What can go wrong in export sales?
Chapter 9 of The International Sales Handbook is called What Can Go Wrong? It contains details of some of the things I have experienced in my 40+ years of exporting: scams; communication failure; incorrect packaging and/or documentation; failure to get paid; and kidnap. I couldn’t cover in that chapter every single disaster I’ve ever seen because that would have trebled the length of the book. Yesterday, however, I was giving a seminar on The Perils of Exporting and when I told the story I’m about to tell you, the delegates were unanimous that this should have been in the book. I’ll consider it for the second edition; in the meantime, here it is.
This happened in a country in West Africa in 2011. We were invited to tender for supply of construction materials by the Ministry of Housing. Those invitations came in quite regularly but we had never succeeded in selling to that country because (see Chapter 3, Corruption, in The International Sales Handbook) we could not see our way to meeting the PFA (Personal Financial Aspirations) of officials within the Ministry. In short, we don’t pay bribes and competitors do. We put in our bid because you should always put in your bid – it’s a mistake to say, “We won’t win so let’s not bother”. If anyone is going to rule you out, let it be the customer and not you. One of our customers, a contractor in that country, had contacts in the Ministry and told us after a couple of weeks that we were low bidder by quite a margin. That made sense; if you have to build in enough to pay off greedy Government officers then you end up with a high price but since it’s those same Government officers who award the contract the fact that you’re dearer than the competition shouldn’t matter.
This time, however, there was a complication. The project was being paid for by a Development Bank with interests in Africa and they were taking a close interest in how the contract was awarded. The German company that bribed Government officials as a matter of course and always won official tenders at a price some 40% above ours was said to be in furious discussion with the officials they had bought but who now could not deliver the contract. Our customer found the situation hilarious: “The Germans want their money back and the Government guys’ wives have spent it.”
The deadline for the tender was extended and we were asked to confirm that our terms were still good. We did so. We received an email full of dire warnings about penalty clauses and what would happen to us if we failed to meet any part of the contract for which we were bidding. Sensible people might have considered backing out at this point because the message we were getting could be very easily translated: “You weren’t supposed to win this tender and, if you do, we’ll make you pay.” Perhaps we’re not sensible but we knew that there was nothing in the contract that had accompanied the invitation to tender that might cause us trouble. We left the tender on the table. Another four weeks went by and, the day before the extended tender was due to close, we were officially advised that we had been awarded the contract. And that is when the fun started.
As I said, when we received the invitation to tender it had an attachment showing the wording that would be required to be in the final contract. That is normal. What is not normal is that the terms of the sale were to be Incoterms DDP (Delivered Duty Paid). If you’re not familiar with this you’ll find a full description of all Incoterms in Chapter 5 of The International Sales Handbook, headed Incoterms and Terms of Payment. If you look there, you’ll see that I say (a) that DDP is unusual and (b) that you need to be very clear on the customer’s creditworthiness to use DDP because you are going to deliver the goods direct into his hands and if he can’t pay you (or decides not to) you’re in a very difficult position. I also warn in that section that “someone has to clear the goods through Customs, get them on a truck or other suitable conveyance and deliver them to the customer. Do you have an agent locally who can do that? If not, it could be terribly expensive.”
We had examined carefully the credit-worthiness of the Ministry of Housing and decided they were good for the money. We had an agent in the country who we had used many times before and in whom we had confidence. We had therefore agreed to the DDP terms. But the Ministry pulled a fast one and we let it happen; they said they wanted to use their own agent to handle the import and not ours. We didn’t have to agree but we did and it was a mistake. I’m telling you about it so that you don’t repeat our error. The agent put every possible obstacle in our way. We would hear nothing from them for days and then they would tell us of some new regulation that had to be met or document that had to be provided before the goods could be cleared. The International Sales Handbook warns you about demurrage and storage costs and how quickly they can add up. It was sixteen weeks before we were allowed to clear the goods, by which time those demurrage and storage costs amounted to more than the profit we had built into our bid. When I suggested in a phone conversation with one of the Ministry officials that they had set out to teach us a lesson (leave Government tenders to the Germans because they pay bribes and you don’t) he laughed and brushed off the idea. I was right, though.
The moral. (All of the anecdotes in Chapter 9 end with a moral). The lesson to be taken away here is not something simple like “Be careful to avoid corruption in West Africa” because that would be ridiculous; if you’re going to do business in West Africa (and why wouldn’t you? There’s a lot of money in some of those countries – but see Chapter 7 of The International Sales Handbook headed Continents and Countries: Specific Issues to see which ones to do business in and which to avoid) then you’re going to encounter corruption and the idea of avoiding it is simply silly. No; the real lessons are: (a) Make sure that you really do understand all of the implications of the Incoterms deal you are making; and (b) When a customer wants to use their own agent and not yours agree happily – so long as your sale is CFR, CIF or any other arrangement that means that, once the goods arrive at the consignee port, all further costs are for the consignee and not for you. Otherwise, stick with your own.
