale for your choice?