6 Harding Tool Corporation
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Harding Tool Corporation, a manufacturer of machine tools and parts, received an offer from a Brazilian commodities broker to exchange $400,000 worth of gears for an equivalent value of Brazilian shoes. Harding was skeptical of the offer as they had no experience or use for shoes. After investigating further, Harding executives met to discuss the proposal. They agreed to have Lloyd Wilcox, the overseas sales manager, investigate further by obtaining more details on the shoes from the broker and finding a commodity specialist to evaluate selling the shoes in the US market. A decision would be made depending on the ability to sell the shoes and receive title to them before shipping any gears.
6 Harding Tool Corporation
- 1. 1 6 Harding Tool Corporation Background Harding Tool Corporation, an American manufacturer of large and small machine tools and parts, gears, valves, and bearings, was a major supplier to industries and companies worldwide. Because of the rise of the U.S. dollar on foreign exchange markets and serious financial crises in many of the countries in which Harding did business, sales, particularly to Latin America, began to decline. A major market for Harding's products had until recently been Brazil. For instance, in 1982 sales to that country's industries were $640,000; but by 1985 sales had declined to just $183,000. This serious problem seemed to have little solution because of Brazil's chronic credit problems and lack of foreign exchange. In the fall of 1986, however, a unique proposition was received at Harding's head office near Cleveland, Ohio, from a Brazilian commodities broker, CompanhiaInternacional de Comercio, S.A. (CIC). CIC's offer was essentially this: In exchange for US$400,000 in assorted gears, Harding would receive the equivalent in Brazilian shoes, which it could sell in the American market. Harding's first reaction was to reject the deal; indeed, the overseas sales manager, Lloyd Wilcox, found the arrangement almost laughable. On further consideration, however, he began to think more seriously about the proposition. Four hundred thousand dollars was a significant amount of money. But what would a machine tool manufacturer do with shoes? Dialogue Participants: Lloyd Wilcox, Overseas Sales Manager, Harding Tool Corp. Jose Cabral, President, CompanhiaInternacional de Comercio Mr. Wilcox is talking on the telephone to Mr. Cabral. Wilcox: I must confess, Mr. Cabral, that at first your offer seemed completely out of the question, but after talking with my associates,we decided we might as well investigate it. Cabral: I'm sure it must have seemed unusual to you at first, but it's oneway Brazil has managed to cope with its foreign exchangeproblems. Wilcox: Obviously, we're happy to sell you $400,000 worth of gears. Butwhat in the world are we to do with shoes? We have absolutelyno use for shoes and know nothing about selling them. Cabral: There are a couple of actions you can take. You can arrange totransfer title to a middleman, say an importer there in the U.S.,or you can do as some companies have doneSears, G.M. orCiticorp, for instanceand set up a trading subsidiary of yourown. Wilcox: I can't see us setting up a trading company. What I can see is myboss laughing me out of the office for even suggesting it. Cabral: That's usually the first reaction. But a company such as yoursthat deals extensively in the Third World might want to considerit. Wilcox: Well, that's another matter. What about this deal? How would itwork? Cabral: It's really fairly simple. You send us $400,000 in partswe sendyou the title for $400,000 in shoes. When you sell the shoes,we'll deliver them wherever you want. That way you don't haveto house them. Wilcox: Hmm. But suppose we can't sell the shoes? Cabral: That shouldn't be a problem. They're excellent shoes, and theprice is extremely low. Wilcox: But I don't know anything about shoes! I don't know what agood shoe is or what a good price is. Cabral: That's where the specialist comes in. If you hand the deal overto a commodities specialist, he should be able to evaluate theproduct and sell it.
- 2. 2 Wilcox: I don't know. The whole business sounds very risky. Cabral: It's not risky. You can even make an extra profit on it. Wilcox: How? Cabral: Take a small commission on the sale of the shoes, seven percent. Wilcox: Well, Mr. Cabral, I obviously can't make a decision now. I will talk to some commodity specialists and to my associates. If they feel we can move the shoes, we might consider it. I should say, I know, that Harding is going to be reluctant to ship $400,000 worth of gears without first having an assurance we will actually get paid. Do this for me -- send specs on the shoes -- even some samples. Also, a breakdown of what gears you want to purchase. Then, we can talk some more. Cabral: Okay, Ill get the shoes off to you right away and also a tentative order for your gears. Thanks for considering this proposal. I feel sure we can work something out. Exhibits Exhibit 1: Information from Cabral regarding shoes CompanhiaInternacional de Comercio, S.A. Rua do Acre 87 20081 Rio de Janeiro, R.J., Brasil Tel.: (021)232-4624 Telex: 6782986 Offer to Sell General Description: 13,200 men's shoes; 31,670 women's shoes Total Price: US$400,000 C.I.F. Styles: Men's 1. Oxfords: leather uppers and soles; brown, black, gray, burgundy 2. Loafers: leather uppers and soles; brown, black, burgundy, tan 3. Casual Lace-ups: leather uppers, cr棚pe soles, foam insole; natural dark brown Styles: Women's 1. Pumps: leather uppers and soles; black, brown, navy, red, burgundy, gray 2. Pumps: leather uppers, man-made material soles; black, brown, navy, burgundy, taupe 3. Flats: leather uppers, cr棚pe soles; red, black, blue, white, gray, burgundy 4. Sandals: leather uppers and soles; natural light brown, natural dark brown, black, tan, navy C.I.F. Prices (US$): 1. Men'sOxfords, 4,500 @ 13.50 Loafers, 6,200 @ 12.00 Casuals, 2,500 @ 9.00 2. Women'sPumps (all leather), 8,000 @ 10.00 Pumps (man-made soles), 12,000 @ 8.00 Flats, 4,000 @7.00 Sandals, 7,670 @ 5.00 U.S. Sizes: Mens 7, 7遜, 8, 8遜, 9, 9遜, 10, Widths: B, C, D, some E, 11, 11遜, 12, 12遜 U.S. Sizes: Women's 5, 5遜, 6, 6遜, 7, 7遜, 8, 8遜,9, 9遜, 10 Widths: some A, B, C Please see accompanying samples and literature.
- 3. 3 Exhibit 2: Letter from Julia Peters, Commodities Broker, to Lloyd Wilcox Overseas Development Corporation International Commodities Brokers 64 West 56th St. New York, NY10019 (212)489-7019 September 21, 1986 Mr. Lloyd Wilcox Overseas Sales Manager Harding Tool Corporation 16263 South Miles Warrensville Heights, Ohio44128 Dear Mr. Wilcox: Thank you for your phone call on Wednesday. Today the information and samples of Brazilian shoes arrived at the office by express mail. As we discussed in our conversation, we do specialize in handling countertrade consignments. After examining the offer to sell and the samples, we feel we could indeed place these shoes. Additional information from the seller, however, is necessary. Specifically, we need to know the exact quantities of shoes in various sizes, widths, and colors. We can either obtain this information directly from the seller, or you can contact your client. If the offer meets the general requirements of our potential buyers, we would be delighted to proceed with the arrangement. Please note that we charge a 2 percent commission for placing your goods. Let us know as soon as possible how you wish to proceed with obtaining the additional information. Hoping to do business with you soon. Sincerely yours, Julia Peters President Exhibit 3: Harding's Gross Sales to Latin America, 1978-1985 (in thousands of US$) 1978 1979 1980 1981 1982 1983 1984 1985 Argentina -- -- 126 114 83 197 112 133 Brazil 264 327 431 524 640 342 206 183 Colombia 324 531 589 320 512 434 486 472 Venezuela 434 576 484 372 464 207 181 192 Mexico 312 236 174 189 76 62 41 77 Chile 122 221 204 Other 120 170 330 410 474 314 306 284 Total 1,454 1,840 2,134 1,929 2,249 1,678 1,553 1,545 % of total gross sales 7.8 6.5 8.9 10.7 10.2 9.8 8.2 6.1
- 4. 4 Exhibit 4: Minutes from Meeting of Harding Executives to Discuss the Brazilian Offer Minutes of Meeting, September 26, 1986 Present: F. Garret, L. Wilcox, M. Ross, C. Carmichael, P. Lamoreux, R. Kaplan (Recording Secretary) The meeting began at 9:45 A.M. in the conference room. Mr. Wilcox presented the details of the offer from CompanhiaInternacional de Comercio and the letter from J. Peters, a commodities broker in New York.Mr. Garret questioned whether Harding was so desperate that it needed to get into the shoe business. Mr. Wilcox answered by saying that while Harding was not desperate countertrade was becoming more common, particularly with countries experiencing foreign exchange problems. Ms. Carmichael added that barter or countertrade was used by many large companies in order to maintain clients in economically troubled regions and that Harding should think about doing the same. Mr. Ross suggested that if the deal were accepted, Harding should add 5-10 percent on to the cost of the gears to cover additional costs (commissions) incurred by the arrangement. Ms. Carmichael said that this was customary and feasible. She added that Harding was in a seller's market as far as Brazil was concerned. Ms. Lamoreux expressed her concern that no goods should be shipped until Harding was sure they could actually sell the shoes. Mr. Wilcox agreed. Mr. Garret felt strongly that the title to the shoes should be received before even one gear was shipped. Mr. Ross, Ms. Carmichael, and Mr. Wilcox agreed. Mr. Garret moved that the meeting be adjourned. Mr. Wilcox argued that no decision had been made. Mr. Garret said that he thought it had been decided to investigate the matter further, bearing in mind the ideas discussed in the meeting. All agreed that this was correct. Mr. Garret asked to be informed of the progress. He said he would make a decision on cost increases to cover commissions depending on Mr. Wilcox s investigation. The meeting was adjourned at 10:41 am Respectfully submitted, Rosemary Kaplan Recording Secretary Some Points to Keep in Mind Although relatively unknown a few years ago, countertrade, the exchanging of goods for goods, is becoming more common in international business dealings. Originally confined primarily to trading between Eastern and Western Europe, countertrade is now a worldwide phenomenon. The exchange of goods is generally concentrated between Western manufacturing countries and developing countries. Usually the Western company sends highly specialized items (cars, cameras, computers) to a developing country; a company in the developing country (or a middleman representing that country) sends less specialized goods (shoes, bicycles, tuna) to the Western nation. In this case, the exchange is precision gears for shoes. Harding must decide whether it is worthwhile to accept the shoes (a commodity for which it has no use) in order to increase sales in Brazil. There are certain risks involved on both sides. Unless the Brazilian trading firm has a customer already lined up for the gears, it may find itself with merchandise it cannot sell; on the other hand, Harding must find a way to sell the shoes in order to ensure a return on the deal. Recently a number of firms specializing in countertrade have been established. Although a few major corporations have set up subsidiary companies to market goods received through countertrade, most companies find they need to use a specialist. These specialist firms, some-times called transit houses, are often offshoots of banks or commodity houses. Many critics argue that countertrade is bad for business and commerce. But with the rise of the dollar on foreign exchange markets and increasingly tight credit in many developing countries, it is obvious that countertrade is one method to maintain international trade.