The assignment of export risk management begins with knowing what the risks are actually. Your first step is therefore to identify the risks in export, types of export risk. Risks are involved in all business transactions either domestic or international. But risks in overseas trade are quite different from domestic trade. More risk is involved during international exports than exporting to domestic market. Therefore, it is essential for the companies which are going to enter in the field of exporting to devote time and money to measure all the risks related to exporting business and setting up risk management plan.
There are many risks and challenges involved in exporting business. Different types of risks involved are:
Financial Risk or Credit Risk
This risk refers to risk of insolvency, non-payment, late payment, default or fraud by foreign buyers. This is incurred because it’s difficult for an exporter to verify the buyer’s creditworthiness and reputation due to larger distances between trading parties. Thus, it is essential for the exporters to collect reports from overseas credit agencies about the financial strength and business reputation of buyer’s firms.
Poor Quality Risk
This is the risk of rejection of entire shipment after the arrival at importer’s premises due to poor quality of exported goods. So, it’s better to check the quality of goods properly before exporting the same. Sometimes importers may ask a pre-shipment inspection that will be conducted by an independent inspection company or it may be suggesting by the exporter to the importer during the negotiation stage that such an inspection be carried out as part of the contract. Such an inspection protects both the importer and the exporter. The costs for the inspection are borne by the importer or it may be negotiated that they be included in the contract price.
Alternatively exporting product samples to importer by an international courier company is a good option. But remember final products produced and shipped must be same as product samples.
This is the risk of transferring goods from one country to another. While transporting, there is the risk of theft, damage and possibly the goods not even arriving at all.
Logistics risks relate to risks of international logistics. The exporter must consider all aspects of international logistics, in particular the contract of carriage. This carriage contract is drawn up between a shipper and a carrier (i.e. transport operator) and largely depends on Incoterms 2010.
This risk arises due to changes in international laws and regulations. They change frequently and are different from country to country. So, it is important for the exporter to drafts a contract in conjunction with a legal firm, in this manner ensuring that the exporter's interests are taken care of. Exporter must be clear about the law and dispute-settlement procedure that will apply to the contract. Great care must be taken in assessing the legal aspects of trade with a particular country.
This risk arises due to instability of government sector. As a result, government policies changes frequently. Thus, exporters must be persistently aware of the policies of foreign governments in order that they can change their marketing tactics accordingly and take the necessary steps to prevent loss of business and investment. It is important to inform exporters to be aware of government interference in the target market.
Unforeseen risks arise due to unexpected occurrence in a country like a natural disaster (earthquake) or terrorist attack. This may completely destroy an export market or exported goods of a company. So, it is important for the exporters to ensure a force majeure clause to be included in any international contract the exporter concludes.
Exchange Rate Risks
The possibility of exchange rate movement is referred to as ‘exchange risk’. The exporter must approach the Foreign Exchange division of his bank prior to quoting any prices internationally. Hedging scheme is a strategy that the exporter could follow in order to protect against the influence of exchange rate movements.
This involves the risk of a country ceasing or restricting access of particular goods into their market. This restriction is place by the use of embargos, tariffs and quotas. It’s may be due to political reasons.
Culture and language risk
Cultural and language risk involves in almost all exporting business because both the parties are from different countries. So, their culture, language and taste are different.
The main purpose of export risk management is to reduce the risks to the most favorable level faced by a company. The way a company manages its export risks is linked to its attitude to risk and to its degree of competitive edge.
A company can manage their export risks by the following ways:
For mitigation of their credit risks, companies ask their customers to pay in advance. They may set credit limits and adjust these to reflect their customers’ payment performance.
By the risk avoidance method companies exported their products only in those countries which are economically risk-proof. Avoiding export risks are not entering markets with political instability or cutting off supplies to customers with a poor payment culture.
Risk transfer means Insurance against export. Insurance cover costs money and reduces margins in export business. Many companies use Letter of Credit (L/C) for securing their payment take out product liability insurance if major losses are a possibility.
Risk acceptance means the exporting company may decide to bear the risk of payment default itself.
Export risk management strategies Accept, Transfer, Avoid and Mitigate offer ways of reducing the risks that exporting companies run. Though, some of the measures also have some costs.
Always remember that periodical checking of the positions of export business ventures in the export risk matrix and amending them if export opportunities and risks change is required.