INTERNATIONAL BUSINESS
Case Study 1 - Documentary Credit (Marks -16)
M/S Auto India
Introduction
M/S Auto India is a public limited company; they manufacture SUVs
(sports utility
Vehicle), in technical collaboration with General Motors of USA. The
company has established their
manufacturing base at Ranjangaon in Pune. They have acquired an area
of 250 acres and the total
project cost is estimated at Rs 1500 crores. As per the projections,
the company is slated to achieve a
25% market share in the Indian market, within a period of two years.
Out of the total project cost, 49% is brought in by General Motors and
the rest is tied up with financial
institutions, international banks and Indian banks. The working
capital is financed by a consortium of
banks in which Global bank, Pune branch, is the leader. The company
imports many parts of the car
engine in a CKD (completely knocked down) condition from General
Motors, Detroit, after establishing
import letters of credit through its main bankers, Global Bank, Pune
Branch.
M/S Auto India approached Global Bank, Pune for opening of import
letter of credit as per UCP ICC 600
for USD 100,000, on sight basis, in favour of General Motors, Detroit.
Type of credit - Irrevocable negotiable
Application - UCP ICC 600
Applicant - M/S Auto India, Pune, India
Beneficiary - M/S General Motors, Detroit, USA.
Issuing Bank - Global Bank, Pune, India
Advising Bank - The American Bank, New York
Negotiating Bank - The American Bank, New York
Reimbursing Bank - International Bank, New York
Availability - Negotiable at sight
Expiry - At the counters of The American Bank, New York
Amount - USD 100,000
Merchandise - Car engine parts
Quantity and price - 50 units @ USD 2000 per unit
Circumstances
Issuing Bank
Global Bank, Pune issued its irrevocable negotiable credit through its
head office in Pune
since Global Bank co-ordinated all its accounting and communication
functions at its head office. The
Bank’s head office transmitted the credit through Swift network as
instructed by its Pune branch to General Motors, Detroit, through The
American Bank, New
York.
Advising Bank
The American Bank, New York advised the credit to General Motors,
Detroit on receipt
of the swift transmission.
Credit
Along with other conditions, the credit clearly stated that the
negotiating bank was to
forward the documents directly to Global Bank’s head office at Pune.
Beneficiary
After export of the consignment, General Motors, Detroit presented the
documents under
the credit to The American bank, New York.
Negotiating Bank
The American Bank, New York, examined the documents presented by
General Motors
and determined that they were in compliance with the terms and
conditions of the credit. The
American bank negotiated the documents and forwarded the documents, as
per the credit
terms, to the HO of Global Bank in Pune and claimed reimbursement from
International
bank, New York.
Reimbursing Bank
International Bank, New York honoured the reimbursement claim by
crediting the current
account of the American Bank, New York and debiting the account of
Global Bank, Pune, in its
books.
Issuing Bank Head Office
Global Bank’s Head Office, at Pune, received the documents and after
internal
registration of the documents, forwarded the documents to its Pune
Branch by inter-office
mail.
Issuing Bank Branch
On receipt of the documents by the Pune branch of Global Bank, they
examined the
documents and determined that they were discrepant. They were (a) 60
units were
shipped instead of 50 units, thereby overdrawing the credit value by
USD 2000 (b)
Inspection certificate by Auto Inspection Council, USA is not
submitted, as per credit
terms. Global Bank contacted Auto India for waiver of the
discrepancies.
Applicant
Auto India requested for copies of the documents to be forwarded by
fax and after
reviewing the same, they refused to waive the discrepancies.
Issuing Bank Branch
Global Bank, Pune Branch instructed its HO to transmit an
authenticated swift to The
American Bank, New York stating that Global Bank had rejected the
documents for the noted
discrepancies, requesting the American Bank’s instructions as to
disposal of the documents,
and demanding a refund of the funds reimbursed.
Issuing Bank Head Office
The HO of the Global Bank sent the authenticated swift message to the
American Bank,
New York, as instructed by its Pune Branch.
Negotiating Bank
On receipt of the swift notification advising that Global Bank had
rejected the documents
for the stated discrepancies, the American Bank informed Global Bank
that it did not accept
the rejection of the drawing since the Global Bank did not comply with
UCP 600 sub-article 14
for standard examination of documents. Therefore, Global Bank was said
to be stopped from
dishonouring its irrevocable obligation.
Issuing Bank
Global Bank, Pune Branch responded by stating that they acted in
accordance with UCP
article 14, since their
action did not exceed five banking days following the day of receipt of the
documents at their branch counters after which they scrutinised the
documents and
determined to refuse them. They maintained that as per article 14
of UCP 600, they notified
about the rejection of the documents, by swift, not later than the
close of the fifth banking day
following the day of receipt of the documents. They had pointed out
all the discrepancies and
had informed American Bank, New York that they were holding the
documents at the latter’s
disposal.
Negotiating Bank
The American Bank, New York replied as follows:-
We disagree with your position that you acted in accordance with UCP
600 article 14.
Documents were delivered by courier to your HO as per the terms of the
credit, on Monday,
January 7, 2008. Your swift notifying rejection of the documents was
not sent until
Wednesday, Jan 16, 2008 that is, on the eighth banking day after
receipt of the documents
by your bank.
Issuing Bank
Global Bank, Pune Branch, responded by stating that even though its HO
received the
documents on January 7,2008; the Global Bank’s Pune Branch did not
receive the documents
until the following Thursday, January 10, 2008, and the swift advice
rejecting the documents
was sent within the time period permitted in UCP article 14.
Negotiating Bank
The American Bank, New York, replied that it was not their concern how
Global Bank’s
operational policy impacted on their inability to comply with UCP. The
American Bank, New
York stated that in accordance with the credit terms and conditions,
documents were
negotiated by them and forwarded to Global Bank’s HO by courier. The
documents were
received by Global Bank on Jan 7, 2008, and any notice of rejection of
the documents should have been
given within the close of the fifth banking day following receipt of
the documents. Global Bank’s Pune
Branch failed to do so. Therefore, the American Bank, New York’s
position was firm relative to UCP 600
article 14 and they would
not refund the funds reimbursed.
Questions
1) Was Global Bank, Pune Branch correct in its argument, as the credit
issuing bank?
2) Was the
stand taken by The American Bank, New York correct, as the negotiating bank?
Foreign Trade
M/S Taneja Exports, Mumbai
Introduction
Mr. Gurmeet Taneja and Mr. Rahul Khatri are partners of M/S Taneja
exports, Mumbai.
Both of them qualified from IIFT, New Delhi in the year 2002. They
declined lucrative
corporate job offers, since they have decided to plunge into the world
of international
business.
M/S Taneja Exports is registered as a partnership firm, with Mr.
Gurmeet Taneja and Mr. Rahul
Khatri sharing the profits in the ratio of 60: 40.
The partners had conducted in depth market survey in the domestic as
well as
international markets regarding the demand of women’s apparels in
cotton and hosiery. They
have taken the assistance of Apparel export promotion council and the
marketing agencies in
various countries of European Union.
On account of their knowledge in foreign trade, they were able to
quickly assess that Indian
exporters have not succeeded in penetrating into the huge apparel
market of Europe.
They found out that the main reasons were ineffective marketing,
improper quality control and
non adherence to the shipping schedules. Mr. Gurmeet concentrated on
marketing of the
cotton and hosiery apparels abroad and Mr. Rahul ensured on the
procurement of the raw
materials and timely execution of shipments.
The firm had taken an industrial gala, measuring 700 sq ft, at 501,
Mangal Das market, Lower
Parel, Mumbai. They were paying a monthly rent of Rs. 35,000/- for the
office premises and
the stock of garments was kept in a godown in the same gala area, for
which the rent
payable was Rs. 15,000/- pm
The firm was sourcing their raw materials from the south Indian towns
of Tirupur and
Coimbatore. As per the export orders, they were providing the raw
materials for job works
in Mumbai and subject the samples to rigorous quality and
specification checks. The firm had
employed 2 accounts staff and 3 contract workers to attend to daily
office and godown
activities.
The firm was able to achieve steady improvement in export sales due to
the stringent quality
control measures and timely execution of shipment schedules. The
following were the credit
facilities enjoyed from M/S International Bank of India, Fort branch,
Mumbai.
Facility (Amount in Lakhs) 2003 2004 2005
Fund based
a) Export packing credit 5.00 7.00 10.00
b) Foreign bill purchased/Foreign
bill negotiated
5.00 7.00 10.00
Non Fund based
a) Performance guarantee 2.00 5.00 7.00
Export sales 20.00 30.00
40.00
Towards the security of the credit facilities, the firm had mortgaged
the residential house,
valued at Rs 85 lakhs, belonging to Mr. Vikram Taneja, father of Mr.
Gurmeet Taneja, and
stocks valued at Rs 15 lakhs was also hypothecated to the Bank. Mr.
Vikram Taneja stood
guarantee for the facilities sanctioned to the firm.
M/S Taneja exports used to avail the export packing credit facility
from International Bank of
India and adjust the same by purchase or negotiation of the export
bills drawn on their
European buyers. Generally the bills carried a tenor period of 60
days. Most of the export bills
were drawn and send for collection through international Bank of
India, Mumbai Fort Branch,
to the foreign buyer’s bankers, based on the confirmed purchase order
of the buyer. The bills
were paid on the due dates and the conduct of the account on the
bank’s books was quite
satisfactory. Based on the past history and the increase in
sales turnover achieved by the firm, the bankers were happy to
increase the credit limits
from Rs 7 lakhs in 2003 to Rs 17 lakhs in 2005.
On June 17, 2005, the firm submitted an export document to
International Bank of India, Fort
Branch, for Euro 53000.00, drawn on M/S St Laurn Fashions, Paris. The
documents were
drawn on 60 days DA terms as per the contract. The merchandise under
the export were ladies
garments in cotton and hosiery. In the covering letter of the firm to
the bank, they had
instructed the bank to present the documents to St Laurn, Paris,
through their bankers viz,
Credit Lyonnais, Paris. The exporter had submitted bills of exchange,
bills of lading, commercial
invoice, packing list, inspection certificate, certificate of origin
and in the bill of exchange it was
typed as ‘to be co-accepted by credit Lyonnais’.
The International Bank of India took the documents in its books and
sent the documents for
collection to Credit Lyonnais, Paris. In due course, they received
communication from Credit
Lyonnais that the documents were accepted by St Laurn and due date of
the
documents were August 25, 2005.The bankers informed the due date of
the bill to Taneja
exports. On August 30, 2005, Taneja Exports informed the bankers that
they are yet to receive
the payment of the bill for Euro 53000.00 in their books. The bank
sent a swift message
enquiring about the fate and payment of the bill. Two days later the
bank received a message
from Credit Lyonnais saying that the importer, St Laurn, had become
bankrupt and they were
unable to pay the bill. International Bank of India informed the same
to Taneja Exports. They
argued with the bank that they had clearly mentioned in the bills of
exchange that the
documents were to be released against the co-acceptance of the
French bank only. Immediately the Indian bank send a message to Credit
Lyonnais that
since the bill of exchange contained the co-acceptance clause by the
French bank, they
are liable to pay even though the importer had become bankrupt. The
French bank refuted the
claim of the Indian Bank and intimated that the bank’s collection
instruction did not contain
any co-acceptance clause by the French bank and they had acted as per
the provisions in the
uniform rules for collection in the ICC publication No 522.
Since payments were not forthcoming, Taneja Exports filed a suit with
the National Consumer
Forum, New Delhi for deficiency of services by International Bank of
India, Mumbai, on
November 10, 2005. They put forth the argument that the bank was
deficient in not
mentioning about the co-acceptance clause in their covering letter to
the French bank and in
case of non-coacceptance by the French bank they would have returned
the documents to
India and the exporter could have arranged for an alternate buyer or
re- import of the
merchandise. This negligence on the part of the bank had caused them
total financial loss.
After hearing the arguments of both the parties, The National Consumer
Forum gave the
judgement, on February 6, 2006, that the International Bank of India
was deficient and
negligent in their services and ordered them to compensate the value of
the export bill of Euro
53000.00 (approx Rs 24 lakhs) along with 15% interest, till the date
of payment.
The bank went on appeal against the order of the consumer forum in the
Supreme Court on
March 20, 2006. After hearing the counsels of both sides, the Supreme
Court gave the
judgement that since the original agreement between the exporter and
importer do not have
any co-acceptance clause by the importer’s banker, the co-acceptance
clause on the bill of
exchange cannot be binding on the French Bank as well as on the Indian
Bank.
The bankruptcy of the importer is the reason for loss to the exporter
and not the deficiency of
service by the bank. The Supreme Court set aside the judgement of the
National consumer
forum and passed the judgement in favour of the bank, with costs, on
March 15, 2007.
Questions
1) Elaborate the deficiency of service on the part of the bank,
pointed out by the National
consumer redressal forum, in the light of the uniform rules for
collection ICC publication
No.522.
2) Advise the firm about the precautions they should have taken to
avoid such a colossal
business loss.
3) Discuss the remedial measures the bank in India should take to
avoid such damaging
judgements by the consumer forums.
4) Elaborate the Supreme Court judgement in the context of the
international banking
rules and
practises, as guided by the ICC publications.
Case-3 (Marks -16)
LATE MOVER ADVANTAGE?
Though a late entrant, Toyota is planning to conquer the Indian car
market. The Japanese auto major
wants to dispel the notion that the first mover enjoys an edge over
the rivals who arrive late into a
market.
Toyota entered the Indian market through the joint venture route, the
partner being the Bangalore based
Kirloskar Electric Co. Known as Toyota Kirloskar Motor (TKM), and the
plant was set up in 1998 at Bidadi
near Bangalore.
To start with, TKM released its maiden offer— Qualis. Qualis is not a
newly conceived, designed, and
brought out vehicle. Rather it is the new avatar of Kijang
under which brand the vehicle was sold in
markets like Indonesia.
Qualis virtually had no competition. Telco’s Sumo was not a
multi-utility vehicle like Qualis. Rather, it was
a mini-truck converted into a rugged all-purpose van. More
importantly, Toyota proved that even its old
offering, but decked up for India, could offer better quality than its
competitor. Backed by a carefully
thought out advertising campaign that communicated Toyota’s formidable
global reputation, Qualis went
on a roll and overtook Tata Sumo within two years of launch.
Sumo sold 25,706 vehicles during 2000—2001, compared to a 3 per cent
growth over the previous year,
compared to 25,373 of Qualis. But during 2001—2002, it was a different
story. Qualis had been clocking
more than 40 per cent share of the market. At the end of Sept 2001,
Qualis had sold over 25,000 units,
compared to Sumo’s 18000 plus.
The heady initial success has made TKM think of the future with robust
confidence. By 2010, TKM wants to
make and sell one million vehicles per year and garner one-third share
of the Indian market. The firm is
planning to introduce a wide range of vehicles—a sub-compact, a sedan,
a luxury car and a new multiutility
vehicle to replace Qualis. A significant percentage of the vehicles
will be exported.
But Toyota is not as lucky in China. Its strategy of ‘late entry’ in
China seems to have back fired. In 2005,
it sold just 1, 83, 000 cars in China, the fastest growing auto market
in the world. Toyota ranks ninth in
the market, far behind Volkswagen, General Motors, Hyundai and Honda.
Toyota delayed producing cars
in China until 2002, when it entered a joint venture with a local
company, the First Auto Works Group
(FAW). The first car manufactured by Toyota FAW, the Vios, failed to
attract much of a market, as, despite
its unremarkable design, it was three times as expensive as most cars
sold in China.
Late start was not the only problem. There were other lapses too.
Toyota assumed the Chinese market
would be similar to the Japanese market. But Chinese market, in
reality, resembled the American market.
Sales personnel in Japan are paid salaries. They succeeded in building
a loyal clientele for Toyota by
providing first-class service to them. Likewise, most Japanese auto
dealers sell a single brand, thereby
ensuring their loyalty to it. Japan is a relatively a well-knit
country with an ethnically homogeneous
population. Accordingly, Toyota used nationwide advertising to market
its products in its home country.
But China is different. Sales people are paid commissions and most
dealers sell multiple brands.
Obviously, loyalty plays little role in motivating either the sales
staff or the dealers, who will ignore a slow
selling product should a more profitable one turn up. Besides, China
is a large, diverse country. A
standardized ad campaign will not do. Luckily, Toyota is learning its
lessons. Competition in the Chinese
market is tough, and Toyota’s success in reaching its goal of selling
a million cars a year, by 2010, is
uncertain. But, its chances are brighter as the company is able to
transfer lessons learned in the American
market to its operations in China.
Questions:-
1. Why has the late corner’s strategy’ of Toyota failed in China,
though it succeeded in India?
2. Why has
Toyota failed to capture the Chinese market? Why is it trailing behind its
rivals?
THE EU’S LAGGING COMPETITIVENESS
In a report produced for the European Commission, published in
November 1998, it was argued that the
EU lags behind the USA and Japan on most measures of international
competitiveness. Gross domestic
product per capita, sometimes used as an indicator of international
competitiveness at the country level,
was 33 per cent lower in the EU as a whole than in the USA and 13 per
cent lower than in Japan. The EU’s
poor record in creating employment was singled out for particular
criticism. As this appeared to apply
across 2. the board in most industrial sectors, it suggested that the
EU’s poor performance related to the
business environment in general and, in particular, to the flexibility
of Europe’s labor markets and
excessive regulation in markets for goods and 3. Services. A shortage
of risk capital for advanced
technological development and high cost and 4. Inefficiency of
Europe’s financial services was also
highlighted by the report. For one reason or another, European
industries generally lag behind in
technology industries. If measured by the number 5. of inventions
patented in at least two countries, the
USA is well ahead of most European countries, as well as Japan.
Despite these shortcomings, the report’s
authors focus attention on flexible markets, market liberalization,
and the creation of a competitive
business environment rather than on targeted intervention by the EU or
national authorities.
Questions:-
1) Is gross domestic product per capita a useful indicator of
international competitiveness in the EU?
2) Is it fair to point the blame for the EU’s poor international
competitiveness at inflexible labor markets,
regulated goods and services markets, and a general lack of
competition? What alternative explanations
might be suggested? What appears to be the problem with the EU’s
banking sector?
3) Is the number of patents registered a useful indicator of superior
international competitiveness? Why
do you think the USA does well in this area?
4) Should the
EU consider more targeted intervention in the form of subsidies or strategic
trade policy?
Case-5 (Marks-16)
AT THE RECEIVING END
Spread over 121 countries with 30,000 restaurants, and serving 46
million customers each day with the
help of more than 400,000 employees, the reach of McDonald’s is
amazing. It all started in 1948 when
two brothers, Richard and Maurice ‘Mac’ McDonald, built several
hamburger stands, with golden arches in
southern California. One day a travelling salesman, Ray Kroc, came to
sell milkshake mixers. The
popularity of their $0.15 hamburgers impressed him, so he bought the
world franchise rights from them
and spread the golden arches around the globe.
McDonald’s depends on its overseas restaurants for revenue. In fact,
60 per cent of its revenues are
generated outside of the United States. The key to the company’s
success is its ability to standardize the
formula of quality, service, cleanliness and value, and apply it
everywhere.
The company, well known for its golden arches, is not the world’s
largest company. Its system wide sales
are only about one-fifth of Exxon Mobil or Wal-Mart stores. However,
it owns one of the world’s best
known brands, and the golden arches are familiar to more people than
the Christian cross. This
prominence, and its conquest of global markets, makes the company a
focal point for inquiry and
criticism.
McDonald’s is a frequent target of criticism by anti-globalization
protesters. In France, a pipes moking
sheep farmer named Jose Bove shot to fame by leading a campaign
against the fast-food chain.
McDonald’s is a symbol of American trade hegemony and economic
globalization. Jose Bove organized
fellow sheep farmers in France, and the group led by him drove
tractors to the construction site of a new
McDonald’s restaurant and ransacked it. Bove was jailed for 20 days,
and almost overnight an
international anti-globalization star was borne. Bove, who resembles
the irrelevant French comic book
hero Asterix, travelled to Seattle in 1999, as part of the French
delegation to lead the protest against
commercialization of food crops promoted by the WTO. Food, according
to him, is too vital a part of life to
be trusted to the vagaries of the world trade. In Seattle, he led a
demonstration in which some skimasked
protestors trashed at McDonald’s. As Bove explained, his movement was
for small farmers against
industrial farming, brought about by globalization. For them,
McDonald’s was a symbol of globalization
implying the standardization of food through industrial farming. If
this was allowed to go on, he said,
there would no longer be need for farmers. “For us,” he declared,
“McDonald’s is a symbol of what WTO
and the big companies want to do with the world.” lroncally, for all
of Bove’s fulminations against
McDonald’s, the fast food chain counts its French operations among its
most profitable in 121 countries.
As employer of about 35,000 workers, in 2006, McDonald’s was also one
of France’s biggest foreign
employers.
Bove’s and his followers are not the only critics of McDonald’s.
Leftists, anarchists, nationalists, farmers,
labor unions, environmentalists, consumer advocates, protectors of
animal rights, religious orders and
intellectuals are equally critical of the fast food chain. For these
and others, McDonald’s represents an evil
America. Within hours after US bombers began to pound Afghanistan in
2001, angry Pakistanis damaged
McDonald’s restaurants in Islamabad and an Indonesian mob burned an
American flag.
McDonald’s entered India in the late 1990s. On its entry, the company
encountered a unique situation.
Majority of the Indians did not eat beef but the company’s
preparations contained cow’s meat. Nor could
the company use pork as Muslims were against eating it. This left
chicken and mutton. McDonald’s came
out with ‘Maharaja Mac’, which is made from mutton and ‘McAloo Tikki
Burger’ with chicken potato as the
main input. Food items were segregated into vegetarian and
non-vegetarian categories.
Though it worked for sometime, this arrangement did not last long. In
2001, three Indian businessmen
settled in Seattle sued McDonald’s for fraudulently concealing the
existence of beef in its French fries. The
company admitted its guilt of mixing miniscule quantity of beef
extract in the oil. The company settled the
suit for $10 million and tendered an apology too. Further, the company
pledged to label the ingredients of
its food items, and to find a substitute for the beef extract used in
its oil.
McDonald’s succeeded in spreading American culture in the East Asian
countries. In Hong Kong and
Taiwan, the company’s clean restrooms and kitchens set a new standard
that elevated expectations
throughout those countries. In Hong Kong, children’s birthdays had
traditionally gone unrecognized, but
McDonald’s introduced the practice of birthday parties in its
restaurants, and now such parties have
become popular among the public. A journalist set forth a ‘Golden
Arches Theory of Conflict Prevention’
based on the notion that countries with McDonald’s restaurants do not
go to war with each other. A British
magazine, The Economist, prints an yearly ‘Big Mac Index’ that
uses the price of a Big Mac in different
foreign currencies to assess exchange rate distortions.
Questions:-
1. What lessons can other MNCs learn from the experience of
McDonald’s?
2. Aware of the food habits of Indians, why did McDonald’s err in
mixing beef extract in the oil used for
fries?
3. How far has
McDonald’s succeeded in strategizing and meeting local cultures and needs?
