In this article we will discuss about the advantages and disadvantages of direct and indirect exporting.
Advantages of Direct Exporting:
Main advantages of direct exporting are as under:
1. Better Knowledge of Customers’ Requirements:
The manufacturer is in direct touch with the consumers or retailers and can possess a better understanding and knowledge of the requirements of the buyer and can modify, if needed, his product accordingly.
If the product of a manufacturer is successful in international markets he builds up name, reputation and goodwill. The goodwill so earned is likely to remain an asset of the manufacturer rather than of some middlemen.
3. Full Control:
The manufacturer has complete control over foreign market. Exporter has complete control over the prices to be charged for his product, can determine the credit terms, and may have control over the distribution system. He is the prime decision maker in exporting.
4. Full Returns on Exports:
The manufacturer enjoys full returns on the sales of his goods in foreign market because he does not have to share his profits with anyone else. As we know that in indirect exporting, the middlemen purchase the products in the exporters’ country at cheaper rates and sell them at higher prices in foreign markets of their choice and thus share the profits. Exporters have also not to pay commission on foreign sales.
5. Full Knowledge of Market Conditions:
By going direct, the manufacturer may have full information on marketing opportunities and trends, competitors, product acceptance and other valuable information.
The manufacturer is assured of permanency in the business of exports because he is not dependent on others and takes full responsibility of his own export trade. He goes on adopting and adjusting to the growing market requirements and thereby furthers his business.
7. Short Chain of Distribution:
Indirect exporting chain of distribution is shortened because some of the middlemen are eliminated completely. It may result in early delivery of goods at lower prices to the foreign consumers.
8. Proper Choice for Certain Products:
The direct exporting is necessary in the following cases and there is no other alternative to get success:
(i) In respect of commodities which use a highly technical sales organisation and require after sale services;
(ii) When middlemen are disinclined towards accepting all the risks of export trade.
(iii) When importer in foreign country wants direct contact with manufacturer or where middlemen build a barrier between the two parties;
(iv) When exporter desires a direct flow of information which may be integrated into practices with a view to adapting production according to marketing conditions requirement of the consumer.
(v) When complex international situation, with its multiplicity of exchange regulations and tariffs, has increased the cost of exporting.
9. Dedicated Staff:
Under direct exporting, all the export operations are conducted by manufacturer’s own staff. As their own prosperity depends upon the success of manufacturer and foreign trade, they work with greater dedication.
Due to dedicated staff, the following are the main advantages:
(i) The employees have more knowledge about the company’s products in comparison to an agent or a distributor.
(ii) They can be trained in company’s specific sales methods and techniques.
(iii) They can be compensated in accordance with the long-term overall interests of the whole enterprise and of the employees.
(iv) They serve as a better source of information about the product acceptance and other market conditions and such information shall be more reliable.
Thus, direct exporting is more advantageous than the indirect exporting, provided the firm is financially sound to organise the direct exporting. In America and Japan most of the companies are using this strategy for exports.
Disadvantages of direct exporting are as follows:
1. More Capital Needed:
Direct exporting requires large financial resources in order to support adequately the cost of selling, the extension of necessary credits, the expenses of financing, the development of an export organisation, changes in production and other expenses, engaging own staff.
2. Managerial Ability Essential:
In the efficient operation of direct exporting, the managerial ability plays an important role. Only the management well conversant about foreign markets, their needs and requirements, process of exporting documentation, shipping, financing and language etc., can succeed in direct export trade.
3. Increased Distribution Costs:
The distribution costs in foreign markets, such as maintaining a suitable channel of distribution, setting up its own sales organisation etc., are increased considerably. These costs will either increase the prices of the product to consumers or reduce the profits margin of the exporter.
4. More Risky:
Direct exporting is more risky as all the risks involved in export trade such as credits, financing, collection etc., are borne by the manufacturer himself. Certain other expenses such as market investigation and research, promotional expenses are also borne by the exporter. These expenses and risks, after all, become the part of total cost.
5. Other Limitations:
(i) It frequently involves the maintenance of stocks in foreign markets which is, at best, an expensive operation.
(ii) The manufacturer is frequently called upon to supply service direct from the factory—another expensive undertaking.
(iii) It involves greater initial outlay before profits begin to flow in.
In short, this type of exporting is not suitable to small exporting firms which cannot arrange adequate finances for export or undertake to bear the risks involved, or manage it competently. This system is more favourable to large firms.
Advantages of Indirect Exporting:
Indirect exporting is more suitable for a small manufacturer who is totally inexperienced in export trade and does not possess the adequate financial and managerial resources required for making the successful entry in a foreign market.
The main advantages of indirect exporting are:
1. Free from Botheration:
The producer exporter is free from all legal and procedural formalities which are necessary for export markets. The merchant exporter (the middleman) takes care of all the botherations involved such as documentation, shipping arrangements, financial, credit risks, procuring licences from government department etc., and assumes all sales in foreign markets.
2. No Need for Export Organisation:
In indirect export, the company need not establish own organisation for distribution. No need to set up branches or offices in foreign markets. In this way, he can organise its export trade without investing his capital funds because middlemen purchase in cash from the company or sometimes they offer advance for producing goods for exports.
As soon as the producer sells the product to the middleman, he becomes free from all worries of selling the product in foreign markets. In this way, he saves a lot of money because he is not required to conduct market surveys, set up his own distribution channel, carry out programmes for advertising and other promotional activities and also need not provide after sale services etc.
4. A Boon to New Entrants:
The new entrants in export markets are the main beneficiaries. They are new and know nothing about export and problems involved in it. On the other hand, the merchant exporter knows everything regarding foreign markets and exports. They (producer) sell their products to them. During the course of time they gain experience and become fully aware of the procedures, formalities and problems of export trade.
5. Valuable Market Information:
Merchant exporters are mostly experienced persons having full knowledge of various markets and marketing conditions. They provide the best source of information about foreign markets and the demand of the product therein to the exporter producers. The producers can adapt their products on the basis of such authentic information and improve their profitability. Adaption as per requirements of the foreign customers increases sales as well.
6. Other Advantages:
It affords a means of building up a quick volume of trade, because the middlemen know where and how to get rapid international distribution. The merchant exporter sells the goods in different markets of the world and thus helps the exporter to produce more.
(i) Middlemen are mostly well reputed firms. They obtain large orders from the importers of different countries. The producer firm gains out of the goodwill of the middlemen.
(ii) The merchant exporters may provide sales opportunities in otherwise out of way markets.
Disadvantages or Limitations of Indirect Exporting:
Main disadvantages of indirect exporting are as under:
1. Ignorance about Foreign Trade:
The middlemen perform all the functions of export trading. The manufacturer exporter, even after years of exporting, remains ignorant about foreign markets and marketing operations and continues to be totally dependent on middlemen.
2. No Scope for Product Development:
Middlemen sell products in which they are interested. Moreover, the firm remains ignorant of the market. Hence there is no scope for product development. Therefore, long-term development of the market is not possible.
3. Inappropriate in Certain Cases:
Indirect exporting is inappropriate in following circumstances:
(i) Where the products are either highly specialised or custom built. In such cases, overseas importers generally like to deal directly with the manufacturer or his representative.
(ii) Where after-sale services or warehousing facilities are required, direct involvement of exporter is called for.
(iii) Where the unit value is much higher or it is an industrial product, the importers like full satisfaction about the quality of the product.
4. Availability of Middlemen:
Export merchants may not be available for all foreign markets. In such countries no export is possible.
5. Commission to Middlemen:
Middlemen, engaged in export trade, charge commission for their services. This, in turn, increases the cost of the product and reduces the profitability to the manufacturer. Moreover, seller does not have any control over prices.
6. No Obligation to any Manufacturer:
The export merchants may concentrate on products which offer them the greatest profit. They buy products in the cheapest market in their own account and sell them in the best market and hence feel no particular obligation to any manufacturer. If they are commission agents they oblige only those manufacturers who offer them higher commission.
7. No Efforts to Promote Exporter’s Product:
In the case of export commission house, the middlemen primarily represent the foreign customer as a buying representative, and he purchases goods only for foreign importers. Moreover, he is not interested in any particular manufacturer. In such circumstances the middlemen cannot be expected to do much to promote the sales of the manufacturer.
8. No Permanency of Business:
The permanency of any export business, built up by indirect methods, cannot be assured because the middlemen control the outlets and may, at any time, shift their clientele to competing lines. In other words, manufacturers and export houses both have no personal involvement in the export business and either party may drop the other at any moment.